T.C. Mem o. 2 01 6- 13 3

UNITED STAT ES TAX COURT

JAC K R. DURLAND, JR ., Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt TINA D. FAUSETT , Pet it io ne r, AND JACK R. DURLAND, JR., In te rv en orv. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 2 75 34 -1 0, 2 83 96 -1 0. Fi le d J ul y 19 , 20 16
.

Ja ckR. Durl an d, J r., pro se. Sco ttT. Bank s an d Ken ne th W . Kli ng enbe rg , forpe ti ti on er i n d oc ke t No
. 28 39 6- 10
. Mo en ik a N. Col em an , Heath er L. Lam pe rt, a ndLin daL. W on g, fo r
res po nd en t.- 2 -

[* 2] CONTENTS FINDINGS OF FACT.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 I. Bac kg ro un d.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 A. Pet it io ne rs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 B. Mr. Du rla nd ’s Dis ba rm en t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 C. Mr. Du rla nd ’s Trans fers of As se ts to th e Dur la nd19 95 Irrev oc ab le Trus t an d M s. Faus et t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 D. Norris R. Harri s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 II. Eve nt s Occ urrin g Du rin g 1 99 9 and20 00
. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 A. Mr. Harr is Bri ng s M r. Durl an d In -Ho us e. . . . . . . . . . . . . . . . . . . . . . 12 B. Ch eck s Fr om

T.J. Oil & Gas
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 C. Gul fp ort Oi l & Gas.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 D. Gul fp ort Oi l & Gas’ Acqu is it io n o f Co nt ro l o f ARXA.
. . . . . . . . . . 15 E. Pu rp orte d Lo an s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1. $2 0,0 00
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2. $3 50 ,00 0.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3. $6 5,0 00
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 F. Mat ag or daLeas e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 G. Gul fp ort Oi l & Gas C he ck s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 H. Pri va te Inv es to r an d In ve st ec Ch eck s. . . . . . . . . . . . . . . . . . . . . . . . . 28 I. 20 00 Cas hi er’s Ch eck s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 J. Ms . Fau se tt ’s Sep arat io n F ro m Mr. Du rla nd
. . . . . . . . . . . . . . . . . . . 29 K. 20 00 Div or ce Pr oc eed in gs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1. 20 00 Okl ah om a Div or ce Ca se . . . . . . . . . . . . . . . . . . . . . . . . . 32 2. Mi ss is si pp i Di vo rce C as e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3. Ms . Fau se tt ’s Meet in g With t he FBI.
. . . . . . . . . . . . . . . . . . . 34 4. Ms . Fau se tt ’s Con te m ptHeari ng . . . . . . . . . . . . . . . . . . . . . . . 35 L. 19 99 Return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 M. Bo le yn En erg y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 III. Eve nt s Occ urrin g Du rin g 2 00 1 and20 02
. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 A. 20 01 Cas hi er’s Ch eck s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 B. Mr. Du rla nd ’s andMr. Harri s’ Ass ig nm en t o f Sh ares of Gu lfp ort Oil & Gas Co m

m on Sto ckto Gul fp ort Oi l & Gas.
. . . . . . . . . . . . . . 39- 3 -

[* 3] C. Ch eck s Is su edto Bo le yn En erg y . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 D. Prytani a StreetHou se . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 E. Hub bardLit ig at io n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 F. Mr. Du rla nd ’s Depa rtu re. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 G. 20 00 an d 2 00 1 R eturns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 IV. Eve nt s Occ urrin g Aft er 2 00 2.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 A. Sai ntAndrews Co urt Ho us e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 B. 20 02 -2 00 7 R eturns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 C. IRS’ Inv es ti ga ti on of M r. Durl an d.
. . . . . . . . . . . . . . . . . . . . . . . . . . 46 D. Mr. Du rla nd ’s Trans fer o f 1,5 00 Sh ares of B ol eyn En erg y Co m m onSto ckto Ro se woo d Ven tu res . . . . . . . . . . . . . . . . . . . . . . . 47 E. Mr. Du rla nd ’s Ind ic tm en t fo r Tax Evas io n. . . . . . . . . . . . . . . . . . . . 48 F. Mr. Du rla nd ’s Ple a Agr eem en t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 G. 20 07 Okl ah om a Div or ce Ca se . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 V. Defi ci en cy

Not ic es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 OPINION.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 I. Prel im in ary Mat te rs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 A. Cred ib il it y

of Witne ss es an d R el iabi li ty of Doc um en ta ry Evi de nc e. 52 B. Ju di ci al Est op pe l.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 C. Mr. Du rla nd ’s Ple a Agr eem en t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 II. Peri odof Li m it at io ns on Ass es sm en t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 III. Unr ep orte d In co m e Adju st m en ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 A. Bu rd enof P ro of

.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 B. Sp eci fic -It em

Met ho d.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 C. The Part ie s’ Argu m en ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 D. Sp eci fic Ite m s atIss ue for19 99
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 1. T.J. Oil & Gas Sal ary Ch eck s To ta li ng $5 5,0 00
. . . . . . . . . . . 62 2. Pu rp orte d Lo an s To ta li ng $4 35 ,00 0.
. . . . . . . . . . . . . . . . . . . . 63 E. Sp eci fic Ite m s atIss ue for20 00
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 1. T.J. Oil & Gas Ch eckfor $5 ,00 0.
. . . . . . . . . . . . . . . . . . . . . . 66 2. Gul fp ort Oi l & Gas Sa la ry Ch eck s To ta li ng $1 22 ,50 0.
. . . . . 66- 4 -

[* 4] 3. Ch eck s Pa y ab le to T.J. Oil & Gas an d Gu lfp ort Oi l & Gas.
. . 67

4. Cas hi er’s Ch eck s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 F. Sp eci fic Ite m s atIss ue for20 01
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 IV. Ci vi l Fr au d P en al ti es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 A. Sect io n 6 66 3( a) Gen eral ly.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 B. Whe th er Mr . Durl an d Is Liab le forth e Ci vi l Fr au d P en al ti es . . . . . . 73 1. Co ll at eral Est op pe l.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 2. Und erp aym en t o f Tax
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 3. Frau du le ntInt en t. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 a. Und ers ta ti ng Inc om e. . . . . . . . . . . . . . . . . . . . . . . . . . . 76 b. Fai li ng To Ma in ta inAdequa te Reco rd s. . . . . . . . . . . . . 77 c. Offeri ng Im

pl au si bl e o r In co ns is te ntExp la na ti on s. . . . 77 d. Co nc eal in g As se ts or I nc om e. . . . . . . . . . . . . . . . . . . . . 77 e. Pro vi di ng Inc om

pl et e o r Mi sl ead in g In fo rm at io n t o th e Tax pa y er’s Tax Return P rep arer . . . . . . . . . . . . . . . 78 f. Offeri ng Fal se or I nc red ib le Test im on y . . . . . . . . . . . . . 79 g. Fi li ng Fal se Docu m en ts . . . . . . . . . . . . . . . . . . . . . . . . . 79 h. Ext en si ve Deal in gs inCas h.
. . . . . . . . . . . . . . . . . . . . . 80 i. Su m

m ary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 V. Whe th er Ms . Fau se ttIs J oi nt ly andSev eral ly L iabl e. . . . . . . . . . . . . . . . . . 81 A. Jo in t an d S ev eral Liab il it y Gene ral ly.
. . . . . . . . . . . . . . . . . . . . . . . . 81 1. Sect io n 6 01 5( b)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 2. Sect io n 6 01 5( c).
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 3. Sect io n 6 01 5( f).
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 B. Whe th er Ms . Fau se ttIs El ig ib le forRel ie f Und er Se ct io n 6 01 5.
. . . 89 1. Sect io n 6 01 5( c) Re li ef.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 a. Actu al Kno wled ge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 i. 19 99
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 ii
. 20 00
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 ii i. 20 01
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 b. Dur es s Ex cep ti on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 2. Sect io n 6 01 5( b) Rel ie f.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 3. Sect io n 6 01 5( f) Re li ef.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 VI. Co nc lu si on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2- 5 -

[* 5] MEMORANDUM FINDINGS OF FACT AND OPINION MARVEL, Ch ie f Ju dg e: Res po nd en t d et erm in edth e fo ll owi ng de fic ie nc ie s in Fed eral in co m e ta x a ndciv il frau d p en al ti es un de r se ct io n 6 66 3( a) wi th res pe ct to Jac k R . Durl an d, J r.: 1

Year Defi ci en cy Pen al ty se c. 66 63 (a) 19 99 $1 88 ,70 9 $1 41 ,53 2 20 00 55 6,8 23 41 7,6 17 20 01 17 ,65 3 13 ,24 0 Res po nd en t d et erm in edth e fo ll owi ng de fic ie nc ie s i n F ed eral in co m e ta x wi th
res pe ctto Tin a D. Fau se tt : Year Defi ci en cy 19 99 $1 88 ,70 9 20 00 55 6,8 23 20 01 17 ,65 3 The is su es forde ci si on are: (1) whet he r res po nd en t i ss ue d t he no ti ces of de fic ie nc y

to Mr. Du rla ndan d M s. Faus et t b efo re the pe rio ds of l im it at io ns on
as se ss m en t ex pi redfor

19 99 -2 00 1; (2) whet he r Mr. Du rla ndrece iv edun rep orte 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 1 Rev enue Co de (Co de ), as am en de d a ndineffe ctfor th e y ears inis su e, an d a ll Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e. So m e m on et ary am ou nt s h av e b een rou nd edto th e n eare stdo ll ar.- 6 -

[* 6] in co m e o f $4 90 ,00 0, $ 1,5 52 ,94 0, an d $ 45 ,00 0 fo r 19 99 , 20 00 , and20 01 , res pe ct iv el y ; (3 ) whe th er Mr . Durl an d i s l iabl e fo r ci vi l fr au d p en al ti es un de r
se ct io n 6 66 3( a) o f $1 41 ,53 2, $ 41 7,6 17 , and$1 3,2 40 for 19 99 , 20 00 , and20 01 , res pe ct iv el y ; an d (4 ) whe th er Ms . Fau se ttis eli gi bl e fo r rel ie f fro m joi ntan d
se ve ral li ab il it y

forth e 1 99 9- 20 01 de fic ie nc ie s u nd er s ect io n 6 01 5( b) , (c), o r (f).

FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io ns of factan d fa ct s drawnfro m st ip ul at edex hi bi ts are i nc or po rat edhe rei n b y

th is refe ren ce. Pet it io ne rs res id edat s ep arat e ad dr es se s i n Ok la ho m a Ci ty, Okl ah om a, whe n the y

pe ti ti on edth is Co urt. I. Bac kg ro un d A. Pet it io ne rs Mr. Du rla ndrece iv eda la w deg ree fr om th e Uni ve rs ity

of Ok la ho m a Co ll eg e o f Law in 19 62 . He recei ve d h is li cen se to pra ct ic e la w inOkl ah om a in 19 62 , andhe pra ct ic edlaw wi th th e Cro we & Du nl ev y law fi rm fro m 19 62 un ti l 19 89 . In 1 98 9 h e an d a no th er at to rn ey form edth e Berry

& Dur la ndlaw fi rm . Berry & Dur la ndsubs eque nt ly became Durla nd& Dur la nd ; M r. Durl an d a ndhi s fathe r, Ja ckDurl an d, Sr ., were th e two na m e p artne rs of t he firm . From be fo re- 7 -

[* 7] 19 95 un ti l 1 99 7 M r. Durl an d s ha redoff ic e sp ace wi th anatt orne y na m ed Darqui taMag ga rd . Mr. Dur landpra ct ic edlaw wi thDurl an d & Durl an d u nt il 19 99
. Ms . Fau se ttatt en de d c ol le ge forap pr ox im at el y th ree a nda ha lf years at Okl ah om a Uni ve rs it y

an d C en tra l St at e Co ll eg e, no w th e Uni ve rs it y of C en tra l Okl ah om a, whe re s he m ajor edinhi st ory an d En gl is h e du cat io n b utdi d n otearn a de gr ee. Mr. Du rla nd ’s par en ts an d M s. Faus et t’s p aren ts kn ew eac h o th er, an d M s. Fau se ttan d M r. Durl an d s aw eac h o th er atfun ct io ns th ei r paren ts ho st ed . Duri ng th e su m m er o f 19 97 Ms . Fau se ttbe ga n wo rk in g fo r Mr. Du rla ndas asec ret ary. Mr. Du rla ndan d M s. Faus et t m arri edonJu ne 26 , 19 99
. Mr. Du rla ndha d t wo p rio r m arri ag es be fo re m arrying Ms . Fau se tt . He and hi s s eco ndwife di vo rcedon Decem be r 5, 1 99 5. Ms . Fau se ttals o was pre vi ou sl y m arri edbe fo re m arrying Mr. Du rland . She
m arri edLarry

McC al l i n 1 97 2. OnNov em be r 6, 1 99 5, M s. Faus ett fi le d fo r di vo rce f ro m Mr. Mc Cal l i n the Dis tri ctCo urt o f Okl ah om a Co un ty, Okl ah om a. Afte r fi rin g h er o rig in al di vo rce a tt orne y Ms . Fau se tthi redMs . Mag ga rdto rep res en t h er i n h er d iv or ce fr om Mr. Mc Cal l. The co urt g ran te d M s. Faus et t a di vo rce f ro m Mr. Mc Cal l o n Au gu st16 , 19 96
.- 8 -

[* 8] B. Mr. Du rla nd ’s Dis ba rm en t Mr. Du rla nd ’s un cl e, W il li am T. Durl an d, es tabl is he d atru stinSep te m be r 19 92 . Mr. Dur la ndan d J ud it h An n P ed ers on , a ni ece o f W il li am Durl an d, wer e ap po in te d c ot ru st ees of t he tru st . W it ho utMs . Ped ers on ’s or Wil li am Durl an d’s kn owl ed ge , Mr. Dur landwithdrew $ 22 0,0 00 fro m th e trus t fo r hi s p ers on al us e. Ina le tt er d at edMarc h 2 1, 1 99 7, M r. Durl an d fa ls el y to ldMs . Ped ers on th atth e withd rawnfun ds were i nv es te d i n c ert ifi cat es of d ep os it , andhe subs eque nt ly pr es en te d h er wi th for ge d c ert ifi cat es of d ep os it
. Mr. Du rla ndlat er ad m it te d t ha t h is in it ia l s to ry was ali e, an d h e in st ead cl ai m edto ha ve bo rro wedth e wit hd rawnfun ds . To supp ort h is ne w cla im he pr oduc edun si gn ed , bac kd at edpro m is so ry no te s. On t he ba si s o f Mr. Durla nd ’s frau du le ntco nduc t wi th res pe ctto hi s u nc le ’s tru stth e Okl ah om a BarAss oc ia ti on bro ug htdi sc ip li na ry pro ceed in gs ag ai ns t h im
. Ms . Mag ga rdrep res en te d M r. Durl an d i n tho se pro ceed in gs . On Sep te m be r 8, 19 98 , a tri al pane l o f th e Supr em e Co urt o f Okl ah om a fo un d t ha t M r. Durl an d h ad
co nv ert edforhi s p ers on al us e $ 22 0,0 00 of f un ds he ldintru st ; h adco m m it te d
va rio us act s o f di sh on es ty, de cei t, fraud , andm is rep res en ta ti on ; an d h adforward ed frau du le ntcert ifi cat es of d ep os itto Ms . Ped ers on . On th e b as is of t he se fin di ng s,- 9 -

[* 9] th e tr ia l p an el reco m m en de d t ha t h e b e d is ba rred . On Ma rch18 , 20 03 , th e Supr em e Co urt o f Okl ah om a d is ba rredMr. Du rla nd
. C. Mr. Du rla nd ’s Trans fers of As se ts to th e Dur la nd19 95 Irrev oc ab le Trus t an d M s. Faus et t On a d at e th atis un cl ear f ro m th e rec or d M r. Durl an d s ig ne d t he ag reem en t fo r th e Ja ckR. Durl an d, J r. 19 95 Irrev oc ab le Trus t (Du rla nd19 95 Irrev oc ab le Trus t), d at edDecem

be r 8, 1 99 5, as th e se tt lo r an d t ru st ee o f th e trus t. Ms
. 2
Res po nd en t co nt en ds th atMr. Du rlandba ck da te d t he Durl an d 1 99 5 2 Irre vo cab le Trus t. Mr . Durl an d t es ti fie d t ha t h e d idno t s ig n the ori gi na l tru st ag reem en t u nt il 19 96 or 1 99 7 (a ndno t i n 1 99 5 a s t he tru stag reem en t s ta te s) , and th e p art ie s s ti pu la te d t ha t M r. Durl an d a ndMs . Fau se ttfir stm etinDecem be r 19 96 . Howev er, i n S ep te m be r 20 00 Ms . Fau se ttm etwith the Fed eral Bureauof In ve st ig at io n (F BI) a ndst at edth atMr. Du rla ndex ecu te d the tru stag reem en t i n 19 96 , andth is is co ns is te ntwith t he do cu m en ts da te d Au gu st19 , 19 96 , th at ap po in te d h er as th e trus te e o f th e trus t. Mo reo ve r, th e trus t ag reem en t re fers to Ms . Fau se ttpri m ari ly as Ms . McCa ll --h er l eg al na m e in Decem be r 19 95 --an d t he tru stag reem en t an d t he do cu m en ts da te d Au gu st19 , 19 96 , are al l n ot ari zed . Ms. Fau se ttals o t es ti fie d t ha t h er p aren ts an d M r. Durl an d’s p aren ts kn ew eac h o th er be fo re Mr . Durl an d a ndMs . Fau se ttbe ga n d at in g andth atsh e h adpre vi ou sl y m et Mr. Du rla ndat f

un ct io ns th ei r pa ren ts ho st ed
. Add it io na ll y , Ms . Mag ga rd --wh o was th ensh ari ng anoff ic e wit h M r. Dur land --t es ti fie d t ha t s he fir stm etMs . Fau se ttat t he en d o f 19 95 or dur in g 1 99 6 an d t ha t s he rep res en te d M s. Faus ett b efo re h er d iv or ce fr om Mr. Mc Cal l o n Aug us t 1 6, 1 99 6. Ms . Fau se tttes ti fie d t ha t M r. Durl an d a ss is te d h er i n h er ef fo rts to ga in ful l cu st od y

of h er s on . In the li gh t o f Ms . Fau se tt ’s st at em en t t o t he FBI in Sep te m

be r 20 00 , heran d M s. M ag ga rd ’s tes ti m on y at tria l, an d the do cu m en ta ry

ev id en ce, we fi nditun li ke ly tha t M r. Durl an d a ndMs . Fau se ttfir st m etin Decem

be r 19 96 . See Ca l-M ai ne Fo od s, In c. v. Co m m is si on er, 9 3 T.C. 1 81 , 19 5 (1 98 9) (di sr eg ard in g ast ip ul at io n a s i nc on si st en t wi th a st ip ul at edex hi bi t). (co nt in ue d...)- 10 -

[* 10 ] Fau se tt , th enrefe rredto as M s. M cCa ll , was n am edth e b en efi ci ary of th e tru st . Ms. Faus ett was en ti tl edto all in co m e earne d b y th e as se ts inth e trus t du rin g M r. Durl an d’s l ife ti m e, an d a fte r hi s d eat h t he tru st ’s ass et s wer e to be di st rib ut edto he r. In t he ev en t M s. Faus et t d ie d b efo re Mr . Durl an d, the tru st ’s
as se ts were t o b e d is tri bu te d t o M r. Durl an d’s d es cen da nt s. In do cu m en ts da te d Aug us t 1 9, 1 99 6, M r. Durl an d re si gn ed , andMs . Fau se ttwas app oi nt edtru st ee o f th e trus t. Ms . Fau se ttsi gn edth e d oc um en t ap po in ti ng he r th e trus te e o n Au gu st 19 , 19 96
. Inanatt ach m en t t o t he ori gi na l tru stag reem en t M r. Durl an d p ur po rte d t o tra ns fer 1 95 it em s o f pe rs on al an d re al pro pe rty to t he tru st ee o f th e trus t. In cl ud edin th es e it em s wer e o il , gas , andot he r m in eral in te res ts own edby thre e pa rtn ers hi ps an d a19 91 Merc ed es . Add it io na ll y , in19 98 Mr. Du rla ndco nv ey edmin eral rig ht s i n c ert ai n pr op ert ie s i n s ev eral co un ti es of Ok la ho m a an d re al pro pe rty in Ok laho m a an d Co lo rad o t o M s. Faus et t.

(...co nt inue d) 2 W e d o n otfin d M r. Durl an d’s t es ti m on y th athe ba ck da te d t he Durl an d 1 99 5 Irre vo cab le Trus t ag reem en t t o b e cre di bl e, an d we a re n otpe rs ua de d tha t i t was .- 11 -

[* 11 ] Dur in g t he y ears in is su e Ms . Fau se ttm ai nt ai ne d abro ke rag e acc ou ntat Merril l Lync h (F au se ttMerr il l Lync h a cco un t). In Jan ua ry 20 00 sh e o pe ne d a br ok erag e acc ou ntat C ha rle s Sc hwab (F au se ttCh arl es Sch wab acco un t). D. Norris R. Harri s In19 77 Norr is R. Harri s h ire d M r. Durl an d a s an att orne y for anoi l
co m pa ny, Cent ex Oil , th athe ha d s ta rte d i n 1 97 6. Mr . Harri s at te nd edjun io r
co ll eg e in Odes sa , Texa s. He b eg anwork in g i n t he oi l i ndus try in 1 95 6, an d du rin g t he rel ev an t p eri od s o wne d i nt eres ts ina va rie ty of bu si ne ss en ti ti es . Mr. Dur landsubs eque nt ly pro vi de d l eg al servi ces to a nu m be r of th os e en ti ti es , in cl ud in g T.J . Oil & Gas , Inc . (T.J. Oil & Gas ), an d C ov in gt on Ener gy, Inc. (Co vi ng to n En erg y ). T.J. Oil & Gas an d C ov in gt on Ener gy hadth ei r pr in ci pa l pl aces of b us in es s atth e sa m e ad dr es s i n Gu lfp ort, Mi ss is si pp i. Dur in g t he y ears in is su e Mr. Harris was m arri edto Cin dy Harris . He has a
so n, J on atha n G. Harr is , fro m a pr ev io us m arri ag e. Dur in g t he y ears in is su e Mr. Harris em pl oyed J on atha n Harris an d Ter es a Ri ch ard so n i n c on ne ct io n wi th hi s v ari ou s b us in es se s. He h ire d M s. Ri ch ard so n i n Ju ne 19 99
. Mr. Harr is ha d aclo se rel at io ns hi p wi th Bet ty L . Ferg us on , who own eda ch eckcas hi ng bu si ne ss th atdi d b us in es s as Ferg us on Ch eckCas hi ng Co
.- 12 -

[* 12 ] (Ferg us on Ch eckCas hi ng ). Mr. Harri s re gu la rly sen t o th ers to cas h p ers on al ch eck s fo r hi m

at F erg us on Ch eckCas hi ng . II. Eve nt s Occ urrin g Du rin g 1 99 9 and20 00 A. Mr. Harr is Bri ng s M r. Durl an d In -Ho us e In19 98 , whi le Mr. Du rla nd ’s di sc ip li na ry pro ceed in gs were p en di ng , Mr. Harri s as ke d M r. Durl an d t o m ov e to Gul fp ort t o h el p h im m an ag e h is oi l an d g as bu si ne ss es . On Dece m

be r 10 , 19 98 , Mr. Dur la ndsi gn edanem pl oym en t ag reem en t wi th Co vi ng to n En erg y . The em pl oym en t ag reem en t p ro vi de d t ha t M r. Dur landwou ldrece iv e anan nu al sal ary of $1 20 ,00 0 fr om

Co vi ng to n En erg y . In Ja nu ary 19 99 Mr. Du rla ndm ov edto Gul fp ort t o wo rk forMr. Harr is an d h is
va rio us bu si ne ss es . Inearl y 19 99 Mr. Du rla ndan d M r. Harri s ca ll edMs . Fau se ttto co nv in ce he r to joi n M r. Durl an d i n Gu lfp ort. The y off eredto hi re Ms . Fau se ttas M r. Dur land ’s sec ret ary. InJu ne 19 99 Ms . Fau se ttm ov edto Gul fp ort. OnJune 24 , 19 99 , Mr. Dur landpu rch as eda 3.8 -car atdi am on d ri ng for$1 9,3 80 . On Ju ne 26 , 19 99 , Mr. Dur landan d M s. Faus et t m arri ed , andhe ga ve th e 3 .8-c aratdi am on d ri ng to he r as he r wed di ng band
.- 13 -

[* 13 ] B. Ch eck s Fr om T.J. Oil & Gas Afte r Mr. Du rla ndbe ga n wo rk in g fo r Mr. Harris , he r ecei ve d t he fol lo win g ch eck s fr om

T.J. Oil & Gas du rin g 1 99 9: Ch eckNo. Date Mem o l in e Am ou nt 10 13 1/ 13 il le gi bl e $5 ,00 0 10 48 1/ 26 “ sa la ry ” 7,5 00 10 65 2/ 4
--- 5,0 00 10 84 2/ 16
--- 7,5 00 11 22 3/ 5 “ sa la ry Marc h” 5,0 00 11 37 3/ 15 “ sa la ry Mar 1 5 9 9” 5,0 00 15 15 4/ 1 “ sa la ry Apri l 1 99 ” 5,0 00 15 54 4/ 15
--- 5,0 00 15 87 4/ 30 “ sa la ry 5-1 -9 9” 5,0 00 16 13 5/ 14 “ le ga l fe es an d c on su lt in g” 5,0 00 Tot al 55 ,00 0 Mr. Du rla ndcas he d t he se ch eck s atFerg us on Ch eckCas hi ng . Peti ti on ers di d n ot rep ort the se am ou nt s o n t he ir 1 99 9 re tu rn . On a d at e th atis un cl ear f ro m th e rec or d M r. Durl an d e xe cu te d aba ck da te d $5 5,0 00 pro m is so ry

no te pa y ab le to T.J. Oil & Gas
. The p ro m is so ry no te cal le d 3 fo r an nu al in te res t p aym en ts an d t wo p rin ci pa l p aym en ts , no ne of wh ic h wer e
m ad e.

