TAX COURT OPINION

Case: Solutus, LLC, Ozark Pure Trust, Robin Standifird, Trustee, Tax Matters Partner
Docket Number: 29600-13
Judge: Goeke
Opinion Type: bench
Filed: 11/14/2017
Pages: 16

UNITED STATES TAX COURT WASHINGTON, DC 20217 SOLUTUS, LLC, QZARK PURE TRUST, ROBIN STANDIFIRD, TRUSTEE, TAX MATTERS PARTNER, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, ) ) ) ) ) ) ) Docket No. 29600-13. ) ) Respondent ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Proceduré, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondetít a copy of the pages of the transcript of the trial in the above case before .ludge Joseph Robert Goeke at Phoenix, Arizona containing his oral findings of fact and opinion rendered at the tFial session at which the case was heard. .In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. Nòvember 14, 2017 SERVED NOV 1 5 2017 Bench Opinion by Judge Joseph Robert Goeke October 13, 2017 Solutus, LLC, Ozark Pure Trust, Robin Standifird, Trustee, 3 Tax Matters Partner v. Commissioner Docket No. 029600-13 THE COURT: .The Court has decided to render oral findings of fact and opinion in this case -and the following represents the Court's oral findings of fact and opinion. The oral f-indings of fact and opinion shall not 1 2 3 4 5 6 7 8 9 10 be relied upon as precedent in any other case. This 11 opinion is.rendered pursuant to Tax Court Rule of Practice 12 and Procedure.152 and Section 7459(b) of the Internal 13 Revenue Code. Hereinafter references to sections are to 14 15 sections of the Internal Revenue Code. This .case arises as a result of the issuance by 16 the Internal Revenue Service (IRS) of a notice of final 17 partnership administrative adjustment (FPAA) to Solutus, 18 LLC (Petitioner or Solutus). This FPAA was issued for the 19 years 2008 and 2009. And a separate. FPAA was issued for 20 21 22 23 2010. These two FPAAs have been combined for purposes of the current litigation. So the years in question are 2008 through 2010. There's no dispute that the Petitioner is an 24 entity that is subject to the procedures for partnership 25 and other pass-through entities known as TEFRA procedures. See Section 6221, et al. This is a very unusual TEFRA case in that all of the Solutus earnings are in fact the earnings of a nonpartner, Lance C. Standifird, hereinafter 4 referred to as LCS. He attempted the assignment of his income from earnings as a salesman to avoid payment of income tax. LCS has a history of aggressive tax evasion and has been previously labeled by this°Court as "a frequent litigator of groundless challenges to the validity of the Internal 1 2 3 4 5 6 7 8 9 10 Revenue Code." Standifird v. Commissioner, T.C. Memo .11 2002-245. 12 13 14 15 16 17 18 19 The assignment of income from an individual to another entity or to another individual is not a new phenomenon in the income tax system. And has long been rejected and ie the -, and that rejection has resulted in 1 Zr a large body of case law which does not permit taxpayers to assign income which they have properly earned to another entity or te-another person. The fact that this assignment takes place 20 between an individual and a TEFRA partnership adds a level 21 of procedural complexity to this matter. But 22 nevertheless, the assignment should not be recognized and 23 given efficacy simply because of the use of a partnership. 24 The FPAA disallows fraudulent expenses which 25 were claimed to offset the income assigned by LCS to the 5 1 2 3 4 5 6 7 8 9 Solutus, LLC. As a protective measure, the IRS issued a notice of deficiency to LCS as an individual. He moved to dismiss that matter for lack of jurisdiction because of the TEFRA rules which required that the assignment of income be resolved at the partnership level. Respondent agreed with that position and explained that the regime for dealing with TEFRA entities required that the case be dismissed even if the Court determined that the Solutus 10 entity was not a valid tax partnership. 11 12 As a result, this Court dismissed the case for lack of jurisdiction in 2014 (docket number 30475-13). 13 The jurisdictional question raised by the application of 14 15 the TEFRA provisions merits some further discussion. Section 6221 p.rovides that partnership items and 16. the. applicability of penalties, additions to tax, and QPr 17 additional adjustments related to partnership items must 18 be determined at the partnership level. What follows in 19 the Internal Revenue Code after Section 6221 is a series 20 of statutory provisions which set forth the procedural 21 rules to implement Section.6221 and the partnership 22 procedural regime. 