TAX COURT OPINION

Case: Perry W. Browning
Docket Number: 3531-08
Judge: Halpern
Opinion Type: memo
Filed: 11/03/2011
Pages: 55

T.C. Memo. 2011-261 UNITED STATES TAX COURT PERRY W. BROWNING, Petitioner . COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 3531-08. Filed November 3, 2011. In December 1995', P, the principal sh reholder, its in president, and CEO of SBE, a Vermont-based manufacturing corporation, on the advice of promoters and his own tax adviser, entered into an offshore employee leasing (OEL) arrangement whereby he agreed to lease his services to T, an Irish corporation that subleased his services to L, a U.S. e¼ployee leasing company that subleased his services back to SBE. During the audit years (1995-2000), consideration of P's services, SBE paid L annual amounts equivalent prior years. who reported those payments as wages. balance, after deducting certain amounts, payroll to T for deposit retirement account for P's benefit account) . name of a Bahamas subsidiary of T. received and used, during 1998-2000, credit cards to what SBE had paid P as wages in L paid a portion of those amounts to P, L remitted the taxes owed with respect to its payments to P, (the retirement P and liis wife including the in a deferred compensation or The retirement account was opened in the - 2 - funded the bank account the T subsidiary. Money issued by a Bahamas bank and backed by an account at the same bank in the name of from P's retirement account used to pay the credit card charges, many of which P recognized were personal. During all of years, P continued to represent himself parties as an employee and president of SBE, and he acted on behalf of SBE in the same manner as before adoption of the amounts to be deposited in the retirement account and he effectively controlled the manner in which the assets in the account were invested. During 1998-2000, he exercised his unrestricted access to the funds in the account by means of the Bahamas bank credit cards. the OEL arrangement. He also determined the audit to third Both the 3- and 6-year periods of limitations on to P. the application of assessment under I.R.C. sec. 6501(a) and (e) had expired before R issued the notices of deficiency (the notices) R alleges that the notices were timely issued by reason of 6501(c), which permits assessment of the case of a false or fraudulent return. alleges that, underreported his income, sec. 6663 fraud penalty, and (3) alternatively, liable for the I.R.C. sec. 6662 accuracy-related penalty. for all open audit years, P (1) is liable for the I.R.C. I.R.C. sec. tax at any time in (2) R also is 1. Held: For all audit years, P was in (1) amounts equal constructive receipt of of SBE's payments to L for his services on behalf of SBE over the sum of the amounts he reported as wages plus the employer portions of Medicare taxes that L paid with respect reported wages and (2) income generated by the assets in the retirement account. the Social Security and the capital gains and investment to the excess to those 2. Held, further, P's 1998-2000 returns were fraudulent by reason of P's concealment of bank account and associated credit cards by means of which he had, and intended to exercise, his unrestricted access to the constructively received amounts described in holding 1., supra. the Bahamas 3. Held, further, P's·1995-97 returns were not fraudulent with the result that R's determinations and adjustments regarding those years are barred. 4. Held, further, P is subject to the I.R.C. sec. 6663 fraud penalties for 1998-2000'with espect to all the constructively received amounts described in holding 1., supra. 5. Held, further, because we apply the I.R.C. sec. 6663 fraud penalties to P's total underpayments for 1998-2000, the I.R.C. sec. 6662 accu acy-related penalties do not apply for those years. See I.R.C. sec. 6662(b) (flush language). John M. Colvin and Robert J. Chicoine, for petitioner. Carina J. Campobasso and Robert.W. Dillard, for respondent. MEMORANDUM FINDINGS OF FACTOAND OPINION HALPERN, Judge: By two notices of deficiency dated January 3, 2008 (the notices), respondent determined jbint deficiencies in income taxes and related penalties for peti ioner and his wife, Nancy L. Browning (Mrs. Browning), as fo lows: Year 1995 1996 1997-1998 1999 2000 Deficiency $142,489 171,747 54,166 6,336 11,514 53,275 (cid:16)042 Penalty Sec. 6663 106,867 153,810 40,625 4,752 8,636 39,956 1The deficiencies for all of the years are primarily attributable to the difference between what petitioner's corporation, S B Electronics (SBE) deduct d as payment for petitioner's services and the wages petitioner