The pro m is so ry

no te is da te d J anua ry

1, 1 99 9. Ho wev er, i t i s s ig ne d b y 3 Ms . Ric ha rd so n, wh o b eg anwork in g fo r Mr. Harris inJu ne 19 99
.- 14 -

[* 14 ] Jo na th anHarri s al so ex ecu te d aba ck da te d $ 23 ,00 0 p ro m is so ry no te pay ab le to T.J. Oil & Gas
. The p ro m is so ry no te cal le d fo r an nu al in te res t p aym en ts an d 4 two pri nc ip al pa ym en ts , no ne of wh ic h wer e m ad e. On J un e 1 , 20 00 , T.J. Oil & Gas is su eda $5 ,00 0 c he ck to Mr. Du rla nd . The
m em o l in e o n t he ch eckst at ed , “ Loa n fr om Co rp or at io n” . Mr. Dur la ndcas he d t he ch eckat F erg us on Ch eckCas hi ng . Peti ti on ers di d n otrep ort thi s amoun t o n t he ir 20 00 return. C. Gul fp ort Oi l & Gas On o r ab ou t Ap ril 12 , 19 99 , Mr. Harri s an d M r. Durl an d i nc or po rat ed Gul fp ort Oi l & Gas, In c. (Gu lfp ort Oi l & Gas) . On Apr il 30 , 19 99 , Mr. Harri s, o n be ha lf o f Gul fp ort Oi l & Gas, an d M r. Durl an d e xe cu te d ath ree- y ear e m pl oym en t ag reem en t. The em

pl oym en t ag reem en t p ro vi de d t ha t M r. Durl an d (1 ) wou ld
rece iv e anan nu al sal ary of $1 20 ,00 0; (2) wou ldbe th e v ic e p res id en t o f Gul fp ort Oil & Gas ; (3 ) wou ldbe gra nt ed39 % of t he co m m on st oc k o f Gul fp ort Oi l & Gas; (4 ) wou ldbe en ti tl edto a 39 % work in g i nt eres t i n a ny oil an d g as lea se s ac qu ire d by Gulfp ort Oi l & Gas i n M is si ss ip pi , Lou is ia na , andTexa s o r fro m Hawki ns Ran ch , Ltd . (Hawki ns Ran ch ), a li m it edpa rtn ers hi p t ha t o wne d a n o il an d g as
The pro m is so ry

no te was a ls o d at edJan uary 1, 1 99 9. Ho wev er, i t t oo is 4 si gn edby Ms. Ri ch ard so n, wh o b eg anwork in g fo r Mr. Harris inJu ne 19 99
.- 15 -

[* 15 ] lea se in Mat ag or daCo un ty, Tex as ; an d (5 ) wou ldha ve th e ri gh t t o a ss ig n h is
worki ng in te res t i n a ny oil an d g as lea se s t o ath irdpa rty. On J un e 7 , 19 99 , Mr. Harri s an d M r. Durl an d e nt eredin to anag reem en t with re sp ectto th e o wne rs hi p o f th e co m m on st oc k o f Gul fp ort Oi l & Gas. Th e ag reem en t p ro vi de d, am on g o th er thi ng s, tha t M r. Harri s an d M r. Durl an d wo ul d
own 61 % an d 3 9%, re sp ect iv el y , of t he co m m on st oc k o f Gul fp ort Oi l & Gas. Ms
. Fau se ttan d M rs . Harri s s ig ne d t he June 7, 1 99 9, ag reem en t as witne ss es . On d at es th atare u nc le ar fro m th e rec or d M r. Durl an d d is cu ss edwith M r. Harri s an d Gen e Gib bo ns , a cert ifi edpubl ic acco un ta ntforanacco un ti ng firm in Mo bi le , Alab am a, th enna m edGib bo ns , Gib bo ns & Bu ck , PC (Gi bb on s, Gi bb on s & Bu ck ), whe th er t o fi le Fed eral in co m e ta x re tu rn s fo r Gul fp ort Oi l & Gas. Gul fp ort Oi l & Gas d idno t fi le an y returns forth e y ears at i ss ue . D. Gul fp ort Oi l & Gas’ Acqu is it io n o f Co nt ro l o f ARXA InMay 199 9 Gu lfp ort Oi l & Gas e nt eredin to anag reem en t wi th ARXA In te rn at io na l En erg y , Inc . (ARXA), a publ ic ly trad edco m pa ny, to p ur ch as e 6
m il li on sh ares of ARXA comm on st oc k a t 2 0 c en ts pe r sh are. Aft er p ur ch as in g th e 6 m il li on sh ares of ARXA comm on st oc k Gu lfp ort Oi l & Gas h el d a
co nt ro ll in g i nt eres t i n ARXA.- 16 -

[* 16 ] On M ay

27 , 19 99 , Gul fp ort Oi l & Gas o pe ne d abro ke rag e acc ou ntwith In ve st ec Ern st& Co . (Gul fp ort Oi l & Gas In ve st ec ac co un t). Gu lfp ort Oi l & Gas he ldso m e o f it s ARXA co m m on st oc k i n the Gul fp ort Oi l & Gas In ve st ec
acco un t. On Au gu st23 , 19 99 , Mr. Dur la ndwrot e a l et te r to Mr. Gib bo ns reg ard in g ARXA’ s Fe de ral in co m e ta x re po rti ng . In the let te r Mr. Durlandst at edas f ol lo ws: Si nc e May

7, 1 99 9, we h av e b een pay in g s al ari es ou t o f ARXA witho utde du ct in g fo r Fed eral Inc om e Tax an d S ta te of M is si ss ip pi In co m e Tax . There ha ve als o b een no de du ct io ns forSo ci al Secu rit y pa ym en ts . W e d is cu ss edth is with you , andy ouin di cat edy ouwou ld tre atth e p rio r paym en ts as l oa ns an d we wo ul d s ta rt wi th ho ld in g t he ne xtqu art er. ARXA di d n otfil e an y

returns forth e y ears at i ss ue . E. Pu rp orte d Lo an s In19 99 Mr. Harr is an d M r. Durl an d re cei ve d the fol lo win g p ur po rte d l oa ns --wh ic h t he y

ne ve r rep ai d- -fro m

Gul fp ort Oi l & Gas: Mr. Harr is 1 Mr. Du rla nd Ch eck No. Date Am ou nt Ch eck No. Date Am ou nt 10 29 6/ 11 $1 25 ,50 0 10 54 6/ 24 $2 0,0 00 2 5 10 92 7/ 12 33 5,0 00 10 90 7/ 15 35 0,0 00 3 6 05 24 10 /1 9 75 ,00 0 05 37 10 /2 8 65 ,00 0 4 7 Tot al 53 5,5 00 Tot al 43 5,0 00- 17 - Mrs . Harri s was th e p ay ee o n a ll of t he pu rp orte d l oa n c he ck s. [* 17 ] 1 The m em o l in e o n c he ckNo. 1 02 9 b or e th e n ot at io n “ Loa n

2 fro m co m pa ny”. The m em o l in e o n c he ckNo. 1 09 2 b or e th e n ot at io n “ Loa n 3 fro m co m pa ny in a dv an ce o n Dee d o f Tru st ”. Mr. Harr is us edth is ch eckto pa y

off a de fau lt edm ortg ag e o n h is an d M rs . Harri s’ ho m e in Lon g B each , Mis si ss ip pi . On Ju ly 16, 1 99 9, M r. Harri s an d M rs . Harri s ex ecu te d alan d d eedof tru stinfav orof Gu lfp ort Oi l & Gas en cu m be rin g t he ir h om e in Lon g B each , Mis si ss ip pi , inco nn ect io n with apro m is so ry

no te fora $3 35 ,00 0 l oa n. Th e la ndde edof t ru st was reco rd edon Ju ly 19, 1 99 9. The m em o l in e o n c he ckNo. 0 52 4 b or e th e n ot at io n “ lo an 4 fro m co rp or at io n”
. Mr. Du rla ndan d J on atha n Harris si gn edch eckNo. 1 05 4. 5 Mr. Du rla ndan d J on atha n Harris si gn edch eckNo. 1 09 0, an d 6 th e m em o l in e o n t he ch eckst at es “ lo anfro m co m pa ny andadva nc e on lan d d eedof tru st ”. Mr. Du rla ndan d M r. Harri s s ig ne d c he ckNo. 0 53 7, an d t he 7 m em o l in e o n t he ch eckst at es “ lo anfro m co rp or at io n”
. Mr. Du rla nddo cu m en te d t he pu rp orte d l oa ns th athe rece iv edfro m Gul fp ort Oi l & Gas a s fo ll ows .

1. $2 0,0 00 On a d at e th atis un cl ear f ro m th e rec or d M r. Durl an d e xe cu te d a$2 0,0 00 pr om is so ry

no te da te d Jun e 2 5, 1 99 9, p ay ab le to Gul fp ort Oi l & Gas. Th e pr om is so ry

no te cal le d fo r an nu al in te res t p aym en ts an d t wo p rin ci pa l p aym en ts , no ne of wh ic h wer e m ad e. Mr. Harr is an d M rs . Harri s s ig ne d t he pro m is so ry no te
as witne ss es . Mr. Dur la ndex ecu te d asec ur it y ag reem en t d at edJu ne 30 , 19 99 , gr an ti ng Gul fp ort Oi l & Gas asec ur it y in te res t i n M s. Faus et t’s wed di ng ba nd . On- 18 -

[* 18 ] Aug us t 1 6, 2 00 0, i n c on ne ct io n wi th di vo rce p ro ceed in gs th enoc cu rri ng in Mi ss is si pp i b etweenMr. Du rla ndan d M s. Faus et t, a St at e o f Mi ss is si pp i UCC -1 fin an ci ng st at em en t was fil edwith re sp ectto th e p ur po rte d $ 20 ,00 0 l oa n. Mr
. Dur land , as d eb to r, an d M r. Harri s, as pre si de ntof Gu lfp ort Oi l & Gas, s ig ne d t he UCC-1 fin an ci ng st at em en t.

2. $3 50 ,00 0 On a d at e th atis un cl ear f ro m th e rec or d M r. Durl an d a ndMs . Fau se tt
ex ecu te d a$3 50 ,00 0 p ro m is so ry no te , dat edJu ly 16, 1 99 9, p ay ab le to Gul fp ort Oi l & Gas
. The p ro m is so ry

no te cal le d fo r an nu al in te res t p aym en ts an d t wo 5 pr in ci pa l p aym en ts , no ne of wh ic h wer e m ad e. Mr. Harr is si gn edth e Ju ly 16, 19 99 , pro m is so ry

no te as wi tn es s. On Oct ob er 1 6, 1 99 9, M r. Durl an d a ndMs . Fau se ttsi gn eda co nt ractto pu rch as e a h ou se on 54 th Str eetin Gul fp ort, Mi ss is si pp i (5 4t h S tre etho us e) fo r $4 07 ,50 0. OnNov em

be r 2, 1 99 9, M s. Faus ett cl os edon th e 5 4t h S tre etho us e,
an d o nl y he r na m e ap pe ars on th e d eed . On Nov em be r 3, 1 99 9, M r. Durl an d a nd Ms . Fau se ttex ecu te d alan d d eedof t ru stinfav orof Gu lfp ort Oi l & Gas

InSep te m

be r 20 00 Ms . Fau se ttst at edto th e FBI th atsh e si gn edth e Ju ly 5 16 , 19 99 , pro m is so ry

no te on Nov em

be r 14 , 19 99
.- 19 -

[* 19 ] en cum

be rin g t he 54 th Str eetho us e inco nn ect io n wi th th e $ 35 0,0 00 pr om is so ry

no te . The l an d d eedof t ru stwas re co rd edon Nov em be r 30 , 19 99
. 3. $6 5,0 00 On No ve m

be r 15 , 19 99 , Ms . Fau se ttpu rch as eda 20 00 Jag ua r XK8 fo r $7 2,5 70 . Ms. Faus et t u se d t he pro ceed s fr om cas hi ng ch eckNo. 0 53 7 t o p ur ch as e th e 2 00 0 J ag ua r. On a d at e th atis un cl ear f ro m th e rec or d M r. Durl an d e xe cu te d a$6 5,0 00 pr om is so ry

no te , dat edOcto be r 28 , 19 99 , payabl e to Gul fp ort Oi l & Gas. Th e pr om is so ry

no te cal le d fo r an nu al in te res t p aym en ts an d t wo p rin ci pa l p aym en ts , no ne of wh ic h wer e m ad e. Mr. an d M rs . Harri s s ig ne d the pro m is so ry no te as witne ss es . On a d at e th atis un cl ear f ro m th e rec or d M r. Durl an d e xe cu te d asec ur it y ag reem en t d at edOcto be r 28 , 19 99 , gra nt in g Gu lfp ort Oi l & Gas asec ur it y in te res t in th e 2 00 0 J ag ua r. On Au gu st16 , 20 00 , inco nn ect io n wi th di vo rce p ro ceed in gs th enoc cu rri ng inMi ss is si pp i b etweenMr. Du rla ndan d M s. Faus et t, a St at e o f Mi ss is si pp i UCC -1 fin an ci ng st at em en t was fil edwith re sp ectto th e p ur po rte d $6 5,0 00 lo an . Mr. Dur la nd , as d eb to r, an d M r. Harri s, as pre si de ntof Gu lfp ort Oi l & Gas , si gn edth e UCC-1 fin an ci ng st at em en t.- 20 -

[* 20 ] F. Mat ag or daLeas e On J un e 2 9, 1 99 9, Gu lfp ort Oi l & Gas andHawki ns Ran ch en te redin to an oi l an d g as lea se with re sp ectto a 67 2- acre pro pe rty in M at ag or daCo un ty, Tex as (Ma ta go rd a le as e). In cl ud edin th e Ma ta go rd a le as e were Hawk in s R an ch W el l No. 1 , Lewis Ran ch W el l No . 4, an d Lewi s R an ch W el l No . 5. The Mat ag or da le as e was reco rd edon Ju ly 7, 19 99
. On J ul y 14 , 19 99 , Gul fp ort Oi l & Gas, M rs . Harri s, an d M s. Faus et t
ex ecu te d a n a ss ig nm en t tran sf erri ng a 61 % in te res t i n t he June 29 , 19 99 , lea se of Lewis Ran ch W el l No . 4 an d Lewi s R an ch W el l No . 5 t o M rs . Harri s an d a39 % in te res t i n t ha t l eas e to Ms . Fau se tt . The J ul y 14 , 19 99 , ass ig nm en t h adan effe ct iv e d at e o f May 2, 19 99 ; was si gn edby Mr. Durl an d o n b eh al f of Gul fp ort Oil & Gas , Mrs . Harri s, an d M s. Faus et t; an d was reco rd edonJu ly 22, 1 99 9. 6

On No ve m

be r 16 , 19 99 , Gul fp ort Oi l & Gas, M rs . Harri s, an d M s. Faus et t 6 ex ecu te d a n a ss ig nm en t tran sf erri ng a 61 % in te res t i n t he June 29 , 19 99 , lea se of Hawki ns Ran ch W el l No . 1 t o M rs . Harri s an d a39 % in te res t i n t ha t l eas e to Ms
. Fau se tt . The No ve m

be r 16 , 19 99 , ass ig nm en t h adaneffe ct iv e d at e o f Sep te m be r 10 , 19 99 ; was si gn edby Mr. Durl an d o n b eh al f of Gul fp ort Oi l & Gas, M rs . Harri s, an d M s. Faus et t; an d was reco rd edon Decem be r 2, 1 99 9. Th e Nov em be r 16 , 19 99 , ass ig nm en t re la te s t o t he same un de rlyin g p ro pe rty as the Ju ly 14, 1 99 9, as si gn m en t, an d i t i s u nc le ar fro m th e rec or d wh y

a se co ndass ig nm en t was requi red
.- 21 -

[* 21 ] Afte r Aug us t 2 2, 1 99 9, Gu lfp ort Oi l & Gas, M rs . Harri s, an d M s. Faus et t
en te redin to anop erat in g a gr eem en t d at edMay 2, 19 99
. Altho ug h the op erat in g 7 ag reem en t i n t he reco rdis da te d M ay 2, 1 99 9, the op erat in g a gr eem en t o rig in al ly ha d alat er d at e th atwas s ub se qu en tl y alt eredwitho utMs . Fau se tt ’s kn owl ed ge . Add it io na ll y , sev eral claus es were l at er ad de d t o t he May 2, 19 99 , op erat in g ag reem en t wi th ou t M s. Faus et t’s kno wled ge . As m od ifi ed , th e Ma y 2, 1 99 9, op erat in g a gr eem en t p ro vi de d t ha t (1 ) Gul fp ort Oi l & Gas wo ul d o pe rat e Lewis Ran chW el l No . 4, Lewi s R an chW el l No . 5, an d Hawk in s R an chW el l No . 1; (2) Gul fp ort Oi l & Gas was requi redto op enit s re co rd s t o i ns pe ct io n b y Mrs . Harri s
an d M s. Faus et t; (3) Gul fp ort Oi l & Gas c ou ldco ll ectall in co m e earne d fr om Lewis Ran ch W el l No . 5 an d a ll ot he r wel ls dri ll edan d c om pl et edon th e 6 72 -acr e pr op erty in Mat ag or daCo un ty, Tex as , un ti l M rs . Harri s an d M s. Faus et t p ai d a ll

The pa rti es st ip ul at edth atth e Ma y 2, 1 99 9, o pe rat in g a gr eem en t was 7 si gn edon th atda te . Howev er, we d o n otfin d t hi s s ti pu la ti on to be cred ib le be cau se th e ag reem en t re fers to Ms . Fau se ttas Ti naFau se ttDurl an d a ndon May 2, 1 99 9, M r. Durl an d a ndMs . Fau se ttha d n oty etm arri ed ; the ag reem en t was no ta riz edby Ms. Ri ch ard so n, wh o b eg anwork in g fo r Gul fp ort Oi l & Gas i n J un e 19 99 ; an d t he May 2, 19 99 , op erat in g a gr eem en t re fers to ass ig nm en ts of Gu lfp ort Oil & Gas ’ in te res t i n the Mat ag or dalea se to Mrs . Harri s an d M s. Faus ett tha t were ex ecu te d o n J ul y

14 an d No ve m

be r 16 , 19 99 . Add it io na ll y , inSep te m be r 20 00 Ms . Fau se ttst at edto th e FBI th atsh e fi rs t b eg anwork in g o n t he May 2, 19 99 , op erat in g a gr eem en t o n Au gu st22 , 19 99 . For t he se reas on s we d is reg ard th e st ip ul at io n a s i nc on si st en t wi th st ip ul at edex hi bi ts inth e rec or d. Se e Cal
Mai ne Fo od s, In c. v. Co m m is si on er, 9 3 T.C. at19 5.- 22 -

[* 22 ] ex pe ns es rel at edto th os e wel ls ; an d (4 ) th e Ma y 2, 1 99 9, o pe rat in g ag reem en t was subjec t t o t he term s o f anag reem en t d at edMay 1, 19 99 , and
en te redin to by Gul fp ort Oi l & Gas, M r. Harri s, an d M r. Durl an d. Afte r Gul fp ort Oi l & Gas, M rs . Harri s, an d M s. Faus et t ex ecu te d t he May 2, 19 99 , op erat in g a gr eem en t, Gu lfp ort Oi l & Gas, M r. Harri s, an d M r. Durl an d
en te redin to anag reem en t d at edMay 1, 19 99
. The M ay 1, 1 99 9, ag reem en t 8 pr ov id ed , inrel ev an t p art , th at(1) Mr. Harri s an d M r. Durl an d a gr eedth at Gul fp ort Oi l & Gas wo ul d a ss ig n i ts in te res t i n Lewi s R an ch W el l No . 5 t o M rs . Harri s an d M s. Faus et t; (2) Mrs . Harri s an d M s. Faus et t wo ul d b e res po ns ib le for al l co st s an d e xp en se s re la ti ng to Lewis Ran ch W el l No . 5 an d t he dri ll in g a nd
co m pl et io n o f al l o th er wel ls on th e p ro pe rty subjec t t o t he Mat ag or dalea se ; an d (3 ) th e rel at edop erat in g a gr eem en t wo ul d b e subjec t t o t he May 1, 19 99 , ag reem en t.

The pa rti es st ip ul at edth atth e Ma y 1, 1 99 9, ag reem en t was si gn edon th at 8 da te . Howev er, we d o n otfin d t hi s s ti pu la ti on to be cred ib le be cau se th e ag reem en t re fers to Ms . Fau se ttas Ti naFau se ttDurl an d a ndon May 1, 19 99 , Mr. Dur landan d M s. Faus et t h adno t yet m arri ed . Add it io na ll y , itap pe ars th atth e pu rp os e o f th e Ma y

1, 1 99 9, ag reem en t was to in se rt a dd it io na l t erm s i nt o t he May 2, 1 99 9, o pe rat in g a gr eem en t, an d we f ou ndth atth e Ma y

2, 1 99 9, ag reem en t was ex ecu te d a fte r Aug us t 2 2, 1 99 9. Fo r th es e rea so ns we di sr eg ardth e st ip ul at io n a s in co ns is te ntwith s ti pu la te d e xh ib it s i n t he reco rd . See Ca l-M ai ne Fo od s, In c. v. Co m m is si on er, 9 3 T.C. at19 5.- 23 -

[* 23 ] Gul fp ort Oi l & Gas e xt ract edga s fr om th e wel ls onth e p ro pe rty subjec t t o th e Ma ta go rd a le as e an d s ol d t he ga s t o Eag le Ener gy Devel op m en t Co . (Eagl e Ene rg y ). Eagl e Ene rg y

was s up po se d t o i ss ue pro du ct io n c he ck s t o Gu lfp ort Oi l & Gas , andGul fp ort Oi l & Gas i n turn was supp os edto is su e ch eck s t o t he les so rs of th e Ma ta go rd a le as e. Eag le Ener gy iss ue d t he fol lo win g p ro du ct io n c he ck s t o ARXA, Gu lfp ort Oil & Gas , andGul fp ort Ven tu res : 9

ARXA pre vi ou sl y

ha d alea se on th e p ro pe rty subjec t t o t he Mat ag or da 9 le as e. It i s u nc le ar fro m

th e rec or d wh atGul fp ort Ven tu res is , why Eagl e Ene rg y is su edpro du ct io n c he ck s t o i t, an d wh y Gul fp ort Oi l & Gas c as he d i ts pro du ct io n ch eck s.- 24 -

[* 24 ] Ch eckNo. Date Payee Am ou nt 51 25 7/ 29 /1 99 9 ARXA $9 6,0 83 51 99 8/ 31 /1 99 9 Gul fp ort Oi l & Gas 10 6,4 50 52 55 9/ 30 /1 99 9 Gul fp ort Oi l & Gas 11 7,8 28 N/A 10 /2 9/ 19 99 Gul fp ort Oi l & Gas 12 0,6 86 53 95 11 /3 0/ 19 99 Gul fp ort Oi l & Gas 50 ,16 0 54 52 12 /3 0/ 19 99 Gul fp ort Oi l & Gas 81 ,20 6 55 26 1/ 31 /2 00 0 Gul fp ort Oi l & Gas 47 ,78 9 55 80 3/ 1/ 20 00 Gul fp ort Oi l & Gas 84 ,15 1 56 41 3/ 31 /2 00 0 Gul fp ort Oi l & Gas 68 ,78 4 56 96 4/ 28 /2 00 0 Gul fp ort Oi l & Gas 56 ,29 2 57 31 5/ 25 /2 00 0 Gul fp ort Oi l & Gas 67 ,22 1 58 14 6/ 30 /2 00 0 Gul fp ort Oi l & Gas 95 ,95 5 58 76 7/ 28 /2 00 0 Gul fp ort Oi l & Gas 17 1,5 92 59 67 8/ 30 /2 00 0 Gul fp ort Oi l & Gas 14 9,3 17 60 29 9/ 30 /2 00 0 Gul fp ort Oi l & Gas 73 ,11 4 60 38 9/ 30 /2 00 0 Gul fp ort Ven tu res 91 ,71 7 61 03 10 /3 0/ 20 00 Gul fp ort Oi l & Gas 71 ,19 7 61 14 10 /3 1/ 20 00 Gul fp ort Ven tu res 20 1,8 75 W it h M r. Harri s’ app ro va l M r. Durl an d c as he d c he ck Nos . 57 31 , 58 14 , 58 76 , 59 67 , 60 29 , 60 38 , 61 03 , and61 14 at F erg us on Ch eckCas hi ng . The ch eck s t ha t Mr. Du rla ndcas he d a t Fe rg us on ’s Che ckCas hi ng to ta le d $ 92 1,9 88
. Gul fp ort Oi l & Gas p ai d o utth e am ou nt s o n t he pro du ct io n c he ck s t ha t Eag le Ener gy iss ue d t o i t o r ARXA fro m Ju ly 199 9 u nt il Apri l 2 00 0 t o M s. Faus et t (o r Mr. Du rla ndin cert ai n m on th s) an d M rs . Harri s i n a cco rd an ce wi thMs . Fau se tt
an d M rs . Harri s’ in te res ts in th e Ma ta go rd a le as e. Howev er, i t d idno t p ay ou t an y- 25 -

[* 25 ] am ou nt s fr om

th e p ro du ct io n c he ck s dur in g t he pe rio d i n wh ic h M r. Durl an d
cas he d t he pro du ct io n c he ck s fr om Eagl e Ene rg y

at F erg us on Ch eckCas hi ng . Gul fp ort Oi l & Gas i ss ue d t he fol lo win g c he ck s t o M s. Faus ett o r Mr. Dur landan d M rs . Harri s: Ms . Fau se ttor Mr. Du rla nd Mrs . Harri s Date Ch eckNo. Am ou nt Ch eckNo. Am ou nt 7/ 29 /1 99 9 10 10 $3 ,66 4
--- --- 7/ 30 /1 99 9 10 14 37 ,47 2 10 12 $5 8,6 11 9/ 1/ 19 99 10 18 41 ,51 6 10 17 64 ,93 5 10 /1 /1 99 9 03 02 45 ,95 3 03 01 71 ,87 5 11 /1 /1 99 9 05 48 47 ,06 8 05 47 73 ,61 9 12 /1 /1 99 9 06 19 19 ,56 2 06 18 30 ,59 7 1/ 3/ 20 00 06 67 31 ,67 0 06 66 49 ,53 6 2/ 1/ 20 00 07 24 18 ,63 8 07 23 29 ,15 1 3/ 3/ 20 00 07 79 32 ,81 9 07 78 51 ,33 2 1 4/ 3/ 20 00 08 31 26 ,82 6 08 30 41 ,95 8 1 5/ 1/ 20 00 08 74 21 ,95 4 08 73 34 ,33 8 1 Tot al 32 7,1 42 50 5,9 52 The se ch eck s wer e m ad e p ay ab le to Mr. Du rla nd . The 1 rem ai nd er were m ad e p ay ab le to Ms . Fau se tt . Mr. Du rla ndcas he d t he ch eck s m ad e p ay ab le to hi m at F erg us on Ch eckCas hi ng . Mr. Du rla ndto ldMs . Fau se tton May 15, 2 00 0, tha t h e h adbe enrece iv in g t he pr oduc ti on ch eck s. Pet it io ne rs rep orte d t he am ou nt s o n t he se ch eck s o n t he ir 1 99 9
an d 2 00 0 re tu rn s.- 26 -

[* 26 ] G. Gul fp ort Oi l & Gas C he ck s On Fe brua ry

15 , 20 00 , Gul fp ort Oi l & Gas i ss ue d c he ckNo. 0 75 0 t o M r. Dur landfor$3 ,50 3. Th e m em o l in e o n t he ch eckst at es “ $5 ,00 0 g ro ss sal ary” and
no te s wi th ho ld in g fo r Med ic are, So ci al Secu rit y , Fed eral in co m e ta x, an d Mi ss is si pp i St at e in co m e ta x. Pe ti ti on ers rep orte d t he am ou ntonth is ch eckon th ei r 20 00 return. Gul fp ort Oi l & Gas a ls o i ss ue d t he fol lo win g c he ck s t o M r. Durl an d i n 20 00 :- 27 -

[* 27 ] Ch eckNo. Date Mem o l in e Am ou nt 08 26 3/ 31 “ Loa n fr om co rp or at io n” $5 ,00 0 08 55 4/ 14 “ Loa n fr om co rp or at io n” 5,0 00 08 72 4/ 26 “ Loa n fr om co rp or at io n” 5,0 00 08 91 5/ 15 “ Loa n fr om co rp or at io n” 5,0 00 09 22 6/ 19 “ Loa n fr om co rp or at io n” 5,0 00 09 46 6/ 27 “ Rep aym en t o f lo anto Gul fp ort Oi l & Gas, In c.” 15 ,00 0 09 66 6/ 30 “ Loa n fr om co rp or at io n” 5,0 00 09 83 7/ 14 “ Loa n fr om co rp or at io n” 5,0 00 10 01 7/ 28 “ Loa n fr om co rp or at io n” 5,0 00 10 15 8/ 15 “ Loa n fr om co rp or at io n” 5,0 00 10 59 9/ 1 “ Loa n fr om co rp or at io n” 5,0 00 10 76 9/ 15 “ Loa n fr om co rp or at io n” 5,0 00 10 97 10 /1 3 “ Loa n fr om co rp or at io n” 10 ,00 0 11 03 10 /1 3 “ Rep aym en t o f pr in ci pl e o f lo anto co rp or at io n” 17 ,50 0 11 04 10 /1 3 “ Rep aym en t o f pr in ci pl e o f lo anto co rp or at io n” 15 ,00 0 11 51 11 /1 “ Loa n fr om co rp or at io n” 5,0 00 11 62 11 /1 5 “ Loa n fr om co rp or at io n” 5,0 00 Tot al 12 2,5 00 Pet it io ne rs di d n otrep ort the se am ou nt s o n t he ir 2 00 0 re tu rn . 1 0