23 In Section 6223, it is recognized that even if 24 an entity is not properly a partnership for tax purposes, 25 if a partnership return is filed and the TEFRA rules would 6 1 2 3 4 5 6 7 8 9 otherwise apply, the determination of the efficacy of that partnership will be made in the context of TEFRA. This is reinforced by Treasury Reg. Section 301.6233-1(b) which provides that even if no partnership entity is found to exist, the TEFRA rules will apply to the determinàtion of the efficacy of the partnership. That is precisely the issue we have in the present situation and that is why even though we are dealing with an assignment of income from an individual to the partnership, the determination 10 of the proper tax treatment of that situation should be 11 made at the partnership level. 12 13 Section 6233 provides that if a partnership return is filed for a year, but it is'determined that no 14 partnership exists, the subchapter that governs the 15 procedure for taxing partnership items still applies to 16 the extent provided in the regulations. The regulation 17 18 19 20 21 cited, Treasury Reg. Section 301.6233-1(b) confirms that the determination of whether a proper partnership exists is to be made at the partnership level in a TEFRA proceeding. This regulatory and statutory analysis has been 22 confirmed by numerous cases, which make clear that even if 23 the partnership is disregarded for tax purposes, the 24 decision to --e-r ignorf=prg of the tax 25 implications of the partnership will be made in the 7 1 2 3 4 5 context of the TEFRA proceedings. This includes determinations whether the partnership had a valid business purpose, which would require that the partnership be ignored if in fact no valid business purpose is recognized. See ASA 6 . Investerings Partnership v. Commissioner, 201 F.3d 505, 7 8 9 10 11 12 13 14 15 16 513 Note 6 (D.C. Circuit 2000 Affirming T.C. Memo 1998-305). In summary, this case is before the Court as a TEFRA matter despite the fact that it involves a tax evasion scheme crafted by an individual who is not a listed partner to Solutus. In 1996, Solutus was formed by LCS with the cooperation of family members for the purpose of evading tax on the income he earned in selling advertising space for Mobile Media, Inc. The named partners of Solutus were 17 Ozark Trust and Pylori Pure Trust. Ozark's named trustee 18 was Robin Standifird (Robin). Robin is the brother of LCS 19 and he represented Solutus .in the tax case as the tax 20 matters partner. 21 Days before trial, he filed a notice that 22 Solutus would no longer participate in the case and that 23 hé personally would no longer participate in the case. 24 His prior filings, however, maintained the fiction that . . 25 LCS was~ not the source of Pétitioner's income by arguing 8 1 2 3 4 5 6 7 8 9 that the partnership had nothing to do with LCS. The evidence admitted at trial establishes that Robin Standifird and LCS participated in peëpetart-i-Trg the submission of false information to the Court and prior to that to the Internal Revenue Service that LCS was not the beneficiary of the funds which were assigned to Solutus. This took the form of LCS submitting false information to the CPA return preparer for Solutus returns for the years 2008, 2009, and 2010. These returns were signed by Robin 10 Standifird claiming expenses which were clearly not 11 business-related expenses as it was apparent to anyone 12 involved in the enterprise that Solutus had no business 13 independent of the income of LCS. 14 LCS controlled the flow of money into and out of 15 Solutus. He arranged for Mobile Media, Inc. to directly 16 deposit his compensation into Petitioners' bank accounts. 17 18 19 20 He then controlled the flow of funds from the account into the accounts of two trusts which were partners. The trust trustees were Robin and LCS's sister. She participated by signing blank checks which she then made available to LCS 21 to use in any way he saw fit. This was just one of the 22 means in which he used the money which had been deposited 23 directly into the Solutus account by Mobile Media. 24 The evidence in the record clearly establishes 25 that the flöw of money into Solutus and out to LCS and his . 9 1 2 3 4 5 6 7 8 siblings was completely controlled by one individual, LCS. To perpetuate this fiction, LCS as previously stated submitted false information to the return preparer for the partnership returns. In this way, he claimed .expenses which would offset the income in the partnership for purposes of the distributions to the trust. Therefore, claiming that the trust received no income from Solutus. The expenses which were falsely claimed have been .9 disallowed in the FPAA and at no time has Solutus in the 10 context of this proceeding offered any evidence which 11 would dispute the disallowance of these expenses as being 12 anrelated to any business activity of Solutus. or even to 13 the legitimate business activiities or claims of legitimate 14 business expense for LCS in the context of his work as a 15 16. 17 18 salesman. The funds directly deposited into the Solutus account by Mobile Media were in 2008, $92,873; in 2009, $85,518; and in 2010, $81,907. These amounts do not 19 reflect the gross income that LCS received from Mobile 20 Media because they do not include the benefits he received 21 from being provided an automobile for his use in his sales 22 activities. 