reported. an amendment increased deficiency for 1996 of $82,200 Mnd a sec. 6663 fraud penalty of $61,650. $25,394 _of reported wages earned by eithe petitioner or respondent asserted an Those increased amounts relate to to amended answer, By - 4 - Mrs. Browning that source other than SBE. the agent mistakenly attributed to a Petitioner and Mrs. Browning (sometimes, the Brownings) filed separate petitions to this Court in response to the notices, and Mrs. Browning's case received its own number, docket No. 6922-08. Because the parties in docket No. 6922-08 filed a stipulation to be bound by any deficiency redetermined in thïs case, we decided not to consolidate the two cases, and we. consider herein only petitioner's case.1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar. The issues for decision are (1) whether the notices for one or more of the years 1995-20Ö0 (the audit years) were timely issued by reason of the application of section 6501(c) (1), which provides for assessment of tax at any time in the case of a false or fraudulent return, and, if so, whether petitioner (2) had additional, unreported wages for one or more open audit years comprising all or a portion of the excess of the amounts SBE paid to a leasing company for his services over the amounts petitioner lIn the stipulation, respondent concedes that the fraud penalty "does not apply" to Mrs. Browning for any of years. the audit reported as wages received from the leasing company; (3) had additional, unreported capital gains for one or more open audit years that were generated by an alleged deferred compensation account; (4) had additional unreported divide ds for 1999 and 2000 (if open) that were generated by the all ged deferred compensation account; (5) as an alternative to issues (2) through (4), had additional, unreported income for 1998-2000 (if open) arising out of petitioner's and Mrs. Browning s charges to a credit card that were paid from the alleged deferred compensation account referred to in issues (3) and (4) ; (6) is liable for the section 6663 fraud penalty for one or more op n audit years; and (7) as an alternative to issue (6), is liable for the section 6662 accuracy-related penalty for one or more open audit years.2 If we decide for petitioner with respect to issue (1), then respondent is time barred from raising any of the other issues, and we must decide the case in petitioner's fa or.3 2There are also certain computational adjustments that follow from the adjustments at issue, but controversy and we need not discuss them. they are not in 3Both the general 3-year limitations period on assessments provided by sec . 6501 (a) and the 6-year limitattions period on assessments provided by sec. 6501(e) (1) substantial omissions from gross income (which was potentially applicable to 1995-97 and 2000) had expired for all of years by Jan. 3, 2008, both notices' date of issuance. in the case of the audit Introduction FINDINGS OF FACT Some facts are stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference. At the time he filed the petition, petitioner resided in Florida. Petitioner's Education and Work Experience Petitioner graduated from the University of Maryland with a bachelor of science degree in industrial management. After graduation, he worked, in both technical and sales positions, for E.I. Dupont. In 1969, he left E.I. Dupont and went to work for Sprague Electric Co. (Sprague), a manufacturer of electronic components, in Barre, Vermont. Petitioner worked for Sprague in a number of managerial positions, including plant manager, until 1985 when he founded S B Electronics (SBE). He purchased for SBE one of Sprague's operating divisions (Sprague had decided to close its Barre plant), which SBE (like Sprague, an electronic components manufacturer) continued to operate in Barre. While at Sprague, petitioner attended the University of Vermont part time to pursue an MBA degree. He enrolled in some accounting courses but dropped out of the program because of his inability to become a full-time student. In 1982, he participated in a management development program at the - 7 - University of New Hampshire. He has never taken any tax courses, and he has little familiarity with tax law. Petitioner was the principal owner, president, and CEO of SBE from 1985 through June 2002 when he sold the company's assets to a new company owned, in part, by one of his sons . SBE was organized as an S corporation and, at its peak, employed 60 to 70 persons . Mrs . Browning and the f ive Browning children were minority shareholders of· SBE. Petitioner is also a part owner and director of Dearborn- Electronics in