Gul fp ort Oi l & Gas a ls o i ss ue d c he ck s t ot al in g $ 15 2,5 00 to Mr. an d M rs . 1 0 Harri s i n 2 00 0. Th e m em o l in es on m an y of t he se ch eck s b or e n ot at io ns in di cat in g th atth e ch eck s wer e fo r lo an s fr om Gul fp ort Oi l & Gas o r rep aym en ts of l oa ns m ad e to Gul fp ort Oi l & Gas.- 28 -

[* 28 ] On Au gu st16 , 20 00 , Gul fp ort Oi l & Gas i ss ue d a$1 2,5 00 ch eckto T.J. Oil & Gas . W it h M r. Harri s’ app ro va l M r. Durl an d c as he d t he ch eckat F erg us on Ch eckCas hi ng . Peti ti on ers di d n otrep ort thi s amoun t o n t he ir 2 00 0 re tu rn . H. Pri va te Inv es to r an d In ve st ec Ch eck s Dur in g 2 00 0 Gu lfp ort Oi l & Gas s ol d s om e o f it s ARXA co m m onst oc k t o pr iv at e in ve st or s, an d i t re cei ve d c he ck s fr om th os e in ve st or s i n am ou nt s t ot al in g $3 27 ,20 0. Ad di ti on al ly, du rin g 2 00 0 Gu lfp ort Oi l & Gas s ol d s om e o f th e ARXA
co m m on st oc k t ha t i t h el d i n i ts Inv es te c acc ou nt , anditrece iv edch eck s i n
am ou nt s t ot al in g $ 16 3,7 52 fro m Inv es te c fo r it s ARXA s to ck . Ms. Faus et t witne ss edpro m is so ry

no te s fo r so m e st oc k p ur ch as es . W it h M r. Harri s’ 1 1 ap pr ov al Mr. Du rla ndcas he d t he pri va te in ve st oran d In ve st ec ch eck s atFerg us on Ch eckCas hi ng . Peti ti on ers di d n otrep ort the se am ou nt s o n t he ir 2 00 0 re tu rn . I. 20 00 Cas hi er’s Ch eck s In20 00 Mr. Du rla ndpurch as edth e fo ll owi ng cas hi er’s ch eck s fr om Whi tn ey Nati on al Ban k wi thcas h:

Ms . Fau se ttst at edto th e FBI inSep te m be r 20 00 th atGul fp ort Oi l & Gas 1 1 was “ba il in g a ndsel li ng ” ARXA st oc k.- 29 -

[* 29 ] Ch eck No. Date Payee Rem it te r li ne Am ou nt 08 30 5 6/ 26 Merril l Lync h “ Gul fp ort Oi l an d Gas Inc .” $3 0,0 00 08 63 7 9/ 25 Merril l Lync h “ Ja ckR. Durl an d J r.” 35 ,00 0 08 67 6 10 /2 Merril l Lync h “ Ja ckR. Durl an d J r.” 22 ,93 0 08 69 0 10 /3 Merril l Lync h “ Ja ckR. Durl an d J r.” 30 ,00 0 08 80 7 11 /2 Merril l Lync h “ Dep os itfor acco un t o f Gulf po rt Oi l & Gas In c.-- JackR. Durl an d J r.” 56 ,61 8 08 94 5 12 /1 9 Gul fp ort Oi l &

Gas “ Paym en t o f Ro y al ti es on

Mata go rd a Co un ty, TX Prop ert ie s- -J ackR. Durl an d J r.” 30 ,00 0 Tota l 20 4,5 48 Mr. Du rla ndde po si te d t he cas hi er’s ch eck s i nt o aMerr il l Lync h a cco un t o wne d b y Gul fp ort Oi l & Gas. J. Ms . Fau se tt ’s Sep arat io n F ro m Mr. Du rla nd Inth e la tt er h al f of

19 99 Ms . Fau se ttbe cam e co nc ern edab ou t ce rta in do cu m en ts sh e h adsi gn edat M r. Durl an d’s re qu es t. Sh e b eg anask in g M r. Dur landforco pi es of d oc um en ts sh e h adsi gn edan d fo r rec or ds rel at in g t o t he Mat ag or dalea se . Mr. Dur la ndrefu se d t o g iv e Ms . Fau se ttth e d oc um en ts an d
reco rd s, an d e ve ntua ll y

he to ldhe r th atMr. Harr is di d n otwanthe r to ha ve th em . On Dec em

be r 30 , 19 99 , Ms . Fau se ttsep arat edfro m Mr. Du rla ndan d m ov ed ba ckto Okl ah om a Ci ty. On o r ab ou t J anua ry 24 , 20 00 , sh e m ov edba ckto- 30 -

[* 30 ] Gul fp ort wi th Mr. Du rla nd . On Feb ru ary 25 , 20 00 , sh e ag ai n s ep arat edfro m hi m an d m ov edba ckto Okl ah om a Ci ty. Inearl y 20 00 Mr. Du rla ndsen t a c he ckfor $2 5,0 00 dra wn o n t he Fau se tt Merril l Lync h a cco un t t o t he Int ern al Rev enue Serv ic e (IR S). Mr. Du rla ndals o to ldMs . Fau se ttth athe ha d fi le d fo r bo th of the m a Fo rm 48 68 , App li cat io n fo r Aut om at ic Ext en si on of Ti m e To Fi le U.S. Ind iv idua l In co m e Tax Return, fo r ta x y ear 1 99 9. OnApri l 1 2, 2 00 0, M s. Faus et t co nt act edth e IRS , andanIRS
em pl oyee in fo rm edhe r th atth e $ 25 ,00 0 c he ckha d n otbe encred it edto he r an d th atno Fo rm s 1 09 9 h adbe enfil edsh owi ng in co m e to he r. On Ap ril 19 , 20 00 , Mr. Dur la ndto ldMs . Fau se ttth athe di d n otwantto ob ta in rel eas es on th e p ro m is so ry no te an d t he de edof t ru strel at in g t o t he 54 th Streetho us e b ecau se “ th ere i s n o t ax li ab il ity onlo an s.” M s. Faus et t t es ti fie d t ha t Mr. Du rla ndals o t ol d h er “ ab ou t a c as e h e h an dl edwher e th ey ne ve r pa idba ckth e lo an s an d t he IRS n ev er caug htit .” On Ap ril 30 an d a ga in on May 15, 2 00 0, M r. Durl an d a sk edMs . Fau se ttto
ex ecu te a wil l n am in g h im as t he so le be ne fic ia ry . Feari ng for he r sa fety

Ms
. Fau se ttde cl in ed . Mr. Dur la ndals o t ol d M s. Faus et t tha t the pu rp os e o f th e wel l- 31 -

[* 31 ] ass ig nm en ts was t o t ak e m on ey ou t o f Gul fp ort Oi l & Gas a ndto pro te cthi m
an d Mr. Harr is
. 1 2 On M ay 31 , 20 00 , Ms . Fau se ttag ai n c on ta ct edth e IRS . An IRS em pl oyee in fo rm edhe r th ata Fo rm 48 68 was fi le d fo r Mr. Du rla ndbu t n otforhe r an d t ha t sh e wou ldha ve to fil e a joi ntreturn t o a vo idlat e fi li ng pe na lt ie s. InJu ne 20 00 Ms . Fau se ttlea rn edth atli en s h adbe enfil edon th e wel ls
subjec t t o the Mat ag or dalea se be cau se Gul fp ort Oi l & Gas h adno t p ai d t he pe op le work in g o n t he well s. Ms . Fau se tthi redanatt orne y fro m Pie dm on t, Okl ah om a, to he lp he r ge t d oc um en ts an d re co rd s fr om Mr. Du rla ndan d Gu lfp ort Oil & Gas . The at to rn ey

wrot e le tt ers an d m ad e p ho ne cal ls to Mr. Du rla nd , Mr. Harri s, Gu lfp ort Oi l & Gas, an d Eag le Ener gy, buthe was unabl e to sec ur e an y of th e rec or ds rel at in g t o t he Mat ag or dalea se . On J un e 2 1, 2 00 0, M r. Durl an d c al le d M s. Faus ett an d t ol d h er tha t the well s s ub ject t o t he Mat ag or dalea se were o nl y no m in al ly ass ig ne d t o h er an d M rs . Harri s an d t ha t h e an d M r. Harri s wer e th e true own ers of t ho se well s. He fu rth er to ldhe r th at , pu rs ua ntto th e Ma y 2, 1 99 9, o pe rat in g a gr eem en t, s he owed

Prev io us ly, Mr. Du rla ndha d t ol d M s. Faus et t tha t the pu rp os e o f th e wel l 1 2 as si gn m en ts was t o p ro te ctMs . Fau se ttan d M rs . Harri s.- 32 -

[* 32 ] hu nd red s o f th ou sa nd s o f do ll ars to Gul fp ort Oi l & Gas fo r ex pe ns es in cu rredon well s s ub

ject t o the Mat ag or dalea se . Ms . Fau se ttwentwith M s. M ag ga rdto Bay Ci ty, Tex as , to fin d a n a tt orne y li cen se d t o p ract ic e la w inTexa s. Ms . Fau se ttsubs eque nt ly file d alaws ui t ag ai ns t Gul fp ort Oi l & Gas a ndEagl e Ene rg y inth e Dis tri ctCo urt fo r Mat ag or daCo un ty, Tex as , forth e p ur

po se s o f ob ta in in g d oc um en ts an d re co rd s re la ti ng to th e Mat ag or dalea se an d p ro te ct in g h er i nt eres t i n t he lea se . K. 20 00 Div or ce Pr oc eed in gs 1. 20 00 Okl ah om a Div or ce Ca se On J un e 3 0, 2 00 0, M s. Faus et t fi le d fo r di vo rce f ro m Mr. Du rlandinth e Dis tri ctCo urt o f Okl ah om a Co un ty, Okl ah om a (2 00 0 Ok laho m a d iv or ce ca se ). Ms . Fau se ttret ai ne d a n a tt orne y , Ani taF. San de rs , to rep res en t h er i n the 20 00 Okl ah om a d iv or ce ca se . Ms. Faus et t tran sf erre d $ 65 ,00 0 t ha t s he ha d p rev io us ly
rece iv edun de r th e Ma ta go rd a le as e in to Ms . San de rs ’ tru stfun d a cco un t.

2. Mi ss is si pp i Di vo rce C as e Mea nwh il e, on Ju ly 12, 2 00 0, M r. Durl an d fi le d fo r di vo rce f ro m Ms
. Fau se ttin th e Ch an cery Cou rt o f Harri so n C ou nt y , Mis si ss ip pi (Mi ss is si pp i di vo rce c as e). Ms . Fau se ttret ai ne d a n a tt orne y to rep res en t h er i n t he Mi ss is si pp i di vo rce c as e.- 33 -

[* 33 ] On J ul y

19 , 20 00 , Mr. Dur la ndfil eda fi na nc ia l s ta te m en t i n t he Mi ss is si pp i di vo rce c as e th atst at edth athe ha d (1 ) no in co m e si nc e Ma rch15 , 20 00 ; (2 )
m on th ly liv in g e xp en se s o f $1 ,41 5; an d (3 ) to ta l l iabi li ti es of $ 35 7,0 00
. On J ul y 27 , 20 00 , Ms . Fau se tt ’s Mis si ss ip pi att orne y fil eda m ot io n fo r te m po rary reli ef i n t he Mi ss is si pp i d iv or ce ca se . On J ul y 27 , 20 00 , th e co urt i n 1 3 th e Mi ss is si pp i d iv or ce ca se is su eda te m po rary ord er tha t (1 ) Mr. Du rla ndpa y sp ou sa l s up po rt o f $4 ,00 0 p er m on th to Ms . Fau se tt ; (2 ) Mr. Du rla ndpro vi de an
acco un ti ng of M s. Faus et t’s s ha re o f th e in co m e fro m th e wel ls on th e p ro pe rty
subjec t t o the Mat ag or dalea se ; (3 ) Mr. Du rla ndan d M s. Faus et t ex ch an ge in co m e ta x d at a; an d (4 ) fu nd s fr om th e Ma ta go rd a le as e b e d ep os it edwith Gu lfp ort Oi l & Gas
. On Au gu st3, 2 00 0, M r. Durl an d fi le d am ot io n t o a m en d the Ju ly 27, 2 00 0, te m po rary ord er i n t he Mi ss is si pp i d iv or ce ca se . On Aug us t 1 0, 2 00 0, M r. Dur landfil eda supp le m en ta l m ot io n t o a m en d the tem po rary ord er; no ti ces of he ari ng reg ard in g t he m ot io n a ndsupp le m en ta l m ot io n t o a m en d t he tem po rary
or de r; a ndanam en de d fi na nc ia l s ta te m en t. The no ti ces of h eari ng seta he ari ng da te of Au gu st11 , 20 00 . In the am en de d fi na nc ia l s ta te m en t M r. Durl an d s ta te d

Ms . Fau se tttes ti fie d t ha t s he ev en tu al ly firedhe r Mi ss is si pp i at to rn ey 1 3 be cau se he fai le d t o fi le do cu m en ts an d re co rd s o n h er b eh al f.- 34 -

[* 34 ] th athe (1) ha d n otrece iv edan y sal ary fro m

Gul fp ort Oi l & Gas a ndARXA si nc e Ja nu ary 1 andMarc h 1 5, 2 00 0, re sp ect iv el y ; (2 ) ha d m on th ly liv in g e xp en se s of $1 ,69 2; an d (3 ) ha d t ot al li ab il it ie s o f $1 ,34 6,9 74
. On Au gu st15 , 20 00 , th e co urt i n t he Mi ss is si pp i d iv or ce ca se is su eda
supp le m en ta l t em

po rary ord er tha t (1 ) th e b al an ces inth e Fau se ttMerr il l Lync h
an d F au se ttCh arl es Sch wab acco un ts be fro zen ; (2 ) Ms . Fau se ttde po si t $ 65 ,00 0 in to th e reg is try of the co urt; (3) Ms . Fau se ttbe en joi ne d fr om

pu rs ui ng he r ci vi l act io n a ga in stGul fp ort Oi l & Gas a ndEagl e Ene rg y inth e Dis tri ctCo urt fo r Mat ag or daCo un ty, Tex as ; (4 ) Ms . Fau se ttpro vi de withi n s ev enda y s t he acco un t st at em en ts forth e Fau se ttMerr il l Lync h a ndFau se ttCh arl es Sch wab acco un ts to Mr. Du rla nd ’s att orne y ; an d (5 ) Mr. Du rla ndpro vi de anacco un ti ng of t he in co m e
an d e xp en se s o f Gul fp ort Oi l & Gas t o M s. Faus et t.

3. Ms . Fau se tt ’s Meet in g With t he FBI On o r ab ou t Se pt em

be r 1, 2 00 0, M s. Faus et t m etwith t he FBI atMs
. San de rs ’ la w off

ic e. At the m eet in g M s. Faus ett d is cu ss edwith the FBI h er
co nc ern s ab ou t M r. Durl an d’s an d M r. Harri s’ act iv it ie s. Sh e p ro vi de d t he FBI with t hr ee “ li st s” in whi chsh e ex pr es se d t ho se co nc ern s an d wh atsh e kne w abo ut Mr. Du rla nd , Mr. Harri s, an d t he ir b us in es s as so ci at es .- 35 -

[* 35 ] Inth e li st s M s. Faus et t s ta te d t ha t s he kn ew Mr. Du rla ndrece iv eda sa la ry of $1 0,0 00 pe r m on th fro m on e o f Mr. Harr is ’ bu si ne ss es an d t ha t M r. Gib bo ns ha d t ol d M r. Durl an d t ha t the y co ul d re po rt M r. Durl an d’s s al ary as a lo anto av oi d pa y in g t ax es . Ms . Fau se ttals o s ta te d t o the FBI tha t M r. Durl an d h adrece iv ed

1 4 th e p ur po rte d l oa ns fro m

Gul fp ort Oi l & Gas, s ee s up ra p artII.E, bu t n ev er pl an ne d t o re pa y

th e am ou nt s an d t ha t the lo an s wer e in te nd edto av oi d t he ir ha vi ng to pa y

tax es . 4. Ms . Fau se tt ’s Con te m ptHeari ng Mr. Du rla ndfil eda m ot io n t o m od ify the Aug us t 1 5, 2 00 0, s up pl em en ta l te m po rary ord er an d t o h ol d aco nt em pthe ari ng . On Sep te m

be r 7, 2 00 0, the co urt in th e Mi ss is si pp i d iv or ce ca se is su eda se co ndsupp le m en ta l t em po rary ord er. The sec on d s up pl em en ta l t em po rary ord er fo un d t ha t M s. Faus et t h adno t de po si te d t he $6 5,0 00 with t he co urt’s re gi st ry an d h adno t p ro vi de d c op ie s o f th e Fau se ttMerr il l Ly

nc h a ndFau se ttCh arl es Sch wab acco un t s ta te m en ts to Mr. Dur land . Con se qu en tl y , th e co urt o rd eredth at(1) Ms . Fau se ttde po si t the $6 5,0 00 to th e co urt’s re gi st ry

withi n 2 4 h ou rs fro m

th e d at e o f th e o rd er; (2) Mr. Du rla nd
no lo ng er b e requi redto pa y tem po rary spo us al supp ort t o M s. Faus et t; (3) Ms
. Ms . Fau se ttst at edth atina co urt h eari ng on May 10, 2 00 0, M r. Durl an d 1 4 te st ifi edth athe ha d n otrece iv eda sa la ry si nc e Ma rch 15 , 20 00 , andMs . Fau se tt wro te th atsh e “ kn ow[ s] fora facthe was s ti ll ge tt in g s al ary. ”- 36 -

[* 36 ] Fau se ttde li ve r wit hi n fi ve da y s t he 20 00 Jag ua r an d h er wed di ng ba ndto th e co urt cl erk ; (4 ) Ms . Fau se ttde li ve r wit hi n t hr ee d ay s co pi es of the Fau se tt Merril l Lync h andFau se ttCh arl es Sch wab acco un t s ta te m en ts to Mr. Du rla nd ’s at to rn ey ; (5 ) Ms . Fau se ttap pe ar fo r a h eari ng to sh ow caus e why sh e sh ou ldno t b e he ldin co nt em

ptof c ou rt; (6) Mr. Du rla ndbe rel ie ve d o f an y ob li ga ti on to ren de r
anacco un ti ng of the in co m e an d e xp en se s o f Gul fp ort Oi l & Gas; an d (7 ) Ms
. Fau se ttfil e a m ot io n t o d is m is s h er ci vi l ac ti on ag ai ns t Gu lfp ort Oi l & Gas a nd Eag le Ener gy in t he Dis tri ctCo urt fo r Mat ag or daCo un ty, Tex as . Ms . Fau se tt ’s con te m

pthe ari ng inth e Mi ss is si pp i d iv or ce ca se was s etfor Sep te m be r 25 , 20 00 . By

th ensh e h adret ai ne d ane w att orne y . Whe n s he arri ve d fo r th e h eari ng , sh e le arn edth atth e h eari ng ha d b eenpo stpo ne d b ecau se of a bo m b t hr eat . Whe n t he he ari ng fin al ly con ve ne d, h er n ew at to rn ey was n ot pr es en t, an d the pre si di ng jud ge requi redhe r to rep res en t h ers el f atth e h eari ng . The pre si di ng jud ge ord eredMs . Fau se ttto de po si t h er wed di ng ba ndan d ach eck dr awnon Ms . San de rs ’ tru stfun d a cco un t wi th th e co urt an d t o c al l M s. Sa nd ers
an d d ire cthe r to fil e a m ot io n t o d is m is s t he 20 00 Okl ah om a d iv or ce ca se . On Sep te m be r 28 , 20 00 , Ms . Fau se ttfil eda m ot io n t o d is m is s t he 20 00 Okl ah om a di vo rce c as e.- 37 -

[* 37 ] Afte r th e Sep te m

be r 25 , 20 00 , con te m

pthe ari ng Mr. Durla ndto ldMs
. Fau se ttth athe wou ldag ree t o s et tl e th e Mi ss is si pp i d iv or ce ca se if M s. Faus et t ag reedto cert ai n c on di ti on s. Mr . Durl an d wan te d M s. Faus ett t o re tu rnto Gul fp ort, b utsh e ref

us ed . Ins te ad , th ey

ag reedth atMs . Fau se ttwou ldm ov e to New Orle an s, Lo ui si an a. Mr. Du rla ndals o d em an de d t ha t M s. Faus ett ag ree t o fo rm a ne w ent it y

to rece iv e th e in co m e earne d u nd er the Mat ag or dalea se an d t o si gna joi ntFed eral in co m e ta x re tu rnfor19 99 . On Oct ob er 2 5, 2 00 0, M r. Dur landan d M s. Faus et t fi le d ast ip ul at io n t o h av e th e Mi ss is si pp i d iv or ce ca se di sm is se d. L. 19 99 Return On Oct ob er 1 6, 2 00 0, M r. Durl an d a ndMs . Fau se ttfil eda joi ntFo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return, fo r 19 99 (19 99 return) . On th ei r 19 99 return pe ti ti on ers rep orte d wag es , tax ab le in te res t, Sc he du le E in co m e, an d t ot al in co m e of $2 5,0 00 , $7 ,71 4, $ 95 ,54 4, an d $ 17 8,7 61 , res pe ct iv el y . On th e at ta ch ed Sch edul e E, Sup pl em en ta l In co m e an d Lo ss , pet it io ne rs rep orte d ro y al ti es , ex pe ns es , dep reci at io n e xp en se or d ep le ti on , andne t i nc om e o f $2 09 ,52 1, $6 7,8 83 , $4 6,0 94 , and$9 5,5 44 , res pe ct iv el y . Gib bo ns , Gib bo ns & Bu ckpre pa red th e 1 99 9 re tu rnon th e b as is of i nf orm at io n tha t M r. Durl an d p ro vi de d t o M r. Gib bo ns .- 38 -

[* 38 ] M. Bo le yn En erg y On Oct ob er 1 7, 2 00 0, M r. Durl an d a ndMs . Fau se ttin co rp or at edBo le yn Ene rg y , Inc . (Bo le yn En erg y ). Ms . Fau se ttwas t he pre si de ntof B ol eyn En erg y , an d M r. Durl an d was vi ce p res id en t, s ecre ta ry , andtre as ur er. Ms . Fau se ttan d M r. Dur landeach own ed75 0 s hares of B ol eyn En erg y . On Oct ob er 1 9, 2 00 0, M s. Fau se ttass ig ne d h er i nt eres t i n t he Mat ag or dalea se to Bo le yn En erg y . After t he y in co rp or at edBo le yn En erg y , Mr. Dur la ndto ldMs . Fau se ttth athe ha d d ep os it ed in to anacco un t atMerr il l Lync h o wne d b y Bo le yn En erg y

(Bo le yn M erri ll Ly

nc h) th e fu nd s fr om

th e Ma ta go rd a le as e p ro du ct io n c he ck s t ha t h e h adpre vi ou sl y
cas he d. III. Eve nt s Occ urrin g Du rin g 2 00 1 and20 02 A. 20 01 Cas hi er’s Ch eck s In20 01 Mr. Du rla ndpurch as edth e fo ll owi ng cas hi er’s ch eck s fr om Whi tn ey Nati on al Ban k wi thcas h:- 39 -

[* 39 ] Ch eck No. Date Am ou nt 09 01 6 1/1 6 $3 0,0 00 09 30 2 2/1 3 12 ,50 0 09 90 2 4/1 7 5,0 00 09 93 0 4/2 4 5,0 00 09 95 9 5/ 3 4,0 00 10 00 0 5/1 7 1,5 00 T ot al 58 ,00 0 The pay ee o n the 20 01 cas hi er’s ch eck s was Gul fp ort Oi l & Gas, an d t he rem it te r li ne on th e ch eck s i nd ic at edth atth e rem it te r was Mr. Du rla ndan d t ha t the y were fo r th e p aym en t o f ro y al ti es on th e Ma ta go rd a le as e. Mr. Du rla ndde po si te d t he
cas hi er’s ch eck s i nt o aMerr il l Lync h a cco un t o wne d b y Gul fp ort Oi l & Gas. B. Mr. Du rla nd ’s andMr. Harri s’ Ass ig nm en t o f Sh ares of Gu lfp ort Oil & Gas Co m

m on Sto ckto Gul fp ort Oi l & Gas On J anua ry

15 , 20 01 , Mr. Dur landan d Gu lfp ort Oi l & Gas e nt eredin to an ag reem en t (Du rla ndJanuary 15 , 20 01 , agr eem en t) t o e xc ha ng e 5 73 of M r. Dur land ’s 1,1 70 sh ares of Gu lfp ort Oi l & Gas c omm on st oc k fo r th e fo ll owi ng pr om is so ry

no te s p ay ab le to Gul fp ort Oi l & Gas:- 40 -

[* 40 ] Date Am ou nt 6/ 25 /1 99 9 $2 0,0 00 7/ 16 /1 99 9 35 0,0 00 10 /2 8/ 19 99 65 ,00 0 12 /3 1/ 20 00 34 ,80 0 1 Tota l 46 9,8 00 Thi s p ro m is so ry

no te is no t i n 1 th e rec or d. Mr. Harr is , on be ha lf o f Gul fp ort Oi l & Gas, an d M r. Durl an d s ig ne d t he Durl an d Ja nu ary 15 , 20 01 , agr eem en t. Ina do cu m en t d at edJan ua ry 15 , 20 01 , reco rd edon Apr il 11 , 20 01 , andsi gn edby Mr. Harris on be ha lf o f Gul fp ort Oi l & Gas, Gul fp ort Oi l & Gas re le as edth e Nov em be r 3, 1 99 9, d eedof t ru sten cu m be rin g t he 54 th Str eetho us e. Inun da te d d oc um en ts si gn edby Mr. Harris on be ha lf o f Gul fp ort Oi l & Gas a ndwitne ss edby Mr. Durl an d a ndMs . Fau se tt , Gul fp ort Oi l & Gas ackno wled ge d t ha t the Ju ne 25 , Ju ly 16, an d Oct ob er 2 8, 1 99 9, p ro m is so ry
no te s wer e p ai d i n fu ll
. 1 5