23 These amounts which were directly deposited into 24 Solutus then flowed out to various entities, the Pylori 25 Pure Trust, the Ozark Pure Trust, and.then-some was cash . (cid:16)042 10 withdrawals. In addition, there was a Fatito (ph.), Ltd. which also received money. All.of these funds which flowed out were controlled by LCS. This is established by the record of trial in this case and the matters deemed stipulated previously. These funds were used for various personal reasons of LCS and his siblings or other family members. The legal issues which are presented by this series of facts in the context of this TEFRA proceeding include who was properly the recipient of the income deposited into the Solutus account; 2) what are the appropriate expenses of Solutus related to this income; 3) is the statute of limitations open for 2008; and 4) what penalties or additions to tax can be determined at the partnership level in this TEFRA proceeding? The first issue regarding who is the proper 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 recipient of the income and the second issue involving 18 what are the appropriate expenses related to this income, 19 are decided for Respondent based upon the facts as 20 established prior to trial in the deemed stipulations and 21 22 23 24 the pleadings in the case. These facts have been supplemented by testimony and other exhibits which were received at trial. It is established beyond dispute that the income reported by 25 S.olutus was earned by LCS and that the expenses claimed by 11 Solutus which were denied in the FPAA are not allowable business expenses. Regarding issue 3, the statute of limitations, we note that the Petitioner has alleged that the year 2008 is beyond the statutory period for the assessment of tax. Sections É501(a) generally provides that the amount of any 26 tax imposed shall be assessed within three years after the return was filed. The only return we're dealing with in the 1 2 3 4 5 6 7 8 9 10 present case is a partnership return, which triggers the 11 application of Section 6229(a) which extends the statute 12 of limitations under Section 6501 and provides that the 13 period of limitation for assessing tax attributable to any 14 partnership item shall be open beyond the three-year 15 period after the return was filed if certain excepti'ons 16 17 18 19 20 21 are met. We will only focus on one of the exceptions argued by Respondent in the present ca-se. That is the exception provided in Section 6229(c)(1) dealing with .a fälse -return. Specifically, that section provides that if a partner, any. partner with intent to evade tax signed or 22 participated directly or indirectly in the preparation of 23 a partner.ship return, which inclddes a false or fraudulent 24 item, the period of limitation will be extended to six 25 years from three years. We find that that is clearly demonstr.ated in the 12 present case. And that the evidence establishes that Robin Standifird well knew that the Solutus réturn information was false and that it misrepresented both Solutus's income and the expenses and he simply participated in his brother's plot to avoid paying tax on his brother's income by signing the partner.ship returns. Respondent argues that LCS himself was a partner because he was de facto the only person that controlled 1 2 3 4 5 6 7 8 9 10 and received the income in question. While this we 11 believe is a correct technical position under TEFRA, we 12 13 14 15 16 17 18 also find that Robin Standifird who was a named partner and signed the returns in .question, participated in the fraud and specifically with iñtent to evade, signed the false return. As established by his signature on the return, which was the result of false information submitted by his brother to the returh preparer. There's also evidence in the record that Robin 19 Standifird was one of the family members originally 20 involved in the discussions with his brother when Solutus 21 22 was formed. And that from the outset, he was involved in various other activities. by his brother to avoid paying 23 federal income tax, including the transferring of named 24 ownership of próperty and other activities. All which 25 were established by the testimony at trial. In any event, we find that Section 6229(c)(1) is 13 applicable here and that the statute of limitations did remain open for the year 2008 at.the time the FPAA was issued to the Petitioner. Our analysis is also confirmed by Robin's continued misrepresentation to the Court the pleadings (r and various memoranda and motions that were provided by Solutus in support of various arguments Solutus made over the course aof the procedural history of this case. These 1 2 3 4 5 6 7 8 9 10 repre.sentations consistently maintain that LCS played no 11 12 13 14 role in the partnership or that the partners knew nothing about LCS's activities. We find these pleadings to be specious-. We next turn to the determinations that can be (cid:16)042 15 made relative to the FPAA's analysis of additions