Longwood, Florida. Petitioner's Relationship With Viggo Carstensen Petitioner' s primary tax adviser has been his longtime accountant, Viggo Carstensen (Mr. Carstensen) . Mr. Carstensen, a Canadian by birth, worked for Air'Canada for 25 years, first in Canada and, beginning in 1973, in the United States, eventually becoming that company's head of human resources for the United States. After retiring from Air Canada in 1985, Mr. Carstensen purchased a franchise of General Business Services (GBS), through which he entered the tax preparation and business consulting fields for clients in central Vermont. Before the advent of reliable tax preparation software, GBS franchisees like Mr. Carstensen's obtained the relevant information from clients and sent it to the GBS office in Rockville, Maryland, for actual return preparation. Mr. Carstensen's primary function was to help his small business clients create recordkeeping systems to - 8 - enable them to track income and expenses and become more profitable. When the tax preparation software improved, Mr. Carstensen learned more about taxes and assumed the tax preparation function on behalf of his clients. He also passed the enrolled agent's exam..and began representing clients before the Internal Revenue Service (IRS). Sometime later, he joined H.D. Vest Investment Securities, Inc. (HD Vest), a registered broker-dealer that used certified public accountants and tax advisers to market its investment products, as a licensed or registered investment representative/adviser. Petitioner met Mr. Carstensen at a seminar both attended as new business owners in connection with their each obtaining a Federal ID number, petitioner for SBE and Mr. Carstensen for his GBS franchise. The seminar provided-information with respect to a new business owner's employment tax and information reporting obligations. Initially, petitioner retained Mr. Carstensen to install a system for keeping records that would form the basis for SBE's financial statements and to prepare quarterly and annual payroll reports. After he joined HD Vest, Mr. Carstensen became an investment adviser to and account representative for petitioner and Mrs. Browning. Mr. Carstensen also prepared all of petitioner and Mrs. ·Browning's individual tax returns, going back at least to 1990, and all of SBE's corporate returns for the audit years. Petitioner's Decision To Engage in a Deferred Compensation/ Offshore Leasing Plan The years 1994-96 were peak profit years for SBE. However, the company was beginning to lose its largest customer to foreign competition. That customer accounted for at least 50 percent of SBE's sales. Recognizing that SBE was in the midst of its most profitable period, petitioner sought a means to defer receipt of a portion of those profits until his retirement. In response to that concern, petitioner's estate planning advisers, to whom he had been referred by Mr. Carstensen, suggested that he meet with Jim Schmidt (Mr. Schmidt), a Florida attorney. One of those advisers referred to Mr. Schmidt as professing to have a state- of -the-art plan in the areas of estate planning and deferred compensation. In the fall of 1995, petitioner and Mr. Carstensen met with Mr. Schmidt and another attorney, Tom Drysdale (Mr. Drysdale), who worked with Mr. Schmidt. During that meeting, Messrs. Schmidt and Drysdale gave petitioner and Mr. Carstensen various handouts, charts, and other related materials, including a legal analysis, which described an offshore employee leasing plan (OEL plan or program) as follows: (1) Petitioner eriters into an employment contract with an Irish corporation (Irish corporation) , pursuant to which, in exchange f or petitioner' s - 10 - services, Irish corporation agrees to (a) pay petitioner'.s business expenses facilitated by the issuance of an offshore credit card to petitioner, (b) pay petitioner "a relatively modest current salary" for his services, and (c) provide "an attractive salary deferral program"; (2) Irish corporation, for a fee, subleases petitioner's services to a U.S. employee leasing company (U.S. leasing company), which, for a larger fee, subleases petitioner's services to SBE; (3) out of its fee, U.S. leasing company pays petitioner a salary, provides him with taxable and nontaxable fringe benefits, and discharges the payroll tax obligations with respect to his salary, all pursuant to its agreement with Irish corporation; and (4) out of its fee from U.S. leasing company, which it receives tax free pursuant to the United States-Ireland income tax treaty, see infra note 6, Irish corporation creates, funds, and administers a nonqualified (under U.S. law), offshore deferred compensation account or trust for petitioner's benefit in its (or a subsidiary's) name.. The assets in the account are subject to the claims of the Irish corporation's (or the subsidiary's) creditors. Petitioner and Mr. Carstensen recognized that the principal tax benefit of the OEL plan, as compared with petitioner's existing status as a direct employee of SBE, was SBE's ability to treat the amounts paid to U.S. leasing company as a currently deductible business expense while petitioner avoided tax on the - 11 - amounts set aside in the deferred compensation account until paid to him upon his retirement from SBE. The written materials that Messrs. Schmi t and Drysdale ' presented to petitioner and Mr. Carstensen represented that the OEL plan was largely predicated on IRS revenue rulings (Rev. Rul. 74-330, 1974-2 C.B. 278, and Rev.-Rul. 74-331 1974-2 C.-B. 281) that discuss the tax aspects of employee loan out programs in the entertainment industry. Those materials also stressed that the program must be both structured and implementëd so as to avoid falling within U.S. caselaw in which the employee leasing arrangement (e.g., of an athlete "leased". to his team) was not respected for tax purposes. Although both petitioner and Mr. Carstên en were very impressed by Messrs. Schmidt and Drysdale, Mr. Carstensen decided to seek a second opinion from a former vice pr sident for tax at GBS who was then in private practice, Jim McCarthy (Mr. McCarthy).* On October 12, 1995, he sent Mr. McCarthy the promotional materials that had been furnished by Messrs. Schmidt and Drysdale. Thirteen days later,· Mr. McCartÙy gave his response, in which he expressed a number'of misgivings regarding the efficacy of the OEL plan: (1) The promoters' failure to either obtain an IRS ruling or guarantee the payment of penalties 4The record does not indicate whether Mr. McCarthy was either (or both) an attorney or a certified public accountant, only that he was "a very knowledgeable individual within GBS." - 12 - and interest that might result from the very real possibility of a successful IRS challenge to petitioner's and/or SBE's tax .. position, (2) the OEL plan "is geared toward" personal service providers such as "entertainers, athletes, attorneys, doctors, accountants, engineers, etc.; those that would fall into the Personal Service Corporation category if incorporated", and (3) in contrast, petitioner "would still be working solely as the head of his manufacturing facility * * * His relationship with his controlled corporation would not change, except on paper." Mr. McCarthy viewed those distinctions as possibly providing the IRS "with a telling argument against * * * [petitioner]." Lastly, Mr. McCarthy noted that, for the OEL plan "to have any chance of deferring tax.on the foregone compensation, * * * [petitioner] must be at risk for that amount with no guarantee of receipt." Mr. McCarthy feared that "if the Irish company goes under, * * * [petitioner] would lose all." Mr. Carstensen considered Mr. McCarthy's advice as a warning that the IRS might challenge the. OEL plan, not as a warning that it was either illegal or improper. In December 1995, after further discussions with Mr. Carstensen and his estate planning advisers, petitioner decided to implement the OEL plan. Implementation of the OEL Plan - 13 - Beginning in December 1995, petitioner, ith Mr. Carstensen's assistance and under Mr. Schmidt s guidance, took various steps that were intended to implement the OEL plan as it had been described by Messrs. Schmidt and Drysdale. That month, pursuant to Mr. Schmidt's instructions, petitioner and Mr. Carstensen traveled to Canada where petitioner signed (1) an employment agreement with an Irish corporatio¼,5 (2) on behalf of SBE, an agreement between SBE and U.S. leasin company, and (3) an SBE check for $500,000, made out to TransNätional, and mailed all three to TransNational at a Dublin, Ireland, address.' The sThe record does not reveal the identity of the Irish (TransNational), there is evidence that later, was replaced by the parties appear to agree that at leasing companies were involved in purportedly corporation with ·which petitioner contracted. Whereas both petitioner and Mr. Carstensen believe it to have always been TransNational Leasing Co. it was Montrain Services, Ltd., which, TransNational. Also, three U.S. implementing the OEL plan during the audit years. the nature or substance of each entity's participation in the execution and implementation of legitimacy of fraudulent intent rather than its name or identity, we will not address the latter