Mr. Du rla ndtes ti fie d t ha t h e si gn edth es e ackno wled gm en ts aro un d 1 5 Ja nu ary 15 , 20 01 . W e d o n otfin d M r. Durl an d’s t es ti m on y to be cred ib le . Ins te ad we fi ndcred ib le Ms . Fau se tt ’s st at em en t t o t he FBI i n S ep te m be r 20 00 th atMr. Dur landha d h er p rep are r el eas es an d a ckno wled gm en ts of p aym en ts at t he same ti m e as he ha d h er p rep are the pro m is so ry no te s fo r th e p ur

po rte d l oa ns .- 41 -

[* 41 ] On J anua ry

15 , 20 01 , Mr. Harri s an d Gu lfp ort Oi l & Gas e nt eredin to an ag reem en t (Ha rri s J anuary 15 , 20 01 , agr eem en t) p ur su an t t o wh ic h Gu lfp ort Oi l & Gas an d M r. Harri s ag reedto ex ch an ge 89 6 o f Mr. Harris ’ 1,8 30 sh ares of Gul fp ort Oi l & Gas c omm on st oc k fo r th e fo ll owi ng pro m is so ry no te s: Date Am ou nt 7/ 16 /1 99 9 $3 35 ,00 0 7/ 16 /1 99 9 12 5,0 00 10 /1 9/ 19 99 75 ,00 0 12 /3 1/ 20 00 42 ,80 0 1 T ot al 57 7,8 00 Thi s p ro m is so ry

no te is no t i n 1 th e rec or d. Mr. Du rla nd , on be ha lf o f Gul fp ort Oi l & Gas, an d M r. Harri s s ig ne d t he Harri s Ja nu ary 15 , 20 01 , agr eem en t. Ina do cu m en t d at edJan ua ry 15 , 20 01 , reco rd edon Apr il 11 , 20 01 , andsi gn edby Mr. Durl an d o n b eh al f of Gul fp ort Oi l & Gas, Gul fp ort Oi l & Gas re le as edth e Ju ly 16, 1 99 9, d eedof t ru sten cu m be rin g M r. an d Mrs . Harri s’ ho m e inLon g B each , Mis si ss ip pi . After M r. Durl an d a ndMr. Harr is
res pe ct iv el y

ass ig ne d 5 73 an d 8 96 sh ares of t he ir Gu lfp ort Oi l & Gas c omm on st oc k t o Gu lfp ort Oi l & Gas, M r. Durl an d a ndMr. Harr is co nt in ue d t o o wn 3 9%
an d 6 1% o f th e o ut st an di ng Gul fp ort Oi l & Gas c omm onst oc k, re sp ect iv el y .- 42 - [* 42 ] C. Ch eck s Is su edto Bo le yn En erg y

Gul fp ort Oi l & Gas i ss ue d t he fol lo win g c he ck s t o B ol eyn En erg y in20 01 : Che ckNo. Date Am ou nt Mem o l in e 13 45 3/2 1 $5 ,00 0 “ Rep aym en t o f lo an s t o c om pany” 13 59 3/2 1 40 ,00 0 “ Loa n t o c om pa ny” 13 96 4/3 0 15 ,00 0 “ Net wo rk in g i nt eres t p aym en t fo r March 20 01 Mat ag or daCo un ty, TXpro pe rti es ” Mr. Du rla ndcas he d t he se ch eck s atFerg us on Ch eckCas hi ng . Bol eyn En erg y rep orte d t he am ou nton ch eckNo. 1 39 6 o n i ts 20 01 return, an d p et it io ne rs rep orte d th atam ou nton a Sch edul e E att ach edto th ei r 20 01 return. Bo le y n En erg y di d n ot rep ort the am ou nton ch eckNo. 1 34 5 o r 13 59 on it s 2 00 1 re tu rn , andpe ti ti on ers di d n otrep ort tho se am ou nt s o n the ir 2 00 1 re tu rn . D. Prytani a StreetHou se Inlat e 2 00 0 o r ear ly 200 1 M r. Durl an d i nf orm edMs . Fau se ttth athe wou ld
no t d iv or ce h er an d t ha t h e wou ldno t g iv e h er the reco rd s h e h adpro m is edhe r. He th endi rect edhe r to lo okfor a ho us e to pu rch as e in New Orleans , Lou is ia na , an d h e h ire d s om eo ne to tak e h er ar ou ndto lo okforon e. On Ap ril 22 , 20 01 , Mr. Dur la ndan d M s. Faus ett s ig ne d aco nt ractto pu rch as e a h ou se on Prytani a StreetinNew Orleans , Lou is ia na(Prytan iaStr eet ho us e), fo r $6 22 ,50 0. OnMay 31, 2 00 1, M s. Faus et t cl os edon th e Prytan iaStr eet- 43 -

[* 43 ] ho us e, an d i t was ti tl edinhe r na m e. Mr. Du rla ndan d M s. Faus et t p ai d fo r th e Prytan iaStr eetho us e wit h acert ifi edch eckfro m Merr il l Lync h a nd$2 5,0 00 in
cas h. Th e certi fie d c he ckfro m Merr il l Lync h was ob ta in edwith fu nd s h el d i n a n
acco un t o wne d b y

Bo le yn En erg y . Tho se fun ds were-- atlea stinpa rt- -fro m
am ou nt s p ai d t o M r. Durl an d, M s. Faus ett, o r Bo le y n En erg y un de r th e Ma ta go rd a le as e. On Se pt em

be r 26 , 20 01 , Ms . Fau se ttform edTrin it y Art & An ti qu es , LLC (Tri ni ty Art) , to sel l art an d a nt ique s. Ona da te th atis un cl ear f ro m th e rec or d M s. Fau se tttra ns ferr edth e Prytan iaStr eetho us e to Trin ity Art. Lat er Tri ni ty Art tra ns ferr edth e Prytan iaStr eetho us e b ackto Ms . Fau se ttso th atsh e co ul d o bt ai n a lo anon th e p ro pe rty. A fte r ob ta in in g t he lo anMs . Fau se tttra ns ferr edth e Prytan ia Streetho us e b ackto Trin it y Art. E. Hub bardLit ig at io n InDecem be r 20 00 ARXA cha ng edit s n am e to Kin g R es ou rces , Inc . (Kin g Res ou rces ). On Ma rch 9, 2 00 1, cr ed it or s o f Kin g R es ou rces an d Gu lfp ort Oi l & Gas su edKin g R es ou rces , Gul fp ort Oi l & Gas, M r. Harri s, an d M r. Durl an d i n t he U.S. Dis tri ctCo urt fo r th e So ut he rnDis tri ctof M is si ss ip pi (Hub ba rdcas e o r li ti ga ti on ). The p la in ti ffs in th e Hub ba rdcas e cl ai m edth atKin g R es ou rces an d Gul fp ort Oi l & Gas h adfai le d t o p ay th e p la in ti ffs am ou nt s due on pro m is so ry- 44 -

[* 44 ] no te s ex ecu te d b y

ARXA andGul fp ort Oi l & Gas. InNov em be r 20 02 Ms
. Fau se ttwas a dd edas ade fen da ntinth e Hub ba rdcas e. F. Mr. Du rla nd ’s Depa rtu re InJu ly 200 1 Hawk in s R an ch sen t a l et te r to Gul fp ort Oi l & Gas d em an di ng
ov erdue royalty

pa ym en ts on th e Ma ta go rd a le as e. On Se pt em be r 12 , 20 01 , aft er Gul fp ort Oi l & Gas fa il edto m ak e th e requi redpa ym en ts , Hawki ns Ran ch te rm in at edth e le as e. Aro un d S ep te m

be r 20 01 Mr. Du rla ndst op pe d wo rk in g fo r Mr. Harris an d Gul fp ort Oi l & Gas. By N ov em be r 20 01 Mr. Du rla ndha d m ov edin to th e Prytan ia Streetho us e wit h M s. Faus et t an d h adst op pe d wo rk in g a lt og ethe r. G. 20 00 an d 2 00 1 R eturns InOcto be r 20 01 Bo le yn En erg y fil eda Fo rm

11 20 S, U.S. Inc om e Tax Return fo r anS Co rp or at io n, fo r 20 00 (20 00 Bo le yn En erg y return) , rep orti ng th at itele ct edto be tax edas a n S co rp or at io n a s o f Oct ob er 1 7, 2 00 0. Anacco un ti ng firm na m edGib bo ns Hall , LLC (Gib bo ns Hall ), pre pa redth e 2 00 0 B ol eyn En erg y 1 6 return, an d M r. Durl an d s ig ne d the return a s an off ic er o f Bo le y

n En erg y .

Gib bo ns Hall ’s bu si ne ss ad dr es s i s the same as Gib bo ns , Gib bo ns & 1 6 Bu ck ’s bu si ne ss ad dr es s.- 45 -

[* 45 ] On Oct ob er 1 7, 2 00 1, M r. Durl an d a ndMs . Fau se ttfil eda joi ntFo rm 10 40 fo r 20 00 (20 00 return) . On th ei r 20 00 return p et it io ne rs rep orte d wag es , tax ab le in te res t, Sc he du le E in co m e, an d t ot al in co m e o f $2 5,0 00 , $5 ,25 4, $ 13 3,4 82 , and $2 04 ,23 8, re sp ect iv el y . On anatt ach edSch edul e E pe ti ti on ers rep orte d ro y al ti es , ex pe ns es , dep reci at io n e xp en se or d ep le ti on , andne t i nc om e o f $2 02 ,71 6, $4 0,0 00 , $2 9,2 34 , and$1 33 ,48 2, re sp ect iv el y . Gib bo ns Hall pre pa redth e 2 00 0 return o n t he ba si s o f in fo rm at io n t ha t M r. Durl an d p ro vi de d t o M r. Gib bo ns . InSep te m

be r 20 02 Bo le yn En erg y

fil eda Fo rm

11 20 S fo r 20 01 (20 01 Bo le y n En erg y return) . Gib bo ns Hall pre pa redth e 2 00 1 B ol ey n En erg y return, an d Mr. Du rla ndsi gn edth e return a s an off ic er o f Bo le yn En erg y . On Se pt em

be r 3, 2 00 2, M r. Durl an d a ndMs . Fau se ttfil eda joi ntFo rm 10 40 fo r 20 01 (20 01 return) . On th ei r 20 01 return p et it io ne rs rep orte d wag es , tax ab le in te res t, Sc he du le E in co m e, an d t ot al in co m e o f zer o, $ 20 ,87 6, $ 27 5,4 30 , and $2 92 ,85 2, re sp ect iv el y . On anatt ach edSch edul e E pe ti ti on ers rep orte d ro y al ti es , ex pe ns es , dep reci at io n e xp en se or d ep le ti on , andne t i nc om e o f $4 36 ,34 1, $6 7,8 16 , $9 6,7 41 , and$2 75 ,43 0, re sp ect iv el y . Gib bo ns Hall pre pa redth e 2 00 1 return o n t he ba si s o f in fo rm at io n t ha t M r. Durl an d p ro vi de d t o M r. Gib bo ns .- 46 -

[* 46 ] IV. Eve nt s Occ urrin g Aft er 2 00 2 A. Sai ntAndrews Co urt Ho us e InJu ly 200 3 M r. Durl an d a ndMs . Fau se ttm ov edin to a ho us e th atMs
. Fau se ttpu rch as edon Sai ntAndrews Co urt i n F ris co , Texa s (S ai ntAndrews Co urt ho us e). Whi le sh e was li vi ng in Fri sc o M s. Faus et t s ol d a nt ique s t hr ou gh a li m it ed li ab il it y co m pa ny she own edna m edRo se woo d Ven tures , LLC (Ros ewo od Ven tures ). B. 20 02 -2 00 7 R eturns Mr. Du rla ndan d M s. Faus et t fi le d jo in t Fe de ral in co m e ta x re tu rn s fo r 20 02
an d 2 00 3. Mr . Gib bo ns pre pa redth e joi ntreturns . Mr. Dur la ndan d M s. Faus et t fil edsep arat e Fed eral in co m e ta x re tu rn s fo r 20 04 -0 7. Anacco un ti ng firm in Dall as , Texa s, p rep aredth e se parat e returns . C. IRS’ Inv es ti ga ti on of M r. Durl an d On a d at e th atis un cl ear f ro m th e rec or d t he FBI g av e th e IRS th e in fo rm at io n t ha t M s. Faus et t h adpro vi de d t o i ts ag en ts in20 00 . In M arch 20 04 Sp eci al Agen t Nan cy

Em m on s an d R ev enue Agen t Li saW an sl ey m etwith M r. Dur landan d M s. Faus et t. On M arch 30 , 20 04 , Spe ci al Agen t Emm on s an d S pe ci al Agen t Darren Mayer m etwith M r. Harri s. Du rin g t he Marc h 3 0, 2 00 4, m eet in g M r. Harri s- 47 -

[* 47 ] cl ai m edth atMr. Du rla ndha d s to le n $ 3 m il li on an d c or po rat e rec or ds fro m Gul fp ort Oi l & Gas b utth athe ha d n oty etco nf ro nt edhi m

ab ou t the st ol enm on ey
orreco rd s. OnApri l 1 3, 2 00 5, Sp eci al Agen t Emm on s an d R ev enue Agen t W an sl ey m etwith M r. Harri s t o re vi ew do cu m en ts rel at in g t o Gu lfp ort Oi l & Gas
an d t o a skhi m

ad di ti on al qu es ti on s. Du rin g t he Apri l 1 3, 2 00 5, m eet in g M r. Harri s s ta te d t ha t h e h adno t s een , anddi d n otha ve , curren cy trans act io n re po rts (CTRs ) m ai nt ai ne d b y

Ferg us on Ch eckCas hi ng an d fi le d i n h is na m e ev enth ou gh th e CTRs rel at edto ch eck s t ha t M r. Durl an d h adcas he d. 1 7 D. Mr. Du rla nd ’s Trans fer o f 1,5 00 Sh ares of B ol eyn En erg y Co m m onSto ckto Ro se woo d Ven tu res On a d at e th atis un cl ear f ro m th e rec or d M r. Durl an d e xe cu te d abi ll of s al e da te d Dec em

be r 28 , 20 04 , th atpu rp orte d t o t ran sf er 1 ,50 0 s hares of c omm on st oc k

Mr. Harr is als o t es ti fie d tha t h e h adno t s en t J on atha n Harris to retrie ve th e 1 7 CTRs fro m

Ferg us onCh eckCas hi ng an d t ha t n ei th er J on atha n Harris no r Ms
. Ferg us onha d g iv enhi m

an y CTRs . W e d o n otfin d M r. Harri s’ st at em en t o r te st im on y to be cred ib le be cau se Jo na th anHarri s cr ed ib ly test ifi edth athe retrie ve d c op ie s o f th e CTRs fro m Ferg us on Ch eckCas hi ng , andwe fin d i t im pl au si bl e th athe wou ldha ve do ne th is on hi s o wn o r th atMr. Harr is di d n otsee th e CTRs th atJo na th anHarri s re tri ev ed
.- 48 -

[* 48 ] in Bo le yn En erg y

fro m hi m se lf t o R os ewo odVentur es . Mr. Dur la nd 1 8 si gn edth e b il l o f sa le as awitne ss . E. Mr. Du rla nd ’s Ind ic tm en t fo r Tax Evas io n On J un e 2 1, 2 00 6, the Uni te d S ta te s fi le d acri m in al in di ctm en t ag ai ns t M r. Dur landwith t he U.S. Dist ric t Co urt fo r th e So ut he rnDis tri ctof M is si ss ip pi . The in di ctm en t ch arg edMr. Durlandwith t wo co un ts of v io la ti ng sec ti on 72 01 with
res pe ctto hi s 1 99 9 a nd20 00 Fed eral in co m e ta x l iabi li ti es , res pe ct iv el y . W it h
res pe ctto 20 00 th e in di ctm en t s ta te d a s fo ll ows : COUNT 2 On o r ab ou t Oct ob er 2 , 20 01 , inHarri so n C ou nt y , inth e So ut he rnDiv is io n o f th e So ut he rnDis tri ctof M is si ss ip pi , th e de fen da nt , JACK R. DURLAND, JR., wh o was a res id en t o f Gul fp ort, Mi ss is si pp i, d idwil lfu ll y att em ptto ev ad e an d d efea t a la rg e p artof t he in co m e ta x due an d o win g b y he an d h is sp ou se to th e Uni te d S ta te s o f Am eri ca fo r th e cal en da r y ear 2 00 0, b y pre pa rin g an d c au si ng to be pre pa red , andby sig ni ng an d c au si ng to be si gn ed , a fal se an d fr au du le ntjoi ntU.S. Ind iv idua l In co m e Tax Return, Fo rm 10 40 , on be ha lf o f th em se lv es , whi ch was fi le d wi th th e In te rn al Rev enue Serv ic e, whe rei n i t was st at edth atth ei r joi nttax ab le in co m e fo r sa idcal en da r y ear was th e su m of $ 20 1,1 64 , andth atth e am ou nt The pa rti es st ip ul at edth atMr. Du rla ndtrans ferr ed1,5 00 sh ares of B ol ey n 1 8 Ene rg y co m m on st oc k t o R os ewo odVentur es on Decem be r 28 , 20 04 . Howev er, we do no t fi ndth is st ip ul at io n t o b e cre di bl e b ecau se th e d at e o n t he bi ll of s al e ap pe ars to ha ve be enalt eredan d M r. Durl an d o wne d o nl y 75 0 s hares of B ol eyn Ene rg y co m m on st oc k. We th eref

or e d is reg ardth e st ip ul at io n a s i nc on si st en t wi th a st ip ul at edex hi bi t i n the reco rd . See Ca l-M ai ne Fo od s, In c. v. Co m m is si on er, 9 3 T.C. at 1 95
.- 49 -

[* 49 ] of t ax du e an d o win g t he reo n was th e su m of $ 56 ,46 5, wh erea s, as he th enan d t he re wel l kne w andbe li ev ed , th ei r joi nttax ab le in co m e fo r th e sa idcal en da r y ear was subs ta nt ia ll y inex ces s o f th at he ret of or e st at edan d t ha t upo n s ai d a dd it io na l t ax ab le in co m e a subs ta nt ia l ad di ti on al tax was due an d o win g t o t he Uni te d S ta te s o f Am eri ca. Invi ol at io n o f Tit le 26 , Uni te d S ta te s C od e, Sect io n 7 20 1. F. Mr. Du rla nd ’s Ple a Agr eem en t Ina le tt er t o M r. Durl an d’s at to rn ey s d at edFeb ru ary 28 , 20 07 , forth e pu rp os e o f cal cu la ti ng Mr. Durland ’s sen te nc e u nd er the Fed eral sen te nc in g gu id el in es forth e co un t re la ti ng to 19 99 , th e U.S. Att orne y ’s Offic e fo r th e So ut he rnDis tri ctof M is si ss ip pi pro po se d n otto in cl ud e in hi s i nc om e $ 43 5,0 00 in pu rp orte d l oa ns fro m

Gul fp ort Oi l & Gas. Ad di ti on al ly, fo r th e p ur po se of cal cu la ti ng Mr. Du rla nd ’s sen te nc e u nd er the Fed eral sen te nc in g g ui de li ne s fo r th e
co un t re la ti ng to 20 00 , th e U.S. Att orne y ’s Offic e p ro po se d n otto in cl ud e th e $1 2,5 00 ch eckpa y ab le to T.J. Oil & Gas , $1 63 ,75 1 i n In ve st ec ch eck s, an d $3 27 ,00 0 i n i nd iv idua l i nv es to r ch eck s; an d t o i nc lu de on ly 39% o f th e $ 92 1,9 89 pr oc eed s fr om

Eagl e Ene rg y

pro du ct io n c he ck s. Add it io na ll y , th e U.S. 1 9 Att orne y ’s Offic e p ro po se d n otto see k a n abu se of t ru stenha nc em en t o n t he The ev id en ce p res en te d a t tria l i nd ic at edth atth e in di vi du al in ve st or 1 9 ch eck s t ot al $3 27 ,20 0. Aft er ro un di ng to th e n eare stdo ll ar, the Co urt fi nd s t ha t th e p ro ceed s fr om

Eagl e Ene rg y

to ta l $ 92 1,9 88 , andth e In ve st ec ch eck s t ot al $1 63 ,75 2.- 50 -

[* 50 ] th eo ry

th atMr. Du rla ndem

be zzl edth e unr ep orte d i nc om e fro m Gul fp ort Oi l & Gas
. On Ap ril 12 , 20 07 , Mr. Dur la nden te redin to a pl ea ag reem en t wi th th e U.S. Att orne y ’s Offic e in whi ch he ag reedto pl eadgu il ty to co un t 2 of the June 21 , 20 06 , in di ctm en t. Pu rs ua ntto th e p le a ag reem en t, the U.S. Atto rn ey ’s Offic e ag reed , am on g o th er thi ng s, t o m ov e to di sm is s t he op enco un t; to st ip ul at e th at th e ta x l os s fo r 20 00 is $1 15 ,55 7; an d t o n otfurth er p ro se cu te Mr. Du rla ndor M s. Fau se ttforev en ts rel at in g t o t he ir 1 99 9- 20 01 tax y ears . The p le a ag reem en t s ta te d
as fol lo ws: 8. Bi nd in g Eff ectOn Th is Dis tri ctOnl y . It i s fu rth er un de rs to odth atth is pl ea ag reem en t d oe s n otbi ndan y st at e o r lo cal pr os ecu ti ng au th or it ie s o r an y ot he r fed eral di st ric t ex cep t as to th e us e o f Defen da nt ’s st at em en ts vo lu nt ari ly giv enhe reu nd er; furth er, th is ag reem en t d oe s n otbi ndth e Att orne y Gene ral of t he Uni te d St at es in reg ardto an y

civ il m at te r in vo lv in g t he tax st atut es of t he Uni te d S ta te s.

* * * * * * * 13
. Co m

pl et e Agr eem en t. Itis furth er u nd ers to odth atth is pl ea ag reem en t co m

pl et el y refl ect s al l p ro m is es , agr eem en ts an d co nd it io ns m ad e b y

an d b etweenth e Uni te d S ta te s At to rn ey ’s Offic e fo r th e So ut he rnDis tri ctof M is si ss ip pi an d Def en dant . On J ul y 27 , 20 07 , th e U.S. Dis tri ctCo urt fo r th e So ut he rnDis tri ctof Mi ss is si pp i ac cep te d agu il ty ple a as to co un t 2 , anddi sm is se d c ou nt1, o f th e Ju ne- 51 -

[* 51 ] 21 , 20 06 , in di ctm en t. The co urt s en te nc edMr. Durla ndto a te rm of im pr is on m en t o f 11 m on th s an d s up erv is edrel eas e o f 3 years an d re qu ire d h im to pa y anass es sm en t o f $1 00 , a fin e o f $3 0,0 00 , andres ti tu ti onof $ 97 ,47 5. Mr
. Dur landwas i m

pr is on edin a Fed eral pri so n c am p i n P en sa co la , Flo rid a, fro m Aug us t 2 00 7 u nt il Ju ne 20 08
. 2 0 G. 20 07 Okl ah om a Div or ce Ca se On No ve m

be r 15 , 20 07 , Ms . Fau se ttfil edfordi vo rce f ro m Mr. Du rla ndin th e Dis tri ctCo urt o f Okl ah om a Co un ty, Okl ah om a (2 00 7 Ok la ho m a d iv or ce ca se ). On M arch 2, 2 00 9, the co urt i n t he 20 07 Okl ah om a d iv or ce ca se di ss ol ve d pe ti ti on ers ’ m arri ag e. The d iv or ce d ecre e st at es th atbo th Mr. Durla ndan d M s. Fau se ttare l iabl e fo r th e ta x fo r th e y ears at i ss ue . V. Defi ci en cy

Not ic es On Se pt em

be r 28 , 20 10 , res po nd en t i ss ue d dup li cat e o rig in al no ti ces of de fic ie nc y

to Mr. Du rla ndan d M s. Faus et t. Inanatt ach edFo rm 88 6- A, Exp lana ti on of Ad

jus tm en ts , res po nd en t d et erm in edth atth e fo ll owi ng am ou nt s Res po nd en t i nt ro du cedin to ev id en ce s ev eral let te rs th atMr. Du rland 2 0 wro te to Ms . Fau se ttwhi le he was i nc arce rat ed . Mr. Dur la ndob jecte d t o t he in tro du ct io n o f th es e le tt ers on th e b as is of the m ari ta l co m m un ic at io ns pri vi le ge . At tria l we re se rv edrul in g o n M r. Durl an d’s o bjec ti on , andby ord er we o ve rru le d Mr. Du rla nd ’s ob

jecti on an d a dm it te d t he let te rs in to ev id en ce. We no te , ho wev er, th atth e p art ie s d idno t re ly on a ny of th os e le tt ers inth ei r po st tri al bri efs , andwe li ke wis e d o n otba se any

of o urfin di ng s o f fac t o n the co nt en ts of t ho se let te rs .- 52 -

[* 52 ] rep res en te d d iv ert edco rp or at e in co m e to Mr. Du rla ndan d/ orMs . Fau se ttfor 19 99 -2 00 1: Ent it y

or s ou rce 19 99 20 00 20 01 T.J. Oil & Gas $5 5,0 00 $1 7,5 00 -0 - Gul fp ort Oi l & Gas 43 5,0 00 12 2,5 00 $4 5,0 00 Eag le Ener gy -0 - 92 1,9 88 -0 - In ve st ec -0 - 16 3,7 52 -0 - In di vi du al in ve st or s -0- 32 7,2 00 -0- Tot al 49 0,0 00 1,5 52 ,94 0 45 ,00 0 Res po nd en t al so de te rm in edth atMr. Du rla ndan d M s. Faus et t wer e en ti tl edto ad di ti on al Sch edul e E de du ct io ns of $ 14 4,5 48 for20 00 an d t ha t M r. Durl an d 2 1
was li ab le forciv il frau d p en al ti es with re sp ectto th e en ti re u nd erp aym en t o f ta x fo r 19 99 , 20 00 , and20 01
. OPINION I. Prel im in ary Mat te rs A. Cred ib il it y

of Witne ss es an d R el iabi li ty of Doc um en ta ry Evi de nc e InNeon at ol og y

Ass oc s., P.A. v. C omm is si on er, 1 15 T.C. 43 , 84 (20 00 ) (ci ti ng Bo eh m

v. Co m m is si on er, 3 26 U.S. 28 7, 2 93 (19 45 ), an d Wil m in gt on Tr.