to tax 16 and penalties. Respondent has maintained throughout the 17 history of this TEFRA case that the addition to taxfor 18 fraud under Section 6663 can be determined at the 19 partnership level and should be the subject of application i 20 by -the Court in the present case. 21 22 Section 6663(a) provides that ìf any part of any underpayment of tax required to be shown on a return is 23 due to frayd, there shall be added to the tax an amount 24 equal to 75 percent of the portion of the underpayment . .25 which is attributable to fraud. Clearly, Section 6663 14 1 2 3 4 5 6 7 8 9 involves an analysis of intent and the intent to file a return which understates tax. In the present case, the .record is clear that LCS did not file personal income tax returns. And it is well known that partnership returns do not actually state a tax liability. While we are cognizant of the fact that cases have upheld the application of the Section 6662 penalty regime in the context of TEFRA proceedings, the parties, specifically Respondent, candidly points out that there 10 have been no cases of record that actually have applied 11 12 the fraud penalty in the context of th TEFRA proceeding£ 3Ú6 We believe that it io on the facts of this case, 13. it is not possible to make a fraud determination that 14 would impose the Section 6663 penalty at the partnership 1 e ve 1 .i.n-t-h-i-s-eeee· b e c a u s e o f 1 5 16 d11d the statutory impediment 17 which requires a finding of intent to understate tax 18 fraudulently in signing a return, Nonc of which was no± 19 actually done by LCS. 20 21 Therefore, we turn to Respondent' s alternative arguments relative to the addition to tax. Respondent 22 maintains that if the Court finds that Section 6663 cannot 23 be determihed at the p.artnership level, that the Court 24 should find that Section 6662 (a) er-i-ven additions to tax 25 can be properly determined at the partnership level. This 15 1 2 3 4 5 6 7 would include in the alternative édjustments based upon Section .6662(b) and Section 6662(c) for negligence. Thè Court focuses specifically on the assertion of negligence based upon the record before us in this partnership case. Negligence under Section 6662.(c) includes any failure to make.a reasonable attempt to comply with the provis*ions of this title and A4+e-tvrnr 8 W includes any careless, reckless, or intentional 9 disregard of the provisions of the Internal Revenue Code. 10 That's precisely what happened here. 11 . There was clearly a disregard of the provisions 12 of the Internal Revenue Code on the behälf of LCS and his 1RLr 13 brother Robin in submitting partnership returns for an 14 entity that was assigned personal income and claiming 15 expenses which were clearly not business-related expenses 16 because the expenses related to personal use of the funds 17 assigned to Solutus. The record in this partnership case 18 makes very clear that those are the.facts that exist that 19 support the application of Sèction 6662(c). 20 . Procedurally, it is well established that the 21 addition to tax under Section 6662 may be determined at 22 23 the partnership level. Section 6.226(f) provide·s. that the Court has 24 jurisdiction to determine all partnership items for the 25 partnership taxable years which are i.nvolved in the FPAA determinations. This includes the application of penalties and additions to tax whiòh can be determined at wooch v.Ani4<-cl 9=4cA 134 s. 7/2 the partnership. level. See also --e-f--Weed- C+- óMGM3). 16 We will not cite any further authorities for that proposition, but it is beyond dispute in the present case that the facts that relate to the TEFRA proceeding before us -i-t-h· the assignment of income from LCS to Solutus establish negligence and that t-h-a-t can be determined as a result of this partnership proceeding 1 2 3 4 5 6 7 8 9 10 as the adjustments flow through to the person$ affected by 11 12 the income which in this case would be LCS. Petitioners have made no arguments that directly 13 relate to this as.signment of income situation because LCS 14 15 even though he was served with a copy of the FPAAs in questiori, did not participate in the partnership case -a-a- yw 16 t--het and his brother who was the tax matters partner 17 specifically avoided acknowledging the obvious facts that 18 the income in question flowed from LCS. t-kr..ou.ghee-t---t-he TLÞ 19 ce 20 21 Me-vest--he-1-ess, tlie determinations we ' ve made as TÉle they .relate to the assignment - of inconte are not refuted in 22 any sense by Solutus and we believe for the reasons stated 23 they're properly before the Court in the context of this 24 TEERA proceeding. 25 An appropriate order will be issued and a dan 1 2 3 decis.ion implementing the FPAA determinations as explained in this opinion will be forthcoming. This doncludes the Court's oral findings of fact .4 and opinion in this case. 17 (Whereupon, at 10:31 a.m., the above-entitled matter was concluded. ) (cid:16)042 5 6 7 8 9 10 11 12 . 13 14 15 16 17 18 19 20 21 22 23 24 . 25