issue. We will refer to the Irish corporation as the Irish company or as TransNational, which respondent appears to acknowledge did, fact, become the purported participating Irish corporation as of December 1997, and we will generally refer to the U.S. company as U.S. the plan and the issue of the plan that is germane to the leasing company. in leasing least Because it is Presumably, Mr. Schmidt's reason for requiring petitioner from outside the to execute and mail documents to TransNational United States was, in what appears to be an excess of caution, assure that the transaction would not endanger TransNational's assumed treaty exemption from United States income taxation. Convention for the Avoidance of Double Taxation and the to See (continued...) - 214 - $500,000 payment was used, in part,. to initially fund the deferred compensation account. On its Forms 1120S, U.S. Income Tax Return for an S Corporation, filed for the audit years, SBE deducted, as part of its "other deductions" on line 19, "Employee Leasing Program" expenses, and petitioner reported, as wages from the various U.S. leasing companies, by name, the following amounts: Year 1995 1996 1997 1998 1999 2000 SBE Deductions Petitioner's Reported Wages From U.S. Leasing Company $500,000 348,342 269,254 99,627 70,958 107,950 $150,000 150,000 150,000 86,000 54,500 -0- -- The differences between the amounts SBE deducted as employee lease payments and the amounts that petitioner reported as wages (after the deduction of various fees payable to TransNational and U.S. leasing company, taxes, and health insurance premiums, which totaled $163,463 during the 1995-2002 existence of the OEL program) were deposited in an account with HD Vest in Irving, Texas, in the name of TransNational Leasing Capital Management Ltd. (TLCM) (the HD Vest account). '(...continued) Prevention of Fiscal Evasion with Respect Capital Gains, U.S.-Ir., art. 7, July 28, 1997, U.S. Tax Treaties (CCH) par. 4401 (providing, of an Irish enterprise are not unless those profits are attributable to a United States "permanent establishment"). taxable in the United States to Taxes on Income and in effect, that the business profits The amounts deposited in or withdrawn from the HD Vest - 15 - account were as follows: Year 1996 (Feb. ) 2 ) 2 1996 (Dec . 1997 1998 1999 2000 2001 2002 2003 Deposits $303, 963 158, 346 --- 85, 420 --- --- 94 , 439 --- --- (Withdrawals)1 --- - - - --- ($15, 416) (95,528) (70,541) (63, 389) (116,477) (218,090) 1With two exceptions, all of the witÌ1drawals were used to pay the charges to the credit cards issued in connection with the HD Vest account. Those exceptidns were (1) $31,000 refunded to SBE in 2002. and (2) distribution. to petitioner in 2003. the $218, 090 final 2The February 1996 deposit' was taken from the $500,000 that petitioner mailed to ·Ireland in December 1995. December 1996 deposit, derived from an SBE payment U.S. the year of =deposit. The like the subsequen deposits, was leasing company payment to TransNational to U. S. leasing company and a (or TLCM) for During the 1996-2000 period, the HD Vest ccount earned capital gains in excess of $195, 000 and investtuent income of $1,299. It also incurred investment expenses f $48,062.7 TLCM was a corporation organized under thé laws of the · Bahamas. Jeremy Cafferata (Mr. Cafferata), a Bahamas resident, was president of and acted on behalf -of TLCM. Mr. Cafferata appointed Mr. Carstensen as the account representative or 7Total deposits plus capital gains and investment income exceeded total withdrawals plus expenses because the account realized a $62, 727 investment loss during its existence . _·16 - executive for the HD Vest account. Mr. Cafferata billed petitioner through Mr. Carstensen for his services with respect to the account and the credit cards (discussed infra) issued in connection therewith. Mr. Cafferata and the people in Texas handling the HD Vest account routinely acquiesced to petitioner's wishes regarding the movement of funds within and the withdrawal of funds from the account. Moreover, even though the account was in TLCM's name and, therefore, subject to its creditors, if any, petitioner recognized that the money in the account was being held for his benefit alone and that it was his money. Petitioner also assumed that he could terminate the program at any time and have the funds in the account returned to him. The HD Vest account was opened in February 1996, and the last reported activity, including the final distribution to petitioner, occurred in May 2003. As part of the implementation of the OEL plan, U.S. leasing company handled petitioner's payroll