Ina do cu m en t d at edJu ne 14 , 20 05 , Rev enue Agen t Wans le y de te rm in ed 2 1 th atpe ti ti on ers subs ta nt ia te d ro y al ty paym en ts of $ 30 ,00 0 d educ te d o n t he Sch edul e E att ach edto th ei r 20 00 return a ndth atth ey were en ti tl edto cla im fu rth er Sc he du le E deduc ti on s o f $1 44 ,54 8 re la ti ng to Whi tn ey Nati on al Ban k cas hi er’s ch eckNos . 08 94 5, 0 86 37 , 08 67 6, 0 86 90 , and08 80 7.- 53 -

[* 53 ] Co . v. Hel ve rin g, 3 16 U.S. 16 4, 1 67 -1 68 (19 42 )), aff ’d, 29 9 F .3d22 1 (3 d Ci r. 20 02 ), we st at edas f ol lo ws: Befo re turni ng to th e is su es at h an d, we p au se to pa ss on ou r pe rcep ti on of t he tri al witne ss es [an d t he rel iabi li ty of m uc h o f th e do cu m en ta ry

ev id en ce]. W e o bs erv e th e can do r, si nc eri ty, an d de m ean orof e achwitne ss inord er t o e va lu at e h is or h er t es ti m on y an d a ss ig n i t wei gh t fo r th e p rimary pu rp os e o f fi nd in g d is pu te d fa ct s. W e d et erm in e th e cre di bi li ty of eac h wi tn es s, wei gh each pi ece o f ev id en ce, draw ap pr op ria te in fere nc es , andch oo se be twee n co nf li ct in g i nf eren ces in fin di ng th e fac ts of acas e. The m ere f act th aton e p arty

pre se nt s u no pp os edtes ti m on y [orothe r ev id en ce] on hi s o r he r be ha lf d oe s n otne ces sa ril y m ean th atth e el ic it edtes ti m on y [o r ot he r ev id en ce] will res ul t i n afin di ng of f actinth atparty’ s fa vo r. W e wil l n otacce ptth e te st im on y of wi tn es se s atface va lu e if we fin d th atth e o ut wardap pe aran ce o f th e fac ts inth ei r to ta li ty con ve y s an im pr es si on co nt rary to t he sp ok enword . * * * The Co urt’s s ta te m en t i n Neo na to lo gy Asso cs . is pa rti cu la rly apthe re. The pa rti es cal le d s ev eral witne ss es to tes ti fy an d i nt ro du cednu m ero us do cu m en ts . Unl es s we o th erwi se he rei n e xp res sl y fin d, we d idno t fi ndth e te st im on y of M r. Dur land , Ms . Fau se tt , Mr. Harri s, o r Ms . Ric ha rd so n t o b e cre di bl e. Add it io na ll y , we ha ve li tt le co nf

id en ce i n the ge nu in en es s o r acc ur acy of m any of t he do cu m en ts th atMr. Du rla nddra fte d, m ai nt ai ne d, o r subs cri be d. B. Ju di ci al Est op pe l Und er the do ctrin e o f jud ic ia l es to pp el , a pa rty tha t wi ns jud ic ia l ac cep ta nc e of a th eo ry in on e cas e can no t p ur su e a co nt rad ic to ry th eo ry ina la te r cas e. See- 54 -

[* 54 ] New Ham

ps hi re v . Mai ne , 53 2 U.S. 7 42 , 74 9 (2 00 1) ; Fa zi v. Co m m is si on er, 10 5 T.C. 4 36 , 44 5 (1 99 5) (ci ti ng Hud dl es to n v . Comm is si on er, 1 00 T.C. 17 , 28 -2 9 (1 99 3) ). Ju di ci al est op pe l i s an equi tabl e p rin ci pl e th e p ur po se of wh ic h i s t o

“pr ot ectth e in te gr it y

of t he jud ic ia l p ro ces s * * * by pro hi bi ti ng pa rti es fro m de li be rat el y

ch an gi ng po si ti on s ac co rd in g t o t he ex ig en ci es of t he m om en t” . New Ham ps hi re v . Mai ne , 53 2 U.S. at74 9- 75 0 (f irs t quo ti ng Edward s v . Aetn a Life In s. Co ., 69 0 F .2d59 5, 5 98 (6t h C ir. 1 98 2) , th enqu ot in g Un it edSta te s v . McC as ke y , 9 F.3 d 3 68 , 37 8 (5 thCir . 19 93 )). “ [J ]udi ci al est op pe l d oe s n otba r a pa rty from

co nt rad ic ti ng it se lf, b utfro m co nt rad ic ti ng a co urt’s d et erm in at io n t ha t
was ba se d o n t ha t p arty ’s po si ti on .” Tele dyne In du s., In c. v. NLRB, 9 11 F.2d 12 14 , 12 17 n.3 (6t h C ir. 1 99 0)
. Mr. Du rla ndco nt en ds th atres po nd en t s ho ul d b e b arre d, u nd er the do ctrin e of jud ic ia l es to pp el , fro m

ass ert in g ade fic ie nc y

gre at er tha n t he tax lo ss th atth e
se nt en ci ng co urt i n h is cri m in al cas e rel ie d o n t o d et erm in e h is res ti tu ti on ob li ga ti on for20 00 . In p art ic ul ar Mr . Durl an d a ss ert s t ha t the tax lo ss th atth e
se nt en ci ng co urt re li edon was b as edup on cert ai n c on ces si on s t ha t the U.S. at to rn ey pro po se d t o m ak e in th e Feb ru ary 28 , 20 07 , let te r to hi s at to rn ey s. Th is
co nt en ti on is witho utm eri t b ecau se res po nd en t h as no t as ke d t hi s C ou rt t o a ccep t- 55 -

[* 55 ] a po si ti on co nt rary to o ne th atth e Gov ern m en t s uc ces sf ul ly ask edth e co urt in Mr. Du rla nd ’s cri m in al cas e to acce pt . C. Mr. Du rla nd ’s Ple a Agr eem en t Mr. Du rla ndco nt en ds res po nd en t s ho ul d b e b ou ndby the term s o f hi s p le a ag reem en t-- un de r whi ch th e co un t re la ti ng to 19 99 was d is m is se d a ndth e Gov ern m en t ag reedno t t o fu rth er p ro se cu te Mr. Du rlandan d M s. Faus ett fo r 19 99 -2 00 1- -an d b y

cert ai n re pr es en ta ti on s t ha t the U.S. Atto rn ey ’s Offic e pu rp orte dl y

m ad e to hi m

th atwere n otm em or ia li zedinth e p le a ag reem en t. The se
co nt en ti on s, h owe ve r, are wi th ou t m eri t. Mr . Durl an d’s p le a ag reem en t ex pr es sl y st at edth atth e Gov ern m en t was no t b arre d fr om pu rs ui ng an y

civ il tax m at te r an d th atitco nt ai ns th e en ti re ag reem en t b etweenth e U.S. Att orne y ’s Offic e fo r th e So ut he rnDis tri ctof M is si ss ip pi an d M r. Durl an d. Si m il arl y , Mr. Dur la nd ’s con te nt io n t ha t the do ctrin e o f equi tabl e es to pp el sh ou ldba r res po nd en t fr om ass ert in g t he de fic ie nc ie s atis su e is witho utm eri t. An ap pe al in th es e cas es wou ldli e, ab se nta st ip ul at io n t o t he co nt rary, in the U.S. Co urt o f App eal s fo r th e Ten th Cir cu it . See s ec. 7 48 2( b) (1 )(A), (2 ). Thatco urt ha s h el d t ha t [t]o s ta te a cl ai m

of e st op pe l ag ai ns t a p riv at e p arty , a li ti ga ntm us t es tabl is h fo ur

ele m en ts : “ (1 ) th e p arty to be est op pe d m

us t kno w th e fact s; (2) th e p arty

to be est op pe d m

us t i nt en d t ha t h is co nduc t wi ll be- 56 -

[* 56 ] act edup on or m

us t s o a ctth atth e p arty

ass ert in g t he est op pe l ha s t he rig htto be li ev e th atitwas s o i nt en de d; (3) th e p arty ass ert in g th e es to pp el m

us t b e ig no ran t o f th e true fact s; an d (4 ) th e p arty as se rti ng th e es to pp el m

us t re ly on t he ot he r pa rty’ s co nduc t t o h is in jury.” Ri os v. Zig la r, 39 8 F .3d12 01 , 12 08 (10 th Cir . 20 05 ) (quo ti ng Kowal czyk, 24 5 F.3 d 1 14 3, 1 14 9 (1 0t h C ir. 2 00 1) ). “ A cla im of e st op pe l ag ai ns t the [G]ove rn m en t requi res anad di ti on al ele m en t: th e p arty ass ert in g e st op pe l m

us t s ho w th atth e [G]ove rn m en t h as en ga ge d i n ‘affi rm at iv e m is co nduc t.’” Id. (c it in g Ko walc zyk, 24 5 F .3dat 1 14 9)
. Mr. Du rla nd ’s pl ea ag reem en t ex pr es sl y st at edth atth e Gov ern m en t was no t ba rredfro m

pu rs ui ng an y

civ il tax m at te r an d d is cl ai m edan y ex tri ns ic ag reem en ts . Mr. Du rla ndha s p res en te d n o c red ib le ev id en ce tha t h e was m is le d i n a ny way . Acco rd in gl y , res po nd en t i s n otba rredfro m ass ert in g t he de fic ie nc ie s atis su e. II. Peri odof Li m it at io ns on Ass es sm en t Gen eral ly, pu rs ua ntto sec ti on 65 01 (a), the am ou ntof a ny tax m us t b e
as se ss edwithi n t hr ee years o f th e fi li ng of areturn. Se ct io n 6 50 1( c)(1 ), ho wev er, pr ov id es th at“ [i]n t he cas e o f a fal se or f rau du le ntreturn wi th th e in te ntto ev ad e ta x, the tax m ay

be ass es se d * * * at a ny tim e.” The de te rm in at io n o f frau d fo r pu rp os es of s ect io n 6 50 1( c)(1 ) is th e sa m e as th e d et erm in at io n o f frau d fo r th e pu rp os es of t he pe na lt y

un de r se ct io n 6 66 3. Neel y v. Co m m is si on er, 1 16 T.C. 79 ,- 57 -

[* 57 ] 85 (20 01 ). In t he cas e o f in co m e ta x d efi ci en ci es on joi ntreturns , pro of of frau d a ga in steit he r sp ou se pre ve nt s t he run ni ng of the pe rio d o f li m it at io ns as t o bo th sp ou se s. Van na m anv. Co m m is si on er, 5 4 T.C. 1 01 1, 1 01 8 (1 97 0)
. The st atut e o f li m it at io ns is anaffi rm at iv e d efen se , andth e p arty ass ert in g i t
m us t s pe ci fic al ly ple aditan d c arry the burd enof s ho win g i ts ap pl ic ab il it y . See Ru le s 3 9, 1 42 (a); Ro bi ns on v. Co m m is si on er, 1 17 T.C. 30 8, 3 12 (20 01 ); Ad le r v. Co m m is si on er, 8 5 T.C. 5 35 , 54 0 (1 98 5) . Peti ti on ers pro pe rly ple ad edth e st atut e of li m it at io ns as ade fen se in th ei r res pe ct iv e p et it io ns , andth e b ur de n o f pr oo f fo r th is is su e is on th em . Howev er, res po nd en t b ears th e b ur de n o f pr ov in g t ha t an
ex cep ti on to th e g en eral th ree- y ear p eri odof l im it at io ns ap pl ie s. See Harl anv. Co m m is si on er, 1 16 T.C. 31 , 39 (20 01 ) (ci ti ng Rei s v . Comm is si on er, 1 42 F.2d 90 0 (6 thCir . 19 44 ), aff’g 1 T.C. 9 (1 94 2) ); B ardwell v. Co m m is si on er, 3 8 T.C. 8 4, 92 (19 62 ), aff’d, 3 18 F.2d78 6 (1 0t h C ir. 1 96 3) . Add it io na ll y , to th e ex te ntth at
res po nd en t re li es on th e d oc tri ne of c ol la te ral est op pe l t o p recl ud e Mr. Du rland ’s arg ui ng th atth e 2 00 0 re tu rnwas n otfrau du le nt , th e b ur de n o f pr oo f is on
res po nd en t. See Ru le s 3 9, 1 42 (a). Mr. Du rla ndis pre cl ud edby the do ctrin e o f co ll at eral est op pe l fr om arg ui ng th atth e 2 00 0 re tu rnwas n otfrau du le nt . See i nf ra p artIV.B.1. Re sp on de nt
co nc ed es , ho wev er, tha t M s. Faus et t i s n otpre cl ud edfro m arg ui ng th atth e 2 00 0- 58 -

[* 58 ] return was no t fr au du le ntbe cau se sh e was no t a p arty to Mr. Du rla nd ’s pl ea ag reem en t. See Vann am anv. Co m m is si on er, 5 4 T.C. at10 18 . W e wil l the refo re de te rm in e o n t he ba si s o f th e ev id en ce i n t he se cas es whet he r th e 1 99 9- 20 01 returns were fraudul en t. Bec au se we co nc lu de be lo w th atth e 1 99 9- 20 01 returns were fraudul en t, s ee in fra p artIV.B.3, re sp on de ntha s m ethi s b ur de n o f sh owi ng th atanex cep ti on to th e g en eral th ree- y ear p eri odof l im it at io n app li es , see sec . 65 01 (c)( 1) ; Nee ly v. Co m m is si on er, 1 16 T.C. at 8 5; Vann am anv. Co m m is si on er, 5 4 T.C. at10 18
. Acco rd in gl y , pet it io ne rs ’ st atut e o f li m it at io ns de fen se fai ls
. III. Unr ep orte d In co m e Adju st m en ts A. Bu rd enof P ro of Gen eral ly, th e Co m

m is si on er’s d et erm in at io n o f a d efi ci en cy is pre su m ed
co rrec t, an d t he tax pa y er b ears th e b ur de n o f pr ov in g tha t the de te rm in at io n i s im pr op er. Ru le 14 2( a)(1 ); Welc h v . Helv eri ng , 29 0 U.S. 1 11 , 11 5 (1 93 3)
. Howev er, i f a t ax pa y er p ro du ces cred ib le ev id en ce with re sp ectto an y factua l 2 2 is su e rel ev an t t o a sc ert ai ni ng th e ta xp ay er’s l iabi li ty for an y tax im po se d b y

“ Cred ib le ev id en ce i s the qu al it y of e vi de nc e whi ch , aft er cr it ic al an al y si s, 2 2 th e co urt wo ul d fi ndsu ffi ci en t upo n wh ic h t o b as e a d eci si on on th e is su e if no co nt rary evi de nc e were s ub m it te d (wi th ou t re ga rdto th e jud ic ia l p res um pt io n o f IRS c orrect ne ss ).” Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 42 (20 01 ) (quo ti ng H.R. Co nf

. Rep t. No . 10 5- 59 9, at24 0- 24 1 (1 99 8) , 19 98 -3 C.B. 7 47 , 99 4- 99 5)
.- 59 -

[* 59 ] subt it le A or B o f th e Co de an d s at is fie s t he requi rem en ts of s ect io n 74 91 (a)( 2) , th e b ur de n o f pr oo f on an y su ch is su e sh ift s t o the Co m m is si on er. 2 3 See s ec. 7 49 1( a)(1 ). W it h re sp ectto so m e o f th e fac tu al is su es inth es e cas es pe ti ti on ers ha ve fai le d t o i nt ro du ce cr ed ib le ev id en ce. We deci de th e rem ai nd er o n t he pr ep on de ran ce o f th e ev id en ce. Bec au se we cande ci de all of t he is su es inth es e
cas es witho utreg ardto th e u lt im at e al lo cat io n o f th e b ur de n o f pr oo f un de r se ct io n 74 91 (a)( 1) , we nee d n otde ci de whet he r pe ti ti on ers sat is fie d t he requi rem en ts of
se ct io n 7 49 1( a)(2 ). See Bl od ge ttv. Co m m is si on er, 3 94 F.3d10 30 , 10 39 (8t h C ir. 20 05 ), aff’g T.C. Me m o. 2 00 3- 21 2; Knu ds env. Co m m is si on er, 1 31 T.C. 18 5, 1 88
- 18 9 (2 00 8)
. Inun rep orte d i nc om e cas es th e U.S. Co urt o f App eal s fo r th e Ten th Cir cu it ha s h el d t ha t the pre su m

pt io n o f co rrec tn es s d oe s n otatt achun ti l the Co m m is si on er h as pro du cedso m e subs ta nt iv e ev id en ce d em on strat in g t ha t the ta xp ay er re cei ve d t he un rep orte d i nc om e. See Un it edSta te s v . McM ul li n, 9 48 Sec. 7 49 1( a)(2 ) requi res a ta xp ay er t o d em on st rat e th athe or s he (1) 2 3 co m pl ie d wi th requi rem en ts un de r th e Co de to subs ta nt ia te an y it em , (2) m ai nt ai ne d a ll reco rd s re qu ire d u nd er the Co de , and(3) co op erat edwith reas on ab le reque st s b y

th e Sec ret ary fo r wit ne ss es , in fo rm at io n, d oc um en ts , m eet in gs , andin te rv ie ws. See als o Hi gb ee v . Comm is si on er, 1 16 T.C. at 4 40 -4 41
. The term “ Secr et ary” m ean s t he Secr et ary of th e Treas ury

or h is de le ga te . Sec. 77 01 (a)( 11 )(B)
.- 60 -

[* 60 ] F.2d11 88 , 11 92 (10 th Cir . 19 91 ); Eri ck so n v . Comm is si on er, 9 37 F.2d 15 48 , 15 51 (10 th Cir . 19 91 ), aff’g T.C. Me m o. 1 98 9- 55 2. Th e p art ie s h av e st ip ul at edth atMr. Du rla ndrece iv edth e am ou nt s t ha t re sp on de ntde te rm in edto be in co m e to hi m

forth e y ears at i ss ue an d t ha t the se am ou nt s wer e n otrep orte d o n Mr. Du rla ndan d M s. Faus et t’s 1 99 9- 20 01 returns . Peti ti on ers , to be su re, d is pu te
res po nd en t’s d et erm in at io n t ha t the se am ou nt s wer e in co m e to Mr. Du rla nd
. Howev er, the st ip ul at io ns are s uf fic ie ntto all ow t he pre su m pt io n o f co rrec tn es s t o at ta chto res po nd en t’s d et erm in at io n. Se e Mc Mu ll in , 94 8 F .2dat 1 19 2; Erick so n v. Co m m is si on er, 9 37 F.2dat 1 55 1. B. Sp eci fic -It em

Met ho d A tax pa y er m

us t m ai nt ai n b oo ks an d re co rd s es tabl is hi ng th e am ou ntof h is
orhe r gr os s i nc om e. See s ec. 6 00 1. If atax pa y er fa il s t o m ai nt ai n a ndpro du ce th e requi redbo ok s an d re co rd s, the Co m m is si on er m ay

de te rm in e th e ta xp ay er’s in co m e b y

an y m etho d t ha t cl earl y

refl ect s i nc om e. See s ec. 4 46 (b ); P et zo ld t v . Co m m is si on er, 9 2 T.C. 6 61 , 69 3 (1 98 9) ; s ec. 1 .44 6- 1( b) (1 ), In co m e Tax Reg s. The Co m m is si on er’s rec on st ru ct io n o f in co m e “ ne edon ly be rea so nabl e in li gh t o f al l s urro un di ng fact s an d c irc um st an ces .” Pet zo ld t v . Comm is si on er, 9 2 T.C. at 68 7. Th e sp eci fic -it em

m etho d i s an in di rectm etho d o f in co m e rec on st ru ct io n t ha t
co ns is ts of e vi de nc e o f sp eci fic am ou nt s o f in co m e rec ei ve d b y a ta xp ay er an d n ot- 61 -

[* 61 ] rep orte d o n t he tax pa y er’s return. Se e Est at e o f Bec k v . Comm is si on er, 5 6 T.C. 29 7, 3 53 , 36 1 (1 97 1)
. Mr. Du rla ndfai le d t o m ai nt ai n a ccu rat e b oo ks an d re co rd s fo r th e y ears at is su e. Res po nd en t was th eref or e jus ti fie d i n u si ng th e sp eci fic -it em m etho d t o de te rm in e p et it io ne rs ’ ta x l iabi li ti es forth e y ears at i ss ue . See i d. at35 3- 35 4. C. The Part ie s’ Argu m en ts Res po nd en t g en eral ly ass ert s tha t the un rep orte d i nc om e th athe de te rm in ed
co m pr is es Mr. Du rla nd ’s wage s an d d iv ert edin co m e fro m Gul fp ort Oi l & Gas t ha t pe ti ti on ers sh ou ldha ve rep orte d o n t he ir r eturns . Peti ti on ers arg ue th at(1) an y
am ou nt s M r. Durl an d re cei ve d a ndret ai ne d wer e n on ta xabl e lo an s an d (2 ) he ga ve
subs ta nt ia l am ou nt s o f th e al le ge dl y di ve rte d i nc om e to Mr. Harr is
. Gro ss in co m e in cl ud es “ al l i nc om e fro m what ev er s ou rce d eri ve d” . Sec. 61 (a). Th is in cl ud es co m pe ns at io n fo r se rv ic es , su ch as wa ge s, s al ari es , and bo nu se s, s ee s ec. 6 1( a)(1 ), “ wro ng fu l ap pr op ria ti on s” , Jam es v. Un it edSta te s, 3 66 U.S. 21 3, 2 19 (19 61 ), an d d iv id en ds , see sec . 61 (a)( 7)
. To the ex te ntth atpe ti ti on ers co nt en d t ha t an y of t he sp eci fic it em s atis su e were l oa ns , th ey

m us t s ho w th atth e u nd erl y in g t ran sa ct io ns crea te d b on a fi de in de bt edne ss . “ Whe th er a b on a fi de de bt or -cre di to r rel at io ns hi p e xi st s i s a qu es ti on of f

actto be de te rm in edup on a co ns id erat io n o f al l the pe rti ne ntfact s i n- 62 -

[* 62 ] th e cas e.” Fi sh er v . Comm is si on er, 5 4 T.C. 9 05 , 90 9 (1 97 0) . Fact or s in di cat iv e o f a b on a fi de de btin cl ud e whe th er: (1) ev id en ce o f in de bt edne ss
ex is ts ; (2 ) an y

sec ur it y is reque st ed ; (3 ) th ere h as be ena de m an d fo r rep aym en t; (4 ) th e p art ie s’ reco rd s re fle ctth e tr an sa ct io n a s a l oa n; (5) any pa ym en ts ha ve be enm ad e; an d (6 ) an y

in te res t was ch arg ed . See, e.g ., Alp ertv. Co m m is si on er, T.C. Mem o. 2 01 4- 70 , at * 20 (ci ti ng Sundby v. Co m m is si on er, T.C. Mem o. 2 00 3- 20 4) . The k ey

qu es ti on is : “ W as th ere age nu in e in te nt io n t o c reat e a d eb t, wi th a
reas on ab le expe ct at io n o f rep aym en t, an d d idth atin te nt io n c om po rt wi th th e
eco no m ic real it y

of c reat in g ade bt or -cre di to r rel at io ns hi p? ” Lit to n B us . Sy s., In c. v. Co m m is si on er, 6 1 T.C. 3 67 , 37 7 (1 97 3)
. D. Sp eci fic Ite m s atIss ue for19 99 Res po nd en t d et erm in edth atpe ti ti on ers fai le d t o re po rt o n t he ir 1 99 9 re tu rn (1 ) sa lary ch eck s t ot al in g $ 55 ,00 0 t ha t T.J . Oil & Gas pa idto Mr. Du rla ndan d (2 ) fic ti ti ou s l oa ns to ta li ng $4 35 ,00 0 t ha t Gu lfp ort Oi l & Gas p ai d t o M r. Durl an d.

1. T.J. Oil & Gas Sal ary Ch eck s To ta li ng $5 5,0 00 Mr. Harr is own edT.J. Oil & Gas . Mr. Dur la ndsi gn edanem pl oym en t
co nt ractwith C ov in gt on Ener gy, ano th er en ti ty owne d b y Mr. Harr is , inDecem

be r 19 98 an d wi th Gul fp ort Oi l & Gas i n 1 99 9. Hi s v ari ou s emplo ym en t co ntract s cal le d fo r a m on th ly sala ry of $ 10 ,00 0. Th e ch eck s fr om T.J. Oil & Gas were i n- 63 -

[* 63 ] am ou nt s o f aro un d $ 10 ,00 0 p er m on th , andth e m em o l in e o n s ev eral of t he ch eck s i nd ic at edth atth e p ur po se of t he ch eck s was to pa y sal ary to Mr. Du rla nd
. Mr. Du rla ndpe rfo rm edservi ces forT.J. Oil & Gas an d s ev eral ot he r en ti ti es in 19 99 , bu t p et it io ne rs rep orte d re cei vi ng wage s o f on ly $25 ,00 0 o n t he ir 1 99 9 return. Al th ou gh Mr. Du rla ndex ecu te d aba ck da te d $ 55 ,00 0 p ro m is so ry no te , pe ti ti on ers in tro du cedno cred ib le ev id en ce s ho win g tha t an y pa ym en ts were ev er
m ad e o n t he pro m is so ry

no te he ex ecu te d o r on a si m il ar o ne ex ecu te d b y Jo na th an Harri s. In de ed , Jo na th anHarri s cr ed ib ly test ifi edth atth e $ 23 ,00 0 am ou nton th e pr om is so ry

no te he ex ecu te d was hi s s al ary an d t ha t h e si gn editon ly becau se Mr. Dur landto ldhi m

th athe ot he rwis e wou ldno t b e p ai d. We con cl ud e th atMr. Dur landrece iv edwage s o f $5 5,0 00 fro m T.J. Oil & Gas th athe fai le d t o re po rt o n pe ti ti on ers ’ 19 99 return.

2. Pu rp orte d Lo an s To ta li ng $4 35 ,00 0 Altho ug h M r. Durl an d a ndMs . Fau se ttex ecu te d p ro m is so ry no te s o f $2 0,0 00 , $3 50 ,00 0, an d $ 65 ,00 0 d at edJu ne 25 , Ju ly 16, an d Oct ob er 2 8, 1 99 9,
res pe ct iv el y , pet it io ne rs in tro du cedno cred ib le ev id en ce s ho win g t ha t the y m ad e
an y of t he pa y

m en ts requi redun de r th os e n ot es . Add it io na ll y , Ms . Fau se ttst at ed to th e FBI th atsh e si gn edth e Ju ly 16, 1 99 9, p ro m is so ry no te on Nov em

be r 14 , 19 99 , andth e UCC-0 1 fi na nc in g s ta te m en ts with re sp ectto th e p ro m is so ry no te s- 64 -

[* 64 ] da te d J un e 2 5 a ndOcto be r 28 , 19 99 , were n otfil edun ti l Au gu st16 , 20 00 , whe n i t was in Mr. Du rla nd ’s in te res t t o d o s o i n t he 20 00 di vo rce p ro ceed in gs . Pet it io ne rs co nt en d t ha t M r. Durl an d re pa idth e $ 43 5,0 00 inpu rp orte d l oa ns by tran sf erri ng 57 3 s ha res of h is Gul fp ort Oi l & Gas c omm on st oc k t o Gu lfp ort Oil & Gas in th e Dur la ndJanua ry , 15 , 20 01 , agr eem en t. Ho wev er, the Durl an d Ja nu ary 15 , 20 01 , agr eem en t was ex ecu te d o n t he same dat e as th e Harri s J anua ry 15 , 20 01 , agr eem en t; an d a fte r bo thag reem en ts were ex ecu te d, M r. Durl an d a nd Mr. Harr is st il l o wne d 3 9% a nd61 %, res pe ct iv el y , of the co m m onst oc k i ss ue d b y Gul fp ort Oi l & Gas. Be cau se th e Ja nu ary 15 , 20 01 , agr eem en ts di d n otaffe ctMr. Dur land ’s andMr. Harr is ’ own ers hi p i nt eres ts inGul fp ort Oi l & Gas, the ag reem en ts di d n oteffe cta tr an sf er o f an yth in g o f va lu e fro m Mr. Du rlandan d Mr. Harr is to Gul fp ort Oi l & Gas. We th eref or e co nc lu de th atMr. Du rla ndne ve r rep ai d- -an d n ev er i nt en de d t o re pa y --the $4 35 ,00 0 i n p ur po rte d l oans . Howev er, we al so do no t ac cep t re sp on de nt ’s con te nt io n t ha t M r. Durl an d
em be zzl edth e $ 43 5,0 00 be cau se (1) Jo na th anHarri s an d M r. Harri s s ig ne d t he ch eck s t ha t Gu lfp ort Oi l & Gas i ss ue d t o M r. Durl an d i n c on ne ct io n wi thth e $4 35 ,00 0 i n p ur

po rte d l oa ns ; (2 ) Mr. Harr is si gn edth e Dur la ndJan ua ry 15 , 20 01 , ag reem en t tha t p ur

po rte d t o d oc um en t the rep aym en t o f th e $ 43 5,0 00 infic ti ti ou s lo an s, an d (3 ) Mr. Harris hi m se lf, t hr ou ghMrs . Harri s, re cei ve d a t l eas t $ 53 5,0 00- 65 -

[* 65 ] in fic ti ti ou s l oa ns fro m Gul fp ort Oi l & Gas i n 1 99 9 a nden ga ge d i n t he same
m ean in gl es s t ran sa ct io n a s M r. Durl an d d idto “ rep ay ” th e lo an s. In st ead , we
co nc lu de th atth e $ 43 5,0 00 was c or po rat e in co m e d iv ert edfro m Gul fp ort Oi l & Gas to Mr. Du rland . Peti ti on ers ha ve in tro du cedno cred ib le ev id en ce s ho win g th atth e in co m e was no t t ax ab le inwho le or i n p art . W e th eref or e su st ai n 2 4
res po nd en t’s d et erm in at io n t ha t the $4 35 ,00 0 i s i nc lu di bl e in Mr. Du rla nd ’s gro ss in co m e fo r 19 99
. E. Sp eci fic Ite m s atIss ue for20 00 Res po nd en t d et erm in edth atpe ti ti on ers fai le d t o re po rt o n t he ir 2 00 0 re tu rn (1 ) a ch eckfor$5 ,00 0 t ha t T.J . Oil & Gas is su edto Mr. Durla nd ; (2 ) sa la ry ch eck s to ta li ng $1 22 ,50 0 t ha t Gu lfp ort Oi l & Gas i ss ue d t o M r. Durl an d; an d (3 ) ch eck s to ta li ng $1 ,42 5,4 40 pa y ab le to T.J. Oil & Gas or Gu lfp ort Oi l & Gas t ha t M r. Dur landcas he d a t Fe rg us on Ch eckCas hi ng . Mr. Dur la ndap pe ars to co nt en d 2 5

Mr. Du rla ndfai le d t o p ro ve th atGul fp ort Oi l & Gas h adan y earn in gs an d 2 4 pr of it s o r th athe ha d a ny bas is inhi s o wne rs hi p i nt eres t o f Gul fp ort Oi l & Gas. Mr. Du rla ndth eref

or e fai le d t o p ro ve th atan y pa rt o f th e d iv ert edco rp or at e in co m e was no t t ax ab le . See s ec. 3 01 ; Tru es de ll v. Co m m is si on er, 8 9 T.C. 1 28 0, 12 95 -1 29 6 (1 98 7)
. The se in cl ud e a ch eckpa y ab le to T.J. Oil & Gas for$1 2,5 00 ; i nd iv idua l 2 5 in ve st orch eck s p ay ab le to Gul fp ort Oi l & Gas t ot al in g $ 32 7,2 00 ; In ve st ec ch eck s pa y ab le to Gul fp ort Oi l & Gas t ot al in g $ 16 3,7 52 ; an d p ro du ct io n c he ck s p ay ab le to Gul fp ort Oi l & Gas t ot al in g $ 92 1,9 88
.- 66 -

[* 66 ] th athe is en ti tl edto ad di ti on al de du ct io ns forcas hi er’s ch eck s t ha t h e bo ug htwith c as h a ndde po si te d i nt o a n a cco un t o f Gul fp ort Oi l & Gas.