taxes and provided for his health insurance, tasks that SBE had previously performed. Throughout the audit years, however, petitioner continued to identify himself to non-payroll-department employees of SBE, to customers of SBE, to financial institutions, and even to Mrs. Browning as president of and as an employee of SBE. Moreover, in 1997 and 1999, on varlous applications to open an IRA or other - 17 - financial accounts, petitioner listed^ SBE as his employer and himself as either "president" or as "president and CEO" of SBE. The contractual relationships among petitioner, SBE, TransNational and U. S. leasing company are uncertain. The contracts that petitioner executed in Canada and mailed to Ireland either were never returned to petitioner or, if returned, were discarded or lost after the sale of SBE in June 2002. Petitioner did retain sample or draft contract s, which may have been provided during the initial presentation of the OEL plan by Messrs. Schmidt and Drysdale. Assuming the sample or draft employment contract between petitioner and TransNational generally reflected the intended or actual contractual relationship between the parties (which petitioner believed'to be the case) , petitioner remained unaware of its actual terms so that his compliance with any specific term would have been coincidental. In practice, even after adopting the OEL plan, petitioner continued to act on behalf of SBE just as he had before participating in the plan. The only signif1cant changes were (1) the substitution of U.S. leasing company for SBE in the handling of his salary, fringe benefits, and payroll taxes, and (2) the diversion, through U.S. leasing company and TransNational, of what previously had been part of his wages to the HD Vest account . No employee of TransNational exercis d any direction - 18 - and/or control over petitioner's services and no employee of TransNational was ever known to him. His only "contact" was Mr. Schmidt, who was the creator and promoter of and petitioner's informal adviser with respect to the OEL program, but who was not an officer or employee of TransNational exerclsing any supervision over petitioner.. Petitioner and Mr. Carstensen agreed with Messrs. Schmidt and Drysdale that the annual amount to be placed in the deferred compensation account would be a formulary amount based upon SBE's annual profits, but, in practice, petitioner unilaterally decided on the annual amount to be placed in the account. When, in 2002, petitioner determined that SBE's business needs required additional cash, he authorized a-transfer of funds from the HD Vest account back to SBE, the funds to be reported as additional income by SBE. Leadenhall Bank Credit Card In 1998, either Mr. Schmidt or Mr. Drysdale advised petitioner and/or Mr. Carstensen that they,were able to issue a·, credit card to petitioner in connection with the OEL program for his use in defraying business expenses. Use of a credit card had been an anticipated feature of the OEL program from its inception. Thereupon, in May 1998, petitioner was issued a credit card by Leadenhall Bank and Trust Company, Ltd., a Bahamas company (Leadenhall.Bank.and Leadenhall Bank credit card), and an 19 - HD Vest checking account at that bank (the Leadenhall Bank account) was created to pay the credit card charges, funds to be obtained from the assets in the HD Vest account. Initially, Mr. Cafferata (at petitioner's request) caused $1p, 000 to be moved from the HD Vest account to the Leadenhall Bank account to secure charges to the Leadenhall Bank credit card. That security account was-opened in the name of "TransNational Leasing c/o Cafferata & Co." Mr. Cafferata had signature authority- with respect to that account. Petitioner arranged for Mrs. Browning to receive a Leadenhall Bank credit card in 1999. He did not explain to her the circumstances of the issuarice of the card, nor did he place any restrictions on her use of tlíe card. During the period from May 1998 through September 2002, petitioner and Mrs . Browning charged over 2, 000 items to the Leadenhall Bank credit card. During that peripd, over $330, 000 was transferred from the HD Vest account to pay petitioner's and Mrs. Browning's credit card charges and associated expenses. A substantial portion (and in Mrs. Browning's case, the overwhelming majority) of those charges was considered by petitioner to be personal, which, to him, meant unrelated to SBE' s business . 