1. T.J. Oil & Gas Ch eckfor $5 ,00 0 Mr. Du rla ndpe rfo rm edservi ces forT.J. Oil & Gas an d s ev eral ot he r en ti ti es in 20 00 , bu t o n p et it io ne rs ’ 20 00 return h e rep orte d re cei vi ng wage s o f on ly $2 5,0 00 . He di d n otin cl ud e a $ 5,0 00 ch eckth atT.J. Oil & Gas is su edto hi m as wag es an d t ha t h adanen try onth e m em o l in e sh owi ng th e p aym en t as a lo anfro m th e co rp or at io n. We do no t fi ndth e en try onth e m em o l in e o f th e ch eckto be cred ib le . Peti ti on ers in tro du cedno cred ib le ev id en ce s ho win g t ha t M r. Durl an d
ev er re pa idth is pu rp orte d l oa n o r th atan y pro m is so ry

no te was e xe cu te d fo r it
. Fi na ll y , th e $ 5,0 00 ch eckis si m il ar i n a m ou ntto th e ch eck s t ha t we fo un d t o b e
sa la ry to Mr. Du rla ndin19 99 . See s up ra p artIII.D.1 . W e co nc lu de th atMr. Dur landrece iv eda wag e p aym en t o f $5 ,00 0 fr om T.J. Oil & Gas th athe fai le d t o rep ort o n p et it io ne rs ’ 20 00 return.

2. Gul fp ort Oi l & Gas Sa la ry Ch eck s To ta li ng $1 22 ,50 0 Mr. Du rla ndtes ti fie d t ha t h e ad m it te d t o t he U.S. att orne y th atth e $ 12 2,5 00
was in co m e to hi m

for20 00 , andth is tes ti m on y is co ns is te ntwith t he ev id en ce. Mr. Du rla nd ’s em

pl oym en t co ntractwith Gu lfp ort Oi l & Gas c al le d fo r a m on th ly
sa la ry of $ 10 ,00 0. Mr . Durl an d p erfo rm edservi ces forGul fp ort Oi l & Gas a nd- 67 -

[* 67 ] sev eral ot he r en ti ti es in 20 00 , bu t h e rep orte d re cei vi ng wage s o f on ly $2 5,0 00 on pe ti ti on ers ’ 20 00 return. Pe ti ti on ers in tro du cedno cred ib le ev id en ce sh owi ng th atMr. Du rlandev er re pa idor m ad e th es e p ur po rte d l oans or t ha t an y pr om is so ry

no te s wer e ev er ex ecu te d fo r th em . Alth ou ghth e m em o l in e o n t he ch eck s s ta te d tha t the am ou nt s o n t he ch eck s wer e fo r lo an s fr om th e co rp or at io n
orrep aym en t o f lo an s t o t he co rp or at io n, we d o n otfin d t he se en tri es to be cred ib le . Fin al ly, th e am ou nt s o n t he ch eck s ar e fo r th e m os t p artsi m il ar i n
am ou nt s t o t he ch eck s t ha t we fo un d t o b e sa la ry to Mr. Durla ndin19 99 . See
supr a p artIII.D.1 . W e co nc lu de th atMr. Du rla ndrece iv edwage pa y m en ts of $1 22 ,50 0 fr om

Gul fp ort Oi l & Gas t ha t h e fai le d t o re po rt o n p et it io ne rs ’ 20 00 return. 3. Ch eck s Pa y ab le to T.J. Oil & Gas an d Gu lfp ort Oi l & Gas Mr. Du rla ndtes ti fie d t ha t h e g av e al l o f th e cas h tha t h e rec ei ve d fr om
cas hi ng th e ch eck s p ay ab le to T.J. Oil & Gas an d Gu lfp ort Oi l & Gas a t Fe rg us on Ch eckCas hi ng to Mr. Harr is . W e d o n otfin d M r. Durl an d’s t es ti m on y on th is po in t t o b e en ti rel y

cred ib le . Mr. Dur la ndan d M r. Harri s re pe at ed ly div ert ed gr os s re cei pt s o f Gul fp ort Oi l & Gas t o t he m se lv es an d t he ir n om in ees (se em in gl y , to de frau d i ts cred it or s an d i nv es to rs ). W e so fin d.- 68 -

[* 68 ] Mr. Harr is tes ti fie d t ha t M r. Durl an d n ev er g av e h im an y of t he m on ey . W e do no t fi ndMr. Harr is ’ te st im on y to be cred ib le . He rep eat ed ly clai m edto no t
rem em be r im po rta ntfact s, an d h is de m ean orsu gg es te d t ha t h is tes ti m on y was ge ne ral ly unt ru th fu l. He fal se ly test ifi edth athe di d n otsen d J on atha n Harris to retrie ve th e CTRs fil edin hi s n am e fro m Ferg us onCh eckCas hi ng , andhe fal se ly to ldth e IRS th athe ha d n otsee n t he CTRs . Add it io na ll y , th e rec or d d em on st rat es th atMr. Harr is en ga ge d i n t he same tax ev as io n t act ic s as th os e em pl oyed b y Mr. Dur landdu rin g t he y ears in is su e. Insh ort, Mr . Harri s was no t a c red ib le witne ss . Noton ly w as Mr. Harr is no t a c red ib le witne ss , bu t h is tes ti m on y st ru ckus
as en ti rel y

im pl au si bl e. Inpa rti cu la r we fi nditrem ark ab le th at , alt ho ug h M r. Harri s h adown ers hi p i nt eres ts of 1 00 % an d 6 1% i n T.J . Oil & Gas an d Gu lfp ort Oil & Gas , res pe ct iv el y , nei th er h e n orJo na th anHarri s m ad e an y att em ptto
reco ve r Mr. Harris ’ sh are o f th e $ 12 ,50 0 and$1 ,41 2,9 40 th atMr. Durla nd al le ge dl y di ve rte d fr om

T.J. Oil & Gas an d Gu lfp ort Oi l & Gas, re sp ect iv el y , in 20 00 . Add it io na ll y , bef

or e Mr. Du rla ndst art edcas hi ng th e p ro du ct io n c he ck s fro m Eagl e Ene rg y , Gul fp ort Oi l & Gas h adbe enm ak in g p aym en ts to Mrs . Harri s
an d M s. Faus et t i n am ou nt s t ha t wer e ex act ly pro po rti on al to Mr. Harr is ’ an d M r. Dur land ’s res pe ct iv e o wne rs hi p i nt eres ts init , andMr. Harr is an d M r. Durl an d bo th rece iv edfic ti ti ou s l oa ns fro m Gul fp ort Oi l & Gas i n 1 99 9. We in fer fr om- 69 -

[* 69 ] th is an d fi ndth atMr. Harr is an d M r. Durl an d b oth re cei ve d p orti on s o f th e pr oc eed s i n a cco rd an ce wi th th ei r own ers hi p i nt eres ts : Mr . Harri s h ada 61 %
own ers hi p i nt eres t an d M r. Durl an d a39 % own ers hi p i nt eres t. We con cl ud e th at Mr. Du rla ndactua ll y

rece iv ed39 % of t he $1 ,42 5,4 40 inch eck s p ay ab le to T.J. Oil & Gas or Gu lfp ort Oi l & Gas i n 2 00 0, o r $5 55 ,92 2. 2 6 W e fu rth er co nc lu de th atth e $ 55 5,9 22 th atMr. Du rla ndactua ll y rece iv ed
was co rp or at e in co m e d iv ert edfro m Gul fp ort Oi l & Gas t o M r. Durl an d. Pet it io ne rs ha ve in tro du cedno cred ib le ev id en ce s ho win g t ha t the di ve rte d
co rp or at e in co m e was no t t ax ab le . Accor di ng ly, th e $ 55 5,9 22 is in cl ud ib le inMr. Dur land ’s gro ss in co m e fo r 20 00
.

4. Cas hi er’s Ch eck s Mr. Du rla ndin tro du cedco pi es of c as hi er’s ch eck s t ha t h e b ou gh t wi th cas h
an d d ep os it edin to anacco un t o f Gul fp ort Oi l & Gas i n 2 00 0. Ho wev er,
res po nd en t al read y

all owe d a dd it io na l Sc he du le E deduc ti on s o f $1 44 ,54 8 fo r th e
ex ces s o f th es e ch eck s o ve r th e Sch edul e E de du ct io ns th atpe ti ti on ers cla im edon th ei r 20 00 return. Acco rd in gl y , no furth er ad jus tm en ts are warran te d.

Bec au se th e ch eckpa y ab le to T.J. Oil & Gas was drawnon anacco un t o f 2 6 Gul fp ort Oi l & Gas, we i nf er tha t M r. Durl an d re cei ve d h is sh are o f th atch eckto o.- 70 -

[* 70 ] F. Sp eci fic Ite m s atIss ue for20 01 Res po nd en t d et erm in edth atpe ti ti on ers fai le d t o re po rt o n t he ir 2 00 1 re tu rn ch eck s t ot al in g $ 45 ,00 0 p ay ab le to Bo le yn En erg y fro m Gul fp ort Oi l & Gas. Res po nd en t d idno t al lo w any add it io na l Sc he du le E deduc ti on s fo r cas hi er’s ch eck s t ha t M r. Durl an d b ou gh t wi th cas h a ndde po si te d i nt o a n a cco un t o f Gul fp ort Oi l & Gas dur in g 2 00 1. Mr. Du rla ndpe rfo rm edservi ces forGul fp ort Oi l & Gas a ndsev eral ot he r
en ti ti es in 20 01 , bu t h e d idno t re po rt r ecei vi ng an y wage s o n p et it io ne rs ’ 20 01 return. Pe ti ti on ers in tro du cedno cred ib le ev id en ce s ho win g t ha t M r. Durl an d
m ad e lo an s t o o r rec ei ve d l oa ns fro m an y en ti ty in the se am ou nt s o r th atMr. Dur landex ecu te d p ro m is so ry no te s fo r th es e am ou nt s. We con cl ud e th atth e $4 5,0 00 was c om

pe ns at io n t o h im

for th e se rv ic es th athe pro vi de d. Al th ou gh th e pa y ee o n t he ch eck s was Bo le yn En erg y , th e $ 45 ,00 0 was wage in co m e to hi m th at he fai le d t o re po rt o n p et it io ne rs ’ 20 01 return. Mr. Du rla ndin tro du cedco pi es of c as hi er’s ch eck s t ha t h e b ou gh t wi th cas h
an d d ep os it edin to anacco un t o f Gul fp ort Oi l & Gas i n 2 00 1. Th e am ou nt s o n t he
cas hi er’s ch eck s t ot al $5 8,0 00 . Howev er, tha t am ou ntis les s t ha n t he am ou nt pe ti ti on ers cla im edas S ch edul e E ex pe ns e d educ ti on s o n t he ir 2 00 1 re tu rn .- 71 -

[* 71 ] Acco rd in gl y , no ad

jus tm en t t o t he Sch edul e E ex pe ns e d educ ti on s t ha t pe ti ti on ers cla im edon th ei r 20 01 return i s warran te d. IV. Ci vi l Fr au d P en al ti es A. Sect io n 6 66 3( a) Gen eral ly Sect io n 6 66 3( a) p ro vi de s: “ If an y pa rt o f an y

un de rp aym en t o f ta x re qu ire d to be sh ownon a return i s due to frau d, the re s ha ll be ad de d t o t he tax anam ou nt equa l t o 7 5 p erce ntof t he po rti on of the un de rp aym en t wh ic h i s at tri bu tabl e to frau d.” The Co m

m is si on er b ears th e b ur de n o f pr ov in g fr au d b y cle ar an d
co nv in ci ng ev id en ce. See sec . 74 54 (a); Ru le 14 2( b) . To sa ti sf y th atbu rd en , th e Co m m is si on er m

us t s ho w: (1 ) anun de rp aym en t ex is ts an d (2 ) th e ta xp ay er in te nd edto ev ad e ta xe s kno wn t o b e o win g b y co nduc t i nt en de d t o c on ceal , m is le ad , or o th erwi se pre ve ntth e co ll ect io n o f ta xe s. See Sad le r v. C omm is si on er, 11 3 T.C. 9 9, 1 02 (19 99 ). The Co m m is si on er i s n otrequi redto est ab li sh th e p reci se am ou ntof the de fic ie nc y

to pro ve anun de rp aym en t. See DiLeo v. Co m m is si on er, 9 6 T.C. 8 58 , 88 6 (1 99 1) , aff’d, 9 59 F.2d16 (2dCir . 19 92 ). Howev er, h e can no t d is ch arg e h is bu rd enby sim

pl y rel y in g o n t he tax pa y er’s fai lu re t o p ro ve erro r in hi s de te rm in at io n o f th e d efi ci en cy . See i d. (c it in g Ot su ki v. Co m m is si on er, 5 3 T.C. 96 , 10 6 (1 96 9) , andPig m anv. Co m m is si on er, 3 1 T.C. 3 56 , 37 0 (1 95 8) ). Once th e- 72 -

[* 72 ] Co m

m is si on er es tabl is he s an un de rp aym en t b y cle ar an d c on vi nc in g
ev id en ce, the de fic ie nc y

de te rm in at io n e njo y s i ts us ua l p res um pt io n o f
co rrec tn es s. See id . (ci ti ng Co m pt on v. Co m

m is si on er, T.C. Mem o. 1 98 3- 64 2,
an d C le ve la ndv. Co m

m is si on er, T.C. Mem o. 1 98 3- 29 9)
. Any con du ctli ke ly to m is le ador c on ceal m ay co ns ti tu te anaffi rm at iv e act of ev as io n, an d a n i nt en t t o m is le adm ay be in ferr edfro m

a pa tt ernof s uc h
co nduc t. See Sp ie s v . Uni te d S ta te s, 3 17 U.S. 49 2, 4 99 (19 43 ). Frau d “ do es no t in cl ud e n eg li ge nc e, care le ss ne ss , m is un de rs ta nd in g o r un in te nt io na l
un de rs ta te m en t o f in co m e.” Uni te d S ta te s v . Pech en ik , 23 6 F .2d84 4, 8 46 (3dCir
. 19 56 ). If th e Co m

m is si on er es tabl is he s t ha t s om e p orti on of t he un de rp aym en t i s at tri bu tabl e to frau d, the en ti re u nd erp aym en t i s t reat edas a tt rib ut ab le to frau d,
ex cep t wi th res pe ctto an y po rti on of t he un de rp aym en t tha t the tax pa y er
es tabl is he s i s n otatt rib ut ab le to frau d. Se e se c. 66 63 (b ). Bec au se frau du le ntin te ntm ay be di ffi cu ltto pro ve by dire ctev id en ce, the Co m m is si on er m ay

est ab li sh frau d b y

cir cu m st an ti al ev id en ce. See 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; DiLeo v. Co m

m is si on er, 9 6 T.C. at87 5. Co urts ha ve de ve lo pe d ano ne xc lu si ve li stof f act or s- -o fte n re ferr edto as b ad ge s o f frau d- -th atde m on st rat e fraudul en t in te nt . Tho se ba dg es in cl ud e: (1) un de rs ta ti ng in co m e; (2) fai li ng to m ai nt ai n- 73 -

[* 73 ] ad equa te reco rd s; (3) off eri ng im pl au si bl e o r in co ns is te ntex pl an at io ns ; (4 )
co nc eal in g i nc om e o r as se ts ; (5 ) pr ov id in g i nc om pl et e o r m is le ad in g i nf

orm at io n to th e ta xp ay er’s t ax return p rep arer ; (6 ) of feri ng fal se or i nc red ib le tes ti m on y ; (7 ) fil in g fa ls e d oc um en ts , in cl ud in g fi li ng fal se in co m e ta x re tu rn s; an d (8 ) en ga gi ng in ex te ns iv e d eal in gs in cas h. Se e Bra df or d v . Comm is si on er, 7 96 F.2dat 3 07
- 30 8; Park s v . Comm is si on er, 9 4 T.C. 6 54 , 66 4- 66 5 (1 99 0) ; Re ck li ti s v . Co m m is si on er, 9 1 T.C. 8 74 , 91 0 (1 98 8) ; Li ps it z v . Comm is si on er, 2 1 T.C. 9 17 , 93 7 (1 95 4) , aff’d, 2 20 F.2d87 1 (4 th Cir . 19 55 ); M or se v. Co m m is si on er, T.C. Mem o. 2 00 3- 33 2, s li p o p. at8, af f’d, 41 9 F .3d82 9 (8 th Cir . 20 05 ). The ex is te nc e of an y on e fac to r is no t d is po si ti ve , bu t the ex is te nc e o f se ve ral fact or s i s pe rs ua si ve cir cu m st an ti al ev id en ce o f frau d. Se e Nie dr in gh au s v . Comm is si on er, 99 T.C. 20 2, 2 11 (19 92 ); P et zo ld t v . Comm is si on er, 9 2 T.C. at70 0. B. Whe th er Mr . Durl an d Is Liab le forth e Ci vi l Fr au d P en al ti es 1. Co ll at eral Est op pe l Und er the do ctrin e o f co ll at eral est op pe l, o nc e anis su e o f fac t o r law is

“ actua ll y an d n eces sa ril y

de te rm in edby a cou rt o f co m pe te ntjuri sd ic ti on , th at de te rm in at io n i s co nc lu si ve in subs eque ntsu it s b as edon a di ffer en t caus e o f act io n i nv ol vi ng a pa rty to t he pri orli ti ga ti on .” Mo nt an a v . Uni te d S ta te s, 4 40 U.S. 14 7, 1 53 (19 79 ). Co ll at eral est op pe l i s a ju di ci al ly creat edequi tabl e- 74 -

[* 74 ] pri nc ip le th e p ur

po se s o f whi ch are t o p ro te ctth e p art ie s fr om un ne ces sa ry
an d re du nd an t l it ig at io n, t o c on se rv e jud ic ia l re so ur ces , andto fos te r certa in ty in
an d re li an ce o n ju di ci al act io n. Id . at 1 53 -1 54
. Befo re we m ay

ap pl y co ll at eral est op pe l i n t he co nt ex t o f a fac tu al di sp ut e, th e fo ll owi ng fiv e co nd it io ns m us t b e sa ti sf

ie d: (1) th e is su e in th e se co ndsu it
m us t b e id en ti cal inall res pe ct s wi th th e is su e d eci de d i n t he fir stsu it ; (2 ) th e is su e in th e fi rs t s ui t m

us t h av e b een th e subjec t o f a fi na l ju dg m en t en te redby a cou rt o f
co m pe te ntjuri sd ic ti on ; (3 ) th e p ers on ag ai ns t wh om co ll at eral est op pe l i s as se rte d
m us t h av e b een a pa rty or i n p riv it y with apa rty in t he fir stsu it ; (4 ) th e p art ie s
m us t ac tu al ly hav e li ti ga te d t he is su e in th e fi rs t s ui t an d re so lu ti on of t he is su e
m us t h av e b een ess en ti al to th e p rio r de ci si on ; an d (5 ) th e co nt ro ll in g fa ct s an d ap pl ic ab le leg al pri nc ip le s m us t re m ai n u nc ha ng edfro m th os e in th e fi rs t s ui t. See Bu ss el l v . Comm is si on er, 1 30 T.C. 22 2, 2 39 -2 40 (20 08 ); P eckv. Co m m is si on er, 90 T.C. 16 2, 1 66 -1 67 (19 88 ), aff’d, 9 04 F.2d52 5 (9 th Cir . 19 90 ). Mr. Du rla ndpl ead edgu il ty to t ax ev as io n u nd er s ect io n 7 20 1 fo r 20 00 . A
co nv ic ti on fortax ev as io n p ur su an t t o s ect io n 7 20 1, ei th er upo n agu il ty ple a o r up on a jury verd ic t, co nc lu si ve ly establ is he s t he ex is te nc e o f frau d i n asubs eque nt pr oc eed in g t hr ou gh th e d oc tri ne of c ol la te ral est op pe l. See DiLeo v. Co m m is si on er, 9 6 T.C. at88 5. Itals o c on cl us iv el y est ab li sh es li ab il ity

forth e- 75 -

[* 75 ] civ il frau d p en al ty und er s ect io n 6 66 3( a) b ecau se th e el em en ts of c riminal ta x e va si on un de r se ct io n 7 20 1 a ndciv il frau d u nd er s ect io n 6 66 3( a) ar e v irtua ll y id en ti cal . See An de rs on v. Co m m is si on er, 6 98 F.3d16 0, 1 64 (3dCir . 20 12 ), aff’g T.C. Mem o. 2 00 9- 44 . Accor di ng ly, Mr. Du rla ndis pre cl ud edby the do ctrin e o f
co ll at eral est op pe l fr om

arg ui ng th atth e 2 00 0 re tu rnis no t fr au du le ntor t ha t h e is
no t l iabl e fo r a ci vi l fr au d p en al ty und er s ect io n 6 66 3( a) fo r 20 00 . He th eref or e be ars th e b ur de n o f es tabl is hi ng th e p orti on , if an y , of t he un de rp aym en t fo r 20 00 th atis no t due to frau d. Se e se c. 66 63 (b ). Howev er, as ex pl ai ne d abo ve , see supr a pa rt I I, res po nd en t ca nn otrel y on th e d oc tri ne of c ol la te ral est op pe l fo r th e pu rp os e o f pr ov in g t ha t the frau d e xc ep ti on to th e g en eral th ree- y ear p eri odof li m it at io ns ap pl ie s wi th res pe ctto Ms . Fau se tt . Acco rd in gl y , we wil l d et erm in e 2 7 whe th er Mr . Durl an d i s l iabl e fo r th e se ct io n 6 66 3( a) p en al ty for al l o f th e y ears in is su e--a ndth eref

or e whe th er the 19 99 -2 00 1 re turn s wer e fraudul en t-- witho ut rel ia nc e o n t he do ctrin e o f co ll at eral est op pe l.

Howev er, ev enas wi th res pe ctto Ms . Fau se tt , Mr. Dur la nd ’s gu il ty ple a 2 7 can be --an d i s- -cl ear a ndco nv in ci ng ev id en ce tha t h e in te nd edto ev ad e a t ax du e an d o win g fo r 20 00 . See No rri s v . Comm is si on er, T.C. Mem o. 2 01 1- 16 1, 1 02 T.C.M. (CC H) 26 , 31 (20 11 ).- 76 -

[* 76 ] 2. Und erp aym en t o f Tax Res po nd en t h as pro ve n b y cle ar an d c on vi nc in g e vi de nc e th atMr. Du rla nd fai le d t o re po rt i nc om e fo r eac h o f th e y ears inis su e. See s up ra p artIII.D-F. Acco rd in gl y , res po nd en t h as m ethi s b ur de n o f pr ov in g b y cle ar an d c on vi nc in g
ev id en ce tha t an un de rp aym en t ex is ts foreach of t he y ears inis su e. See Di Leo v. Co m m is si on er, 9 6 T.C. at88 6 (c it in g C om pt on v. Co m

m is si on er, T.C. Mem o. 19 83 -6 42 , andCle ve landv. Co m m is si on er, T.C. Mem o. 1 98 3- 29 9)
. 3. Frau du le ntInt en t
a. Und ers ta ti ng Inc om e A pat te rnof s ub st an ti al ly und erre po rti ng in co m e fo r se ve ral y ears is st ro ng
ev id en ce o f frau d, p art ic ul arl y if the reas on for

th e u nd ers ta te m en ts is no t
sa ti sf act or il y ex pl ai ne d o r is no t due to in no cen t m is ta ke . See Ho ll an d v . Uni te d St at es , 34 8 U.S. 1 21 , 13 7- 13 9 (1 95 4) ; Sp ie s, 3 17 U.S. at 4 99 . On th e b as is of cl ear a ndco nv in ci ng ev id en ce we d et erm in edth atMr. Durla ndfai le d t o re po rt
subs ta nt ia l i nc om e fo r eac h o f th e y ears inis su e. Thi s fa il ur e ap pe ars to be de li be rat e b ecau se Mr. Durla ndto okaffi rm at iv e st ep s t o h id e h is rece ip t o f th is in co m e. Thes e st ep s i nc lu de ex ecu ti ng bo gu s p ro m is so ry no te s, caus in g Gu lfp ort Oil & Gas to st at e o n t he m em o l in es of c he ck s tha t i t i ss ue d t o h im th atth e ch eck s- 77 -

[* 77 ] were fo r lo an s t ha t n ev er ex is te d, an d c as hi ng ch eck s atFerg us on Ch eck Cas hi ng . Accor di ng ly, th is fact orfav or s a f in di ng of f

rau d fo r 19 99 -2 00 1. b. Fai li ng To Ma in ta inAdequa te Reco rd s Bec au se Mr. Du rla ndfai le d t o m ai nt ai n a ccu rat e b oo ks an d re co rd s dur in g th e y ears in is su e, res po nd en t h adto res ort t o t he sp eci fic -it em m etho d t o
reco ns tru ctMr. Du rland ’s in co m e fo r th e y ears inis su e. Acco rd in gl y , th is fact or fav or s a f in di ng of f

rau d fo r 19 99 -2 00 1.
c. Offeri ng Im

pl au si bl e o r In co ns is te ntExp la na ti on s Mr. Du rla nd ’s tes ti m on y

an d s ta te m en ts to th e IRS inwhi ch he tes ti fie d a nd st at edth atcert ai n s al ary ch eck s i ss ue d t o h im in19 99 -2 00 1 wer e fo r lo an s fr om
va rio us en ti ti es to hi m

or f orrep aym en ts of l oa ns he m ad e to th e en ti ti es are im pl au si bl e. Acco rd in gl y , th is fact or fav or s a f

in di ng of f

rau d fo r 19 99 -2 00 1. d. Co nc eal in g As se ts or I nc om e An i nt en t t o e va de tax m ay be in ferr edfro m

“ co nc eal m en t o f as se ts or
co ve rin g up s ou rces of i nc om e”. Sp ie s, 3 17 U.S. at 4 99 ; Ru arkv. Co m m is si on er, 44 9 F .2d31 1, 3 12 -3 13 (9t h C ir. 1 97 1) , aff’g T.C. Mem o. 1 96 9- 48 . Mr. Dur la nd
co nc eal edhi s 1 99 9 i nc om e b y dra fti ng bo gu s p ro m is so ry no te s an d b y

cas hi ng hi s
sa la ry ch eck s atFerg us on Ch eckCas hi ng ; h e co nc eal edhi s 2 00 0 i nc om e b y
cau si ng Gul fp ort Oi l & Gas t o i nc lu de fal se st at em en ts on th e m em o l in es of the- 78 -

[* 78 ] ch eck s t ha t i t i ss ue d t o h im an d b y cas hi ng th e ch eck s atFerg us onCh eck Cas hi ng ; an d h e co nc eal edhi s 2 00 1 i nc om e b y cau si ng Gul fp ort Oi l & Gas t o in cl ud e fal se st at em en ts on th e m em o l in es of t he sal ary ch eck s t ha t i t i ss ue d t o hi m an d b y cas hi ng th e ch eck s atFerg us on Ch eckCas hi ng . Mr. Dur landals o
co nc eal edhi s o wne rs hi p i nt eres t i n a ss et s b y ass ig ni ng th em

to Ms . Fau se tt . Acco rd in gl y , th is fact orfav or s a f in di ng of f

rau d fo r 19 99 -2 00 1.
e. Pro vi di ng Inc om

pl et e o r Mi sl ead in g In fo rm at io n t o th e Tax pa y er’s Tax Return P rep arer Mr. Du rla ndpro vi de d t o M r. Gib bo ns th e in fo rm at io n upo n wh ic h Gi bb on s, Gib bo ns & Bu ckan d Gi bb on sHa ll pre pa redpe ti ti on ers ’ 19 99 -2 00 1 re tu rn s. Mr
. Dur landap pe ars to have in cl ud edin fo rm at io n re la ti ng to th e am ou nt s we de te rm in edto be in co m e to hi m inha nd writ te n d oc um en ts th athe ga ve to Mr. Gib bo ns for19 99 . Add it io na ll y , Mr. Gib bo ns was a ware t ha t Gu lfp ort Oi l & Gas
was ch arac te riz in g s al ari es itpa idto it s emplo y ees in19 99 as l oa ns . Mr. Du rla nddi d n otin cl ud e in fo rm at io n re la ti ng to th e am ou nt s we de te rm in edto be in co m e to hi m ina le tt er tha t h e se ntto Mr. Gib bo ns for20 00 or in th e le tt ers th athe sen t t o M r. Gib bo ns for20 01 . Accor di ng ly, th is fact ordo es
no t fa vo r a fi nd in g o f frau d fo r 19 99 bu t i t d oe s fa vo r a fi nd in g o f frau d fo r 20 00
an d 2 00 1.- 79 -

[* 79 ] f. Offeri ng Fal se or I nc red ib le Test im on y Mr. Du rla ndrep eat ed ly test ifi edth atth e sa la ry ch eck s h e rec ei ve d dur in g 19 99 -2 00 1 wer e fo r lo an s fr om va rio us en ti ti es to hi m

or f orrep aym en ts of l oa ns he m ad e to th e en ti ti es . He als o t es ti fie d t ha t h e g av e al l o f th e cas h t ha t h e
rece iv edfro m

cas hi ng th e ch eck s p ay ab le to T.J. Oil & Gas an d Gu lfp ort Oi l & Gas at F erg us on Ch eckCas hi ng to Mr. Harri s. His tes ti m on y was m os tl y in cred ib le . Accor di ng ly, th is fact orfav or s a f in di ng of f

rau d fo r 19 99 -2 00 1. g. Fi li ng Fal se Docu m en ts Frau du le ntin te ntm ay

be in ferr edwhen a ta xp ay er fi le s a d oc um en t in te nd in g t o c on ceal , m is le ad , or p rev en t the co ll ect io n o f ta x. Se e Sp ie s, 3 17 U.S. at49 9. Fi li ng fal se do cum en ts with t he IRS co ns ti tu te s “ an‘ affi rm at iv e act ’ of
m is rep res en ta ti on su ffi ci en t t o ju st ify the frau d p en al ty.” Z el l v . Comm is si on er, 76 3 F .2d11 39 , 11 46 (10 th Cir . 19 85 ), aff’g T.C. Me m o. 1 98 4- 15 2. Mr . Durl an d fil edFed eral in co m e ta x re tu rn s fo r 19 99 -2 00 1, an d fo r eac h year he kn owi ng ly
om it te d s ub st an ti al am ou nt s o f hi s i nc om e. Acco rd in gl y , th is fact orfav or s a fin di ng of f

rau d fo r 19 99 -2 00 1.- 80 -

[* 80 ] h. Ext en si ve Deal in gs inCas h Ext en si ve de al in gs in cas h t o a vo idscrut in y of atax pa y er’s fi nanc es is a ba dg e o f frau d. Se e Bra df or d v . Comm is si on er, 7 96 F.2dat 3 07 -3 08 . Frau du le nt in te ntm ay

be in ferr edwhen a ta xp ay er h an dl es hi s af fai rs ina m an ne r de si gn ed

“ to av oi d m ak in g t he reco rd s u su al intra ns act io ns of t he ki nd ”. Sp ie s, 3 17 U.S. at 49 9. Mr . Durl an d c as he d num ero us ch eck s dur in g e ach of t he y ears inis su e at Ferg us onCh eckCas hi ng , andhe ke ptlar ge am ou nt s o f cas h i n h is off ic e at Gul fp ort Oi l & Gas. Th is fact orfav or s a f in di ng of f

rau d fo r 19 99 -2 00 1. i. Su m

m ary Man y of t he ba dg es of f

rau d a re p res en t h ere. We con cl ud e th atres po nd en t ha s p ro ve n b y

cle ar an d c on vi nc in g e vi de nc e th atMr. Du rla ndun de rp ai d h is tax li ab il it ie s fo r 19 99 -2 00 1 a ndth atso m e p artof t he un de rp aym en t fo r eac h year was du e to frau d. Mr . Durl an d fa il edto pro ve th atan y po rti on of the un de rp aym en t fo r
an y of t he y ears in is su e was no t at tri bu tabl e to frau d. Acco rd in gl y , to th e ex te nt th atwe su st ai n re sp on de nt ’s def ic ie nc y de te rm in at io ns , see supr a p artIII.D-F, we ho ldth atMr. Du rla ndis li ab le forsec ti on 66 63 (a) c iv il frau d p en al ti es foreach of th e y ears in is su e.- 81 -

[* 81 ] V. Whe th er Ms . Fau se ttIs J oi nt ly andSev eral ly L iabl e A. Jo in t an d S ev eral Liab il it y Gene ral ly Pu rs uantto sec ti on 60 13 (a) s po us es m ay fil e a joi ntFed eral in co m e ta x return. Sp ou se s wh o e le ctto fil e a joi ntreturn fo r a t ax ab le y ear a re re qu ire d t o
co m pu te th ei r ta x fo r th e ta xabl e y ear o n t he ag gr eg at e in co m e o f bo th sp ou se s,
an d t he li ab il ity

forth attax is joi ntan d s ev eral . See s ec. 6 01 3( d) (3 ). Howev er, t o
rem edy cert ai n i nju st ic es th atm ay oc cu r, se ct io n 6 01 5 a ll ows a sp ou se to ob ta in rel ie f fro m

joi ntan d s ev eral li ab il it y incert ai n c irc um st an ces . Sect io n 6 01 5( a)(1 ) pr ov id es th ata sp ou se who ha s m ad e a joi ntreturn m ay
se ekrel ie f fro m

joi ntan d s ev eral li ab il it y un de r subs ect io n (b ) (d eal in g wi threl ie f fro m li ab il it y foranun de rs ta te m en t o f ta x wi th res pe ctto a joi ntreturn) . Sect io n 60 15 (a)( 2) pro vi de s t ha t an eli gi bl e sp ou se m ay ele ctto li m itth atsp ou se ’s li ab il it y for an y de fic ie nc y

with re sp ectto a joi ntreturn u nd er s ub se ct io n (c ) (p ro vi di ng rel ie f fro m

joi ntan d s ev eral li ab il it y fortax pa y ers who are n o l on ge r
m arri ed , are l eg al ly sep arat ed , or a re n o l on ge r li vi ng to ge th er). If atax pa y er d oe s
no t qua li fy

forrel ie f un de r ei th er s ub se ct io n (b ) or(c), the tax pay er m ay see k equi tabl e rel ie f un de r subs ect io n (f ).- 82 -

[* 82 ] 1. Sect io n 6 01 5( b) Und er s ect io n 6 01 5( b) (1 )(A)-( E), th e fo ll owi ng requi rem en ts m us t b e
sa ti sf ie d fo r th e IRS to gra ntrel ie f fro m joi ntan d s ev eral li ab il it y : (1 ) th e sp ou se s fil eda joi ntreturn fo r th e ta xabl e y ear; (2) anun de rs ta te m en t o f ta x i s at tri bu tabl e to anerro ne ou s i te m

of t he no nr eque st in g s po us e; (3) th e reque st in g s po us e
es tabl is he s t ha t i n s ig ni ng th e return h e o r sh e d idno t kno w, andha d n o re as on to kn ow, o f th e u nd ers ta te m en t; (4) aft er t ak in g i nt o a cco un t al l the fact s an d ci rcu m st an ces , itis in equi tabl e to ho ldth e reque st in g s po us e li ab le forth e de fic ie nc y

att rib ut ab le to th e u nd ers ta te m en t; an d (5 ) th e reque st in g s po us e ti m el y el ect s the be ne fit s o f subs ect io n (b ).

2. Sect io n 6 01 5( c) Und er s ect io n 6 01 5( c), i f th e reque st in g s po us e is eit he r (1 ) no lo ng er
m arri edto th e n on reque st in g s po us e, (2 ) le ga ll y sep arat edfro m

th e n on reque st in g sp ou se , or (3 ) no t a m em

be r of th e sa m e h ou se ho ldas t he no nr eque st in g s po us e du rin g t he 12 -m on th pe rio d e nd in g o n t he da te su ch ele ct io n i s fi le d, the reque st in g s po us e m ay

ele ctto li m ithi s o r he r li ab il it y fora de fic ie nc y

as p ro vi de d in subs ect io n (d ). Sec. 6 01 5( c)(1 ), (3 )(A)(i ). A requ es ti ng sp ou se m ay ele ct
se ct io n 6 01 5( c) re li ef an y ti m e aft er the Secr et ary as se rts a de fic ie nc y bu t n o l at er- 83 -

[* 83 ] th antwo y ears aft er the da te on whi ch 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 reque st in g s po us e. Id . subs ec. (c) (3 )(B)
. Sect io n 6 01 5( d) pro vi de s t ha t, i n g en eral , any ite m s g iv in g ri se to a de fic ie nc y

on a joi ntreturn a re al lo cat edto th e sp ou se s as if t he y ha d fi le d
se pa rat e returns . See i d. s ub se c. (d )(3 )(A). The all oc at io n i s m ad e wit ho utreg ard to co m m un it y pro pe rty laws . See i d. s ub se c. (a) (f lu sh lan gu ag e). The reque st in g sp ou se is li ab le on ly for h is or h er p ro po rti on at e sh are o f th e d efi ci en cy th atres ul ts fro m su ch all oc at io n. Se e id . subs ec. (d )(1 ). If anit em gi vi ng ris e to a de fic ie nc y pr ov id eda ta x b en efi t o n t he joi ntreturn t o the no nr eque st in g s po us e, th e it em is al lo cat edto th e n on reque st in g s po us e. See i d. s ub se c. (d )(3 )(B) . The reque st in g sp ou se be ars th e b ur de n o f es tabl is hi ng th e am ou ntof t he de fic ie nc y all oc ab le to hi m or h er. See id . subs ec. (c) (2 ). Rel ie f un de r se ct io n 6 01 5( c) i s n otav ai labl e whe re the Co m m is si on er pr ov es th atth e reque st in g s po us e h ad“ actua l kno wled ge , at t he ti m e su ch in di vi du al si gn edth e return, o f an y it em gi vi ng ris e to a de fic ie nc y * * * wh ic h i s
no t al lo cab le to su ch in di vi du al ”. Id . subs ec. (c) (3 )(C) . Actu al kn owl ed ge is “ an actua l an d c le ar awar en es s (a s o pp os edto reas on to kn ow) of the ex is te nc e o f an it em whi ch gi ve s ri se to th e d efi ci en cy (orpo rti on th ereo f).” Ch es hi re v . Co m m is si on er, 1 15 T.C. 18 3, 1 95 (20 00 ), aff’d, 2 82 F.3d32 6 (5 th Cir . 20 02 ). In- 84 -

[* 84 ] a cas e o f omitt edin co m e th e reque st in g s po us e m us t h av e h adanactua l an d cl ear a waren es s o f th e fac tu al cir cu m st an ces th atres ul te d i n t he om is si on of t he in co m e. See Ki ng v. Co m m is si on er, 1 16 T.C. 19 8, 2 04 n.6 (20 01 ) (ci ti ng Ch es hi re v . Comm is si on er, 1 15 T.C. 18 3) ; Ch es hi re v . Comm is si on er, 1 15 T.C. at 19 5; see als o s ec. 1 .60 15 -3 (c)( 2) (i) (A), In co m e Tax Reg s. Th e reque st in g s po us e ha s ac tu al kn owl ed ge when he or s he kn ows th atth e it em gi vi ng ris e to th e de fic ie nc y

is in co rrec tl y

rep orte d o n t he tax return. Se e Ch es hi re v . Co m m is si on er, 1 15 T.C. at 1 95 . The Co m m is si on er b ears th e b ur de n o f pr ov in g by a prep on de ran ce o f th e ev id en ce tha t the reque st in g s po us e h adactua l kn owl ed ge when si gn in g t he return o f an y it em gi vi ng ris e to th e d efi ci en cy . See
se c. 60 15 (c)( 2) , (3) (C); Cu lv er v . Comm is si on er, 1 16 T.C. 18 9, 1 95 (20 01 ); s ec. 1.6 01 5- 3( c)(2 )(i ), In co m e Tax Reg s. Eve n wh enth e reque st in g s po us e h as actua l kno wled ge of a ny ite m gi vi ng ris e to th e d efi ci en cy , he o r sh e m ay st il l b e en ti tl edto sec ti on 60 15 (c) re li ef i f th e return was si gn edun de r du res s. Sec . 60 15 (c)( 3) (C). Th e ex cep ti onfordu res s fo cu se s o n t he ex is te nc e o r no ne xi st en ce o f du res s i n s ig ni ng th e return. Id . The reg ul at io ns de fin e dur es s fo r th e p ur po se s o f se ct io n 6 01 5( c): Abu se ex cep ti on .--If t he reque st in g s po us e es tabl is he s t ha t h e orsh e was th e v ic ti m

of d om es ti c ab us e p rio r to th e ti m e th e return was si gn ed , andth at , as ares ul t o f th e p rio r ab us e, th e reque st in g- 85 -

[* 85 ] sp ou se di d n otch al le ng e th e tr eat m en t o f an y it em s o n t he return fo r fea r of

th e n on reque st in g s po us e’s ret al ia ti on , th e li m it at io n on actua l kno wled ge in th is pa rag rap h (c ) wil l n otap pl y . * * * Sec. 1 .60 15 -3 (c)( 2) (v ), In co m e Tax Reg s. Du res s i s t he refo re es tabl is he d fo r pu rp os es of s ect io n 6 01 5( c) i f th e reque st in g s po us e p ro ve s t ha t h e o r sh e was a vi ct im of d om es ti c ab us e an d tha t h e o r sh e d idno t ch al le ng e th e tr eat m en t o f an y it em s o n t he return fo r fea r of th e n on reque st in g s po us e’s ret al ia ti on . Id. The reque st in g s po us e h as th e b ur de n o f pr ov in g t ha t h e o r sh e si gn edth e return u nd er du res s. See sec . 60 15 (c)( 3) (C). Bec au se a sp ou se see ki ng rel ie f fro m joi ntan d s ev eral li ab il it y un de r
se ct io n 6 01 5 h as anin cen ti ve to ex ag ge rat e th e d eg ree o f an y ph y si cal an d ps y ch ol og ic al ab us e to whi chhe or s he was s ub jecte d, i f an y , we hav e g en eral ly requi redsubs ta nt ia ti on , or a t l eas t s pe ci fic it y inall eg at io ns , of b ot h p hysic al an d ps y ch ol og ic al ab us e. See Ni hi se r v. C omm is si on er, T.C. Mem o. 2 00 8- 13 5, s li p op . at 2 4- 25 . W e h av e al so tri edto di st in gu is h b etweenrun -o f-the m il l m ari ta l st rif e an d g enui ne ph y si cal or p sycho lo gi cal ab us e. See i d., s li p o p. at25 . This is of te n d iff ic ul t t o d o wh en , inso m any of t he se cas es , th ere i s n o e xp erttes ti m on y to ass is t the Co urt, an d t he ev id en ce o f ab us e an d dur es s i s l im it edto th e te st im on y of t he reque st in g s po us e an d h is or h er ch il dr enan d fr ie nd s,
un supp orte d b y

an y cred ib le ev id en ce fro m

th irdpa rti es su ch as ado ct or , po li ce,- 86 -

[* 86 ] or e ve n a no th er co urt. InNih is er, we rel ie d upo n c ert ai n c omm on featur es of do m es ti c ab us e in do m es ti c rel at io ns law t o i de nt ify a no ne xc lu si ve li stof fact or s t ha t ar e in di cat iv e o f ps y ch ol og ic al ab us e b y a sp ou se . Tho se fact or s ar e: (1 ) is ol at in g t he vi ct im ; (2 ) en co ur ag in g e xh au st io n b y , forex am pl e, in te nt io na ll y li m it in g fo odor i nt errupt in g s le ep ; (3 ) be ha vi ng inanob se ss iv e o r po ss es si ve
m an ne r; ( 4) th reat en in g t o c omm itsu ic id e, to m ur de r th e v ic ti m , or t o c au se th e de ath o f fam il y

or f rie nd s; (5) us in g d eg rad in g l an gu ag e in cl ud in g h um il ia ti on , de ni al of v ic ti m ’s tal en ts an d abi li ti es , andna m e cal li ng ; (6 ) ab us in g d ru gs or al co ho l, i nc lu di ng adm in is te rin g s ub st an ces to th e v ic ti m ; (7 ) un de rm in in g t he vi ct im ’s abi li ty to re as onin de pe nd en tl y ; o r (8 ) oc cas io na ll y in du lg in g i n p os it iv e be ha vi orin ord er t o k eep ali ve ho pe th atth e ab us e wil l ce as e. Id . at 2 6.

3. Sect io n 6 01 5( f) Und er s ect io n 6 01 5( f), rel ie f fro m joi ntan d s ev eral li ab il it y is av ai labl e if (1 ) ta ki ng in to acco un t al l the fact s an d c irc um st an ces , itwou ldbe in equi tabl e to ho ldth e reque st in g s po us e li ab le foran y unpa idtax an d (2 ) rel ie f is no t av ai labl e to th e reque st in g s po us e u nd er s ub se ct io n (b ) or(c). See sec . 60 15 (f)(1 ) an d (2 ). The Co m m is si on er h as publ is he d re ve nu e p ro cedur es li st in g t he fact or s t ha t he co ns id ers in de te rm in in g wh ethe r he wil l g ran t s ect io n 6 01 5( f) rel ie f. See Re v. Pro c. 20 13 -3 4, 2 01 3- 43 I.R.B. 3 97 , m od ifyin g a ndsupe rs ed in g R ev . Pro c.- 87 -

[* 87 ] 20 03 -6 1, 2 00 3- 2 C .B. 29 6. We con si de r th es e fac to rs inth e li gh t o f th e at te nd an t fa ct s an d c irc um st an ces , bu t we ar e n otbo un d b y th em . See Pu ll in s v . Co m m is si on er, 1 36 T.C. 43 2, 4 38 -4 39 (20 11 ). Rev . Pro c. 20 13 -3 4, s ec. 4 .01 , 20 13 -4 3 I.R .B. at 3 99 -4 00 , set s fo rth sev en th res ho ldco nd it io ns th ata reque st in g s po us e m us t s at is fy

to be eli gi bl e fo r rel ie f
un de r se ct io n 6 01 5( f): (1) th e reque st in g s po us e fi le d ajoi ntFed eral in co m e ta x return fo r th e ta x year or

y ears forwhi ch rel ie f is so ug ht ; (2 ) th e reque st in g s po us e do es no t qua li fy

forrel ie f un de r se ct io n 6 01 5( b) or ( c); (3) th e cl ai m forrel ie f is ti m el y fil ed ; (4 ) no ass et s wer e tr an sf erre d b etweenth e sp ou se s as pa rt o f a frau du le ntsch em e; (5) th e n on reque st in g s po us e d idno t tran sf er d is qu al ifi ed
as se ts to th e reque st in g s po us e; (6) th e reque st in g s po us e d idno t kno win gl y pa rti ci pa te in th e fi li ng of afrau du le ntjoi ntreturn; an d (7 ) th e li ab il it y fro m whi ch rel ie f is so ug htis att rib ut ab le to anit em of t he no nr eque st in g s po us e. Whe n areque st in g s po us e sa ti sf ie s t he th res ho ldco nd it io ns of R ev . Pro c. 20 13 -3 4, s ec. 4 .01 , th e Co m m is si on er co ns id ers whethe r th e reque st in g s po us e is
en ti tl edto a st ream li ne d d et erm in at io n o f equi tabl e rel ie f un de r se ct io n 6 01 5( f) pu rs ua ntto Rev . Pro c. 20 13 -3 4, s ec. 4 .02 , 20 13 -4 3 I.R .B. at 4 00 . If a reque st in g sp ou se is no t en ti tl edto a st ream li ne d d et erm in at io n b ecau se th e reque st in g s po us e- 88 -

[* 88 ] do es no t s at is fy

all th e el em en ts inRev . Pro c. 20 13 -3 4, s ec. 4 .02 , th e 2 8 reque st in g s po us e’s reque stforrel ie f m ay be co ns id eredus in g t he equi tabl e rel ie f fact or s i n R ev . Pro c. 20 13 -3 4, s ec. 4 .03 , 20 13 -4 3 I.R .B. at 4 00
. Und er Re v. Pr oc . 20 13 -3 4, s ec. 4 .03 , equ it ab le rel ie f un de r se ct io n 6 01 5( f)
m ay be grant edif, t ak in g i nt o a cco un t al l the fact s an d c irc um st an ces , itwou ldbe in equi tabl e to ho ldth e reque st in g s po us e res po ns ib le forall or p artof t he li ab il it y . Inm ak in g t he de ci si on , th e Co m m is si on er wei gh s a n um

be r of fact or s, i nc lu di ng , bu t n otli m it edto :

(a) M ari ta l s ta tu s. Whethe r th e reque st in g s po us e is no lo ng er m arri edto th e n on reque st in g s po us e as of t he da te th e Servi ce m ak es it s d et erm in at io n. * * * (b ) Eco no m ic hard sh ip . Whe th er the reque st in g s po us e wil l su ffereco no m ic hard sh ip if re li ef i s n otgra nt ed . * * * (c) Kn owl ed ge or r eas on to kn ow. * * * In t he cas e o f an in co m e ta x l iabi li ty tha t was pro pe rly repo rte d b utno t p ai d, wh ethe r, as of t he da te th e return was fil edor t he da te th e reque st in g s po us e reas on ab ly bel ie ve d the return was fil ed , th e reque st in g s po us e kne w orha d re as on to kn ow tha t the no nr eque st in g s po us e wou ldno t o r A reque st in g s po us e is eli gi bl e fo r a s tre am li ne d d et erm in at io n i f th e 2 8 fo ll owi ng ele m en ts are s at is fie d: (1) on th e d at e o f th e reque stforrel ie f, th e reque st in g s po us e is no lo ng er m arri edto , or i s l eg al ly sep arat edfro m , th e no nr eque st in g s po us e; (2) on th e d at e th e return was fil ed , th e reque st in g s po us e di d n otkn ow, an d h adno reas on to kn ow, tha t the re was anun de rs ta te m en t o r de fic ie nc y

on th e joi ntin co m e ta x re tu rn ; an d (3 ) th e reque st in g s po us e wil l s uf fer eco no m ic ha rd sh ip if t he Co m m is si on er d oe s n otgra ntrel ie f. Rev . Pro c. 20 13 -3 4, se c. 4.0 2, 2 01 3- 43 I.R.B. 3 97 , 40 0.- 89 -

[* 89 ] co ul d n otpa y

th e ta x l iabi li ty at th atti m e o r wit hi n areas on ab le pe rio d o f ti m e aft er the fil in g o f th e return. * * * (d ) Leg al ob li ga ti on . Whe th er the reque st in g s po us e o r th e no nr eque st in g s po us e h as a le ga l o bl ig at io n t o p ay th e o ut st an di ng Fed eral in co m e ta x l iabi li ty. * * * (e) Si gn ifi can t b en efi t. Whethe r th e reque st in g s po us e si gn ifi can tl y

be ne fit te d fr om

th e u np ai d i nc om e ta x l iabi li ty or un de rs ta te m en t. * * * (f) Co m pl ia nc e wit h i nc om e ta x l aws . Whe th er the reque st in g sp ou se ha s m ad e a g oo d fa it h e ffo rt t o c om pl y with t he in co m e ta x la ws i n the tax ab le y ears fol lo win g the tax ab le y ear o r y ears to whi ch th e reque stforrel ie f rel at es . * * * (g ) Men ta l o r ph y si cal he al th . Whe th er the reque st in g s po us e was in po orph y si cal or m en ta l h eal th . * * * Id . sec . 4.0 3( 2) , 20 13 -4 3 I.R .B. at 4 00 -4 03 . No si ng le fact oris de te rm in at iv e. Id
. at40 0. B. Whe th er Ms . Fau se ttIs El ig ib le forRel ie f Und er Se ct io n 6 01 5 1. Sect io n 6 01 5( c) Re li ef Res po nd en t co nt en ds th atMs . Fau se ttis no t en ti tl edto rel ie f un de r se ct io n 60 15 (c) b ecau se (1) sh e h adactua l kno wled ge of t he un rep orte d i nc om e atis su e,
se e se c. 60 15 (c)( 3) (C); (2) sh e an d M r. Durl an d t ran sf erre d a ss et s t o e ach othe r as pa rt o f a fraudul en t s ch em e o f th ei rs , see sec . 60 15 (c)( 3) (A)(i i); sec . 1.6 01 5- 1( d) , In co m e Tax Reg s.; an d (3 ) sh e h as no t p ro ve n t ha t the am ou nt s g iv in g ri se to th e- 90 -

[* 90 ] de fic ie nc ie s ar e n otall oc ab le to he r, se e se c. 60 15 (c)( 1) , (d) . Becau se we fin d t ha t M s. Faus et t h adactua l kno wled ge of the un rep orte d i nc om e atis su e an d th atsh e d idno t s ig n t he returns un de r du res s, s he is no t el ig ib le forsec ti on 60 15 (c) re li ef.
a. Actu al Kno wled ge i. 19 99 W e su st ai ne d re sp on de nt ’s det erm in at io n tha t M r. Durl an d h adrece iv edin 19 99 bu t d idno t re po rt o n p et it io ne rs ’ 19 99 return wag e in co m e o f $5 5,0 00 . See
supr a p artIII.D.1 . In Se pt em be r 20 00 , bef

or e p et it io ne rs fil edth ei r 19 99 return, Ms . Fau se ttst at edto th e FBI th atMr. Du rla ndha d t ol d h er tha t M r. Gib bo ns ha d to ldhi m th atth ey co ul d re po rt M r. Durl an d’s s al ary as a “ lo an ” o n t he bo ok s. Ms
. Fau se ttwas a ls o a ware t ha t M r. Durl an d re cei ve d asal ary of $1 0,0 00 pe r m on th fro m on e o f Mr. Harris ’ bu si ne ss es . Alth ou ghMr. Du rla ndcas he d the sal ary ch eck s atFerg us on Ch eckCas hi ng an d t he ch eck s al l b ear d at es th atare b efo re the da te on whi ch Mr. Durlandan d M s. Faus et t m arri ed , Ms . Fau se ttst at edto th e FBI th atsh e “ kn ow[ s] fora factth at* * * [M r. Durl an d] rece iv ed[a] sal ary fro m T.J. Oil & Gas * * * up thr ou gh at l eas t Au gu stof 1 99 9” . Accor di ng ly, res po nd en t h as
m ethi s b ur de n o f pr ov in g t ha t M s. Faus et t h adactua l kno wled ge th atMr. Du rla nd
rece iv ed$5 5,0 00 in un rep orte d wag es in19 99
.- 91 -

[* 91 ] W e al so su st ai ne d re sp on de nt ’s det erm in at io n t ha t M r. Durl an d h ad
rece iv edun rep orte d d iv ert edco rp or at e in co m e o f $4 35 ,00 0 fr om Gul fp ort Oi l & Gas in19 99 , whi chMr. Du rla ndha d c la ss ifi edas l oa ns to av oi d p ay in g t ax es . See
supr a p artIII.D.2 . W

he n M s. Faus et t s ig ne d t he 19 99 return s he kn ew th atMr. Dur landha d n o i nt en ti on of r ep ay in g t he pu rp orte d l oa ns . Ms. Faus et t al so kn ew th atMr. Du rla ndrece iv edth e u nr ep orte d d iv ert edco rp or at e in co m e as pu rp orte d lo an s t o a vo idpa y in g t ax es . Accor di ng ly, res po nd en t h as m ethi s b ur de n o f pr ov in g t ha t M s. Faus ett h adactua l kno wled ge th atMr. Du rla ndrece iv eddi ve rte d
co rp or at e in co m e o f $4 35 ,00 0 i n 1 99 9. ii
. 20 00 W e su st ai ne d re sp on de nt ’s det erm in at io n tha t M r. Durl an d h adrece iv ed wag e in co m e o f $5 ,00 0 fr om T.J. Oil & Gas in20 00 th athe di d n otrep ort o n pe ti ti on ers ’ 20 00 tax return. Se e supr a p artIII.E.1. M s. Faus et t was aware t ha t Mr. Du rla ndrece iv eda sa la ry of $ 10 ,00 0 p er m on th fro m on e o f Mr. Harris ’ bu si ne ss es . In Se pt em

be r 20 00 Ms . Fau se ttst at edto th e FBI th atMr. Du rlandha d cl as si fie d h is sal ary as lo an s t o a vo idpa y in g t ax es . Accor di ng ly, res po nd en t h as
m ethi s b ur de n o f pr ov in g t ha t M s. Faus et t h adactua l kno wled ge th atMr. Du rla nd
rece iv ed$5 ,00 0 i n u nr ep orte d wag es fro m T.J. Oil & Gas in20 00
.- 92 -

[* 92 ] W e su st ai ne d re sp on de nt ’s det erm in at io n tha t M r. Durl an d h adrece iv ed wag e in co m e o f $1 22 ,50 0 fr om Gul fp ort Oi l & Gas i n 2 00 0 t ha t h e d idno t re po rt
on pe ti ti on ers ’ 20 00 tax return. Se e supr a p artIII.E.2. M s. Faus et t s ta te d t o t he FBI t ha t, o n M ay

10 , 20 00 , Mr. Dur la ndha d t es ti fie d i n c ou rt t ha t h e h adno t
rece iv eda sa la ry

si nc e Ma rch 15 , 20 00 , andth atsh e “ kn ow[ s] fora facthe was st il l g et ti ng sal ary. ” Eve n wi th th is kn owl ed ge , Ms . Fau se ttsi gn edth e 2 00 0 re tu rn th atrep orte d o nl y

$2 5,0 00 of wa ge s. Ms . Fau se ttth eref or e kne w th atth e am ou nt 2 9 of wage s re po rte d fo r th e 2 00 0 t ax ab le y ear was in co rrec t. Res po nd en t h as m ethi s bu rd enof p ro vi ng th atMs . Fau se ttha d a ctua l kno wled ge th atMr. Durla nd
rece iv edun rep orte d wag es of $ 12 2,5 00 fro m Gul fp ort Oi l & Gas i n 2 00 0. W e su st ai ne d re sp on de nt ’s det erm in at io n tha t M r. Durl an d h adrece iv edbu t di d n otrep ort o n p et it io ne rs ’ 20 00 return d iv ert edco rp or at e in co m e o f $5 55 ,92 2 fro m Gul fp ort Oi l & Gas. Se e supr a p artIII.E.3. Th e d iv ert edco rp or at e in co m e
was fro m th e sa le of ARXA st oc k a ndpro du ct io n c he ck s fr om Eagl e Ene rg y . Befo re Fe brua ry

20 00 Ms . Fau se ttreg ul arl y rece iv edth e p ro du ct io n c he ck s fr om Eag le Ener gy. Afte r Feb ru ary 20 00 Mr. Du rla ndrece iv edan d c as he d t he pr oduc ti on ch eck s. OnMay 15, 2 00 0, M r. Durl an d t ol d M s. Faus et t tha t h e h ad

The rep orte d wag es were fro m ARXA. Mr. Durl an d a ndMs . Fau se tt 2 9 rep orte d n o wag es fro m

T.J. Oil & Gas or Gu lfp ort Oi l & Gas.- 93 -

[* 93 ] be enrece iv in g t he pro du ct io n c he ck s. WhenMr. Du rla ndan d M s. Faus et t in co rp or at edBo le yn En erg y in Octo be r 20 00 , Mr. Dur la ndto ldMs . Fau se ttth at he ha d d ep os it edin to th e Bo le y n M erri ll Ly

nc h a cco un t the fun ds fro m th e pr oduc ti on ch eck s h e h adpre vi ou sl y cas he d. Aft er Oct ob er 2 00 0 p et it io ne rs
as si gn edMs . Fau se tt ’s in te res t i n t he Mat ag or dalea se to Bo le yn En erg y . Ms. Fau se ttan d M r. Durl an d s ub se qu en tl y pu rch as edth e Prytan iaStr eetho us e in Apri l 20 01 with fu nd s fr om

th e p ro du ct io n c he ck s t ha t h adbe ende po si te d i n t he Bo le yn Merril l Lync h a cco un t. Pet it io ne rs di d n otfil e th ei r 20 00 return u nt il Octo be r 17 , 20 01 . Ms. Faus ett the refo re kne w th atMr. Du rla ndha d re cei ve d d iv ert ed
co rp or at e in co m e inth e fo rm of p ro du ct io n c he ck s fr om Eagl e Ene rg y

th at pe ti ti on ers di d n otrep ort o n t he ir 2 00 0 re tu rn . Ms . Fau se ttals o s ta te d t o the FBI i n S ep te m be r 20 00 th atGul fp ort Oi l & Gas was s el li ng ARXA st oc k t o i nv es to rs , andMs . Fau se ttwitne ss edpro m is so ry
no te s fo r so m e st oc k p ur ch as es . Ms. Faus et t t ol d t he FBI tha t Gu lfp ort Oi l & Gas
was rece iv in g t he fun ds fro m th e sa le s b utth atMr. Du rla ndwou ldsubs eque nt ly
rece iv e 3 9% o f th e in co m e to co rres po ndwith h is in te res t i n Gu lfp ort Oi l & Gas. Res po nd en t h as th eref

or e m ethi s b ur de n o f pr ov in g t ha t M s. Faus et t h adactua l kn owl ed ge th atMr. Du rla ndha d re cei ve d d iv ert edco rp or at e in co m e fro m th e sa le of ARXA st oc k dur in g 2 00 0 tha t p et it io ne rs di d n otrep ort o n the ir 2 00 0 re tu rn .- 94 -

[* 94 ] ii i. 20 01 W e su st ai ne d re sp on de nt ’s det erm in at io n tha t M r. Durl an d h adrece iv ed wag e in co m e o f $4 5,0 00 fro m Gul fp ort Oi l & Gas i n 2 00 1 t ha t h e d idno t re po rt
on pe ti ti on ers ’ 20 01 return. Se e supr a p artIII.F. Alt ho ug h M r. Durl an d a ndMs
. Fau se ttli ve d apa rt dur in g m os t o f th e rel ev an t p artof 2 00 1, M s. Faus et t kne w th at Mr. Du rla ndrece iv eda sa la ry of $ 10 ,00 0 am on th fro m on e o f Mr. Harris ’ bu si ne ss es . Mr. Dur la ndm ov edinwith M s. Faus et t i n No ve m be r 20 01 aft er
res ig ni ng fro m

Gul fp ort Oi l & Gas i n S ep te m be r. Even with t he kn owl ed ge th at Mr. Du rla ndha d wo rk edforGul fp ort Oi l & Gas u nt il Sep te m be r 20 01 , Ms
. Fau se ttsi gn edpe ti ti on ers ’ 20 01 tax return re po rti ng no wage s. Acco rd in gl y , res po nd en t h as m ethi s b ur de n o f pr ov in g t ha t M s. Faus ett h adactua l kno wled ge th atMr. Du rla ndha d re cei ve d $ 45 ,00 0 i n u nr ep orte d wag es fro m Gul fp ort Oi l & Gas in20 01
. b. Dur es s Ex cep ti on Res po nd en t h as sat is fie d h is bu rd enof p ro vi ng th atMs . Fau se ttha d a ctua l kn owl ed ge of t he it em s g iv in g ri se to th e d efi ci en ci es du rin g the 19 99 -2 00 1 ta xabl e y ears . See s up ra p artV.B.1.a. Ms . Fau se ttass ert s tha t s he si gn edth e 19 99 -2 00 1 jo in t t ax returns un de r du res s an d t ha t s he sh ou ldbe rel ie ve d o f joi nt
an d s ev eral li ab il it y

forth e d efi ci en ci es as ares ul t. We the refo re co ns id er- 95 -

[* 95 ] whet he r Ms . Fau se ttqu al ifi es forth e dur es s ex cep ti on un de r se ct io n 60 15 (c)( 3) (C). Dur in g t ria l M s. Faus et t t es ti fie d g en eral ly tha t M r. Durl an d p hysic al ly and ps y ch ol og ic al ly abu se d h er thr ou gh ou t the y ears at i ss ue . Add it io na ll y , th e rec or d refl ect s t ha t M s. Faus et t was un ab le to ob ta in reco rd s o f he r in co m e an d e xp en se s fo r th e 1 99 9 re tu rn , whi chsh e cl ai m s l edhe r to si gnth e joi ntreturn. We will ad dr es s wh ethe r th e ab us e o r th e in ab il it y to ob ta in reco rd s co ns ti tu te s dur es s fo r th e p ur po se of s ect io n 6 01 5( c)(3 )(C)
. Fo r th e Co urt t o fi nddu res s fo r th e p ur po se of s ect io n 6 01 5( c)(3 )(C) , Ms
. Fau se ttm us t s ub st an ti at e, orat l eas t p ro vi de de ta il edan d c red ib le tes ti m on y of ph y si cal or p sycho lo gi cal ab us e. See Pu ll in s v . Comm is si on er, 1 36 T.C. at 4 54 ; Nih is er v . Comm is si on er, s li p o p. at24 -2 5. Ev enif t he Co urt wer e to fin d M s. Fau se tt ’s tes ti m on y

cred ib le , whi ch itdo es no t, s ee s up ra p artI.A, Ms. Faus et t
ne ve r subs ta nt ia te d o r te st ifi edwith s pe ci fic it y reg ard in g h er al le ge d abu se . Ms. Fau se tttes ti fie d abo utge ne ric th reat s an d t hr ee al le ge d i ns ta nc es of p hysic al ab us e, bu t h er t es ti m on y

was n otsubs ta nt ia te d b y any th irdpa rty an d n o p ol ic e

3 0 rep ort was fil ed . Ms. Faus et t al so ne ve r pr ov edsh e si gn edan y returns be cau se of

Ms . Fau se tttes ti fie d t ha t the re were witne ss es to in st an ces of p hysic al 3 0 ab us e, bu t n on e o f th os e al le ge d wi tn es se s t es ti fie d a t tria l.- 96 -

[* 96 ] fearof r et al ia ti on . See s ec. 1 .60 15 -3 (c)( 2) (v ), In co m e Tax Reg s. Th eref or e, Ms . Fau se ttha s n otm ethe r bu rd enof p ro vi ng th atsh e si gn edth e returns un de r du res s due to ph y si cal or p sycho lo gi cal ab us e. See s ec. 6 01 5( c)(3 )(C)
. Ms . Fau se ttals o c on te nd s t ha t b ecau se Mr. Du rla ndrefu se d t o p ro vi de he r with re co rd s s he was fo rcedto fil e joi nt ly. Befo re Ms . Fau se ttan d M r. Durl an d fil edth ei r joi ntreturn o n Oct ob er 1 6, 2 00 0, M s. Faus et t h adreque st eddo cu m en ts fro m Mr. Du rla ndpre su m ab ly to fi le he r own in di vi du al return. Du res s u nd er
se ct io n 6 01 5 re qu ire s ev id en ce o f ph y si cal or p sycho lo gi cal ab us e, an d b ecau se of th atab us e, a fea r th atth e n on reque st in g s po us e wil l re ta li at e if th e reque st in g sp ou se do es no t s ig n t he return. Se e se c. 1.6 01 5- 3( c)(2 )(v ), In co m e Tax Reg s. The refu sa l t o p ro vi de reco rd s i s n otdu res s as co nt em pl at edby sect io n 6 01 5. Ms
. Fau se ttdi d n otsi gn th e joi nt19 99 return u nd er dur es s b utrathe r, as in di cat edin he r st at em en ts to th e FBI in Sep te m be r 20 00 , sh e si gn edth e return b ecau se sh e
was co nc ern edab ou t l at e fi li ng pe na lt ie s an d i nt eres t i f sh e was to fil e in di vi du al ly. Altho ug h M s. Faus et t at te m pt edto ob ta in fin an ci al reco rd s, s he
ne ve r so ug htth e ad vi ce o f a t ax pro fes si on al to ass is t h er wi th fil in g a n i nd iv idua l 19 99 return. Mo reo ve r, itis un cl ear wh atreco rd s M s. Faus et t n eed edto fil e h er return b ecau se sh e h adbe enrece iv in g t he pro du ct io n c he ck s fr om th e Ma ta go rd a le as es un ti l Fe brua ry

20 00 . The rec or d d oe s n otrefl ectth atMs . Fau se ttpa id- 97 -

[* 97 ] ex pe ns es with re sp ectto th e Ma ta go rd a le as es , andinfactli en s wer e fi le d i n Ju ne 20 00 forunpa idop erat in g e xp en se s. Fu rth erm or e, Ms . Fau se ttdi d n otpro ve th atsh e si gn edth e returns forth e y ears at i ss ue s b ecau se of f ear o f ret al ia ti on . 3 1 Ms . Fau se ttis th eref

or e n oten ti tl edto sec ti on 60 15 (c) re li ef. 2. Sect io n 6 01 5( b) Rel ie f Sect io n 6 01 5( b) (1 )(C) pro vi de s t ha t anin di vi du al reque st in g s ect io n 60 15 (b ) rel ie f m

us t n otkn ow o r ha ve reas on to kn ow t ha t an un de rs ta te m en t
ex is te d. Th e actua l kno wled ge requi rem en t u nd er s ect io n 6 01 5( c)(3 )(C) is
na rro wer tha n t he kn ew-o r-s ho ul d- ha ve -kno wn s ta nd ardun de r se ct io n 60 15 (b )(1 )(C) . See Ch es hi re v . Comm is si on er, 1 15 T.C. at 1 95 . Becau se Ms
. Fau se ttha d a ctua l kno wled ge , see supr a p artV.B.1.a, o f th e it em s g iv in g ri se to th e d efi ci en cy , sh e is in el ig ib le forsec ti on 60 15 (b ) rel ie f, se e Altv. Co m m is si on er, 1 19 T.C. 30 6, 3 13 (20 02 ) (requi rin g atax pa y er t o s at is fy all
se ct io n 6 01 5( b) requi rem en ts to qu al ify for re li ef u nd er tha t s ub se ct io n) , aff’d, 1 01 F. App ’x 34 (6t h C ir. 2 00 4)
. Ms . Fau se ttm ay

ha ve fear edth atMr. Du rla ndwou ldpro ceedwith the 3 1 di vo rce p ro ceed in g i n M is si ss ip pi if s he di d n otsi gn th e 1 99 9 re tu rn . The ab us e ex cep ti on of s ec. 6 01 5( c)(3 )(A) re qu ire s t ha t the reque st in g s po us e p ro ve th atsh e was a vi ct im

of d om es ti c ab us e an d b ecau se of t ha t ab us e, sh e si gn edth e return ou t o f fea r of

ret al ia ti on . See s ec. 1 .60 15 -3 (c)( 2) (v ), In co m e Tax Reg s. Alt ho ug h a d iv or ce p ro ceed in g m ay gi ve ris e to m en ta l an gu is h, the Co urt d oe s n otfin d t ha t itris es to th e le ve l o f do m es ti c ab us e in th es e cas es .- 98 -

[* 98 ] 3. Sect io n 6 01 5( f) Re li ef Altho ug h t hi s C ou rt i s n otbo un d b y th e fac to rs inRev . Pro c. 20 13 -3 4,
supr a, we ge ne ral ly con si de r th os e g ui de li ne s. See Pu ll in s v . Comm is si on er, 1 36 T.C. at 4 38 -4 39 . W e fi rs t co ns id er wh ethe r Ms . Fau se ttsat is fie s t he th res ho ld
co nd it io ns of R ev . Pro c. 20 13 -3 4, s ec. 4 .01 , forequi tabl e rel ie f un de r se ct io n 60 15 (f). We nex t co ns id er wh ethe r equi ty ent it le s M s. Faus et t t o s ect io n 6 01 5( f) rel ie f. As a t hr es ho ldco nd it io n fo r se ct io n 6 01 5( f) rel ie f, th e reque st in g s po us e
m us t n otkn owi ng ly part ic ip at e in th e fi li ng of afrau du le ntjoi ntreturn. Re v. Pr oc . 20 13 -3 4, s ec. 4 .01 (6 ). Altho ug h M s. Faus ett i s n otli ab le forth e fraudpe na lt ie s, we ha ve de te rm in edth atth e ta x re tu rn s wer e fraudul en t an d t ha t M r. Durl an d i s li ab le forciv il frau d p en al ti es . See s up ra p artIV.B.3. Ms . Fau se ttsi gn edth es e returns whi le kn owi ng th atin co m e h adbe enom it te d fr om th em . See s up ra p art V.B.1.a. Acc or di ng ly, Ms . Fau se ttdo es no t s at is fy th is th res ho ldco nd it io n fo r equi tabl e rel ie f un de r se ct io n 6 01 5( f). Eve n i f Ms . Fau se ttha d n otkn owi ng ly part ic ip at edinth e fi li ng of a frau du le ntjoi ntreturn, s he wou ldno t b e el ig ib le for rel ie f be cau se Mr. Du rla nd
an d M s. Faus et t tran sf

erre d a ss et s b etweenth em as p artof afrau du le ntsch em e. Ano th er thr es ho ldco nd it io n o f Rev . Pro c. 20 13 -3 4, s ec. 4 .01 (4 ), is th at“ no ass et s- 99 -

[* 99 ] were tran sf

erre d b etweenth e sp ou se s as pa rt o f a fraudul en t s ch em e b y th e sp ou se s.” Th e d is qu al ifyin g t ran sf er i n t hi s ca se rel at es to th e May 20 01 pu rch as e of th e Prytan iaStr eetho us e. Inpu rch as in g t he ho us e Mr. Durla ndan d M s. Faus et t
us edfun ds fro m

anacco un t o wne d b y

Bo le yn En erg y . The Prytan iaStr eetho us e
was ti tl edin Ms . Fau se tt ’s nam e. The fu nd s i n the Bo le yn En erg y acco un t wer e-- atlea stin pa rt- - am ou nt s p ai d t o M r. Durl an d, M s. Faus et t, o r Bo le yn En erg y
un de r th e Ma ta go rd a le as e, an d M s. Faus et t an d M r. Durl an d e ach own edha lf o f Bo le y n En erg y ’s st oc k. By May 20 01 Ms . Fau se ttkn ew th atth e p ur po se of t he well ass ig nm en ts was t o d efraudARXA andGul fp ort Oi l & Gas’ cred it or s an d t he IRS. Sh e al so m

us t h av e kno wn t ha t M r. Durl an d i ns is te d o n h av in g t he Pryta ni a Streetho us e ti tl edon ly in h er n am e b ecau se he want edto pl ace h is ass et s (i .e., hi s po rti onof t he fun ds in th e Bo le yn a cco un t tha t h e o wne d) be y on d the reac h o f hi s cred it or s, i nc lu di ng cred it or s o f ARXA an d Gu lfp ort Oi l & Gas a ndth e IRS
. Nev erthe le ss , sh e ag reedto th is arra ng em en t. Mr . Durl an d t he refo re tran sf erre d
as se ts un de r hi s co nt ro l t o M s. Faus et t as pa rt o f a fraudul en t s ch em e. Subs eque ntev en ts supp ort o urco nc lu si on th atMr. Du rla ndtra ns ferr ed
as se ts to Ms . Fau se ttas p artof afrau du le ntsch em e. Sp eci fic al ly, Ms . Fau se tt la te r tr an sf

erre d t he Pryta ni a Streetho us e to Trin it y Art. Sh e th encau se d Tri ni ty Art t o t ran sf

er the ho us e b ackto he r so th atsh e co ul d o bt ai n alo anon th e Prytan ia- 10 0 -

[* 10 0] Str eetho us e an d t he n t ran sf erre d t he ho us e b ackto Trin it y Art. We inf

er fro m th es e tr an sf

ers th atMr. Du rla ndan d M s. Faus et t n o l on ge r th ou gh t tha t ha vi ng th e Prytan iaStr eetho us e ti tl edinMs . Fau se tt ’s nam e was su ffi ci en t t o pr ot ectth e as se ts fro m

Mr. Du rla nd ’s cred it or s. Altho ug h M s. Faus et t t es ti fie d th atMr. Du rla ndha d t ol d h er t o t ran sf er the ho us e to Trin it y

Art b ecau se sh e was
se ll in g a rt a ndan ti qu es fro m th e h ou se , we do no t fi ndMs . Fau se tt ’s tes ti m on y in th is reg ardto be cred ib le . Mr. Dur la ndals o p la cedot he r as se ts , su ch as t he Mat ag or dalea se , as wel l as in co m e th athe earn ed , inMs . Fau se tt ’s nam e,
os te ns ib ly to h id e th e as se ts an d i nc om e fro m cred it or s t hr ou gh ou t the y ears at is su e. Ms . Fau se ttis th eref or e d is qu al ifi edfro m

equi tabl e rel ie f un de r se ct io n 60 15 (f). See i d.

3 2 Ass um in g a rg ue nd o t ha t M s. Faus et t s at is fie d the th res ho ldco nd it io ns for
se ct io n 6 01 5( f) rel ie f, equi ti es do no t wei gh inhe r fav or . Alth ou gh Ms . Fau se tt
was no t m arri edto Mr. Du rla ndwhen sh e reque st edsec ti on 60 15 rel ie f an d al th ou gh sh e was in co m

pl ianc e wit h h er t ax ob li ga ti on s fo r y ears aft er the y ears at is su e, Ms . Fau se ttha d a ctua l kno wled ge of the un de rs ta te m en ts forth e y ears at 3 3 A reque st in g s po us e al so is no t el ig ib le for sec . 60 15 (c) re li ef wh enass et s 3 2 were t ran sf

erre d a s p artof afrau du le ntsch em e. Sec. 6 01 5( c)(3 )(A)(i i). Res po nd en t co nc ed es th atbo th of t he se fact or s fa vo r gr an ti ng rel ie f to Ms
. 3 3 (co nt in ue d...)- 10 1 -

[* 10 1] is su e. See s up ra p artV.B.1.a. Mo reo ve r, Ms . Fau se ttne ve r pr ov edwith
an y cred ib le ev id en ce tha t s he wou ldsu ffereco no m ic ha rd sh ip if re li ef was no t gr an te d. Ad di ti on al ly pet it io ne rs ’ di vo rce d ecre e st at es th atth e ta x l iabi li ti es for th e y ears at i ss ue are ea ch pa rty’ s re sp on si bi li ty. Ms . Fau se ttrece iv edsi gn ifi can t 3 4 be ne fit s fr om

th e u nd ers ta te m en ts of t ax in cl ud in g a n i nv es tm en t ac co un t i n h er
na m e, ex pe ns iv e jewelry , ho m es , anda lu xu ry car. Ms . Fau se tttes ti fie d t ha t s he
was inpo orm en ta l h eal th an d a tt en de d c ou ns el in g dur in g t he y ears at i ss ue , bu t Ms . Fau se ttne ve r in tro du cedan y cred ib le ev id en ce t o c orro bo rat e h er cl ai m s. Acco rd in gl y , th e Co urt i s n otco nv in cedth atequi ti es weig h i n M s. Faus et t’s fa vo r. Ms . Fau se ttco nt en ds th atth is Co urt s ho ul d g ran t equi tabl e rel ie f ev enif equi ti es do no t wei gh in he r fav orbe cau se of M r. Durl an d’s p hysic al an d ps y ch ol og ic al ab us e. Rev . Pro c. 20 13 -3 4, s ec. 3 .01 , 20 13 -4 3 I.R .B. at 3 98 , gi ve s gr eat er d efer en ce t o t he pre se nc e o f ab us e th anpre vi ou s g ui de li ne s an d re co gn iz es th atwhen ab us e is pre se nt , itm ay affe ctth e an al y si s an d p os si bl y ne ga te th e pr es en ce o f ot he r un fav or ab le fact or s. We hav e al read y co ns id eredwhet he r Ms
. (...co nt in ue d) 3 3 Fau se tt . Rev . Pro c. 20 13 -3 4, s ec. 4 .03 (2 )(d ), 20 13 -4 3 I.R .B. at 4 02 , st at es th atth e

3 4 le ga l o bl ig at io n fa ct oris ne ut ral when th e ta x l iabi li ti es are ea ch pa rty’ s res po ns ib il it y .- 10 2 -

[* 10 2] Fau se ttha d p ro ve n abu se forpu rp os es of t he du res s ex cep ti on un de r
se ct io n 6 01 5( c)(3 )(C) , andwe ha ve fou ndth atth e al le ge d abu se was n ot
subs ta nt ia te d. Se e supr a p artV.B.1.b . The rec or d s im pl y do es no t s up po rt a fin di ng th atMs . Fau se ttwas abu se d s uc h tha t the ab us e wou ldne ga te th e fac to rs th atweig h a ga in stgra nt in g h er s ect io n 6 01 5( f) rel ie f. Her ev id en ce was
un co rro bo rat edan d u nm ov in g a ndhe r act io ns du rin g t he y ears at i ss ue were n ot
co ns is te ntwith h er t es ti m on y at t ria l. Acco rd in gl y , we con cl ud e th atMs . Fau se tt is no t en ti tl edto rel ie f fro m joi ntan d s ev eral li ab il it y un de r an y

subs ect io n o f
se ct io n 6 01 5. VI. Co nc lu si on W e h av e co ns id eredth e p art ie s’ rem ai ni ng arg um en ts , andto th e ex te ntno t di sc us se d abo ve , con cl ud e th os e arg um en ts are i rrel ev an t, m oo t, o r wit ho utm eri t. To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te redun de r Ru le 15 5.