8 During the 3 audit years in which petitioner 8The draft employment contract between the Irish company ith petitioner employer and petitioner that Mr. Schmidt provides for the issuance of -a credit card to petitioner, but it limits the use thereof left to "corporate [presumably referring to the ) (continued. . . - 20 - and Mrs. Browning used the Leadenhall Bank credit cards (1998- 2000), their charges to those cards totaled $128,734 ($14,919, $57,274, and $56,541 for 1998-2000 respectively). Of that amount, $58,621 ($9,621, $29,503, and $19,390 for 1998-2000 respectively) constituted expenditures that petitioner considered personal.' For those same 3 years, the following amounts were withdrawn from the HD Vest account to pay credit card charges 8(...continued) to the employer's approval and to its "prior written Irish company employer, not SBE] business expenses", all of which are subject approval" for expenses exceeding $250. routinely ignored by petitioner and Mrs. Browning in connection with their use of them. the Leadenhall Bank credit cards issued to Those conditions were to 1998 yearend, we accept as what petitioner For 1999 and 2000, we accept as recognized personal charges the charges petitioner listed as personal on a 2003 submission to respondent's agent, Belinda Evans (Ms. Evans), who audited petitioner's 1995-2000 returns. Although there are discrepancies regarding the description of a particular charge as personal or as business between that submission and á 2008 submission to Ms. Evans covering Nov. 27, 1998, through Sept. 16, 2002, we accept as an accurate reflection of what petitioner considered to be personal charges for 1999 and 2000 the earlier submission because it is 5 years closer to those years. 28, 1998, considered to be personal charges the charges petitioner identified as personal on the 2008 submission as it constitutes petitioner's only analysis of his and Mrs. Browning's credit card expenditures during that period that The record also contains Leadenhall Bank statements reflecting their credit card usage for June-August and part of September 1998. All but a very few of the charges reflected on those statements clearly are personal, of evidence to the contrary we have treated all of card charges listed on those 1998 statements as charges petitioner would consider personal. Also, because there is no evidence to the contrary, we have assumed that for the rest of 1998 ·(January-May and Oct. 1-Nov. 26) the Brownings either did not have Leadenhall Bank credit cards or did not use them. .and those few are, at best, ambiguous. For the period from Nov. is in evidence. In the absence the credit - 21 - "and Other Bahamian Fees": 1998, $15,416; 1999, $95,528; and 2000, $70,.541. Petitioner has never reported and. paid tax on any amount attributable to his or Mrs . Browning' s use of the Leadenhall Bank credit cards for what they considered personal· expenditures. Copies of the Leadenhall Bank credit card statements were faxed ,to Mr. Carstensen, who retained :and furnished them to respondent during the audit and the litigation of the case . Petitioner did not review those statements with Mr. Carstensen to determine business versus personal expenditur s in connection with the preparation of his income tax returns. Line 7a of Schedule B, Interest and Ordinary Dividends, of the 1998-2000 Form 1040, U.S. Individual Income Tax Return (sometimes, just Line 7a), asks: at any time during * have an interest in or a signature or othþr authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? [the taxable year] , did you * * On their joint returns for 1998-2000, the Brownings answered "no" to that question. Termination of the OEL Program After SBE's assets were sold, on June 30, 2002, to .a new corporation owned, in part, by one of petitioner's sons, petitioner and Mrs. Browning retired to Florida. In May 2003, the remaining investments in the HD Vest account were sold and, - 22 - on May 23, 2003, the asset remaining in the account ($218,090 in cash) was withdrawn from the account and distributed to another account with HD Vest that petitioner and Mrs. Browning maintained. The Audit By letter dated June 19, 2002, respondent commenced an audit of petitioner and Mrs. Browning's 1999 and 2000 joint returns.1° The agent, Belinda Evans (Ms. Evans), attached to that letter a Form 4564, Information Document Request (IDR), requesting, among other items, the following information regarding petitioner's credit card use during 1999 and 2000: List of all credit under any name, used by you to make purchases * to pay expenses for any purpose, business use, during the [audit] year(s) * * or including personal or foreign or domestic, * cards, * *. * * * In response to that request, petitioner, through Mr. Carstensen, provided only a credit report that did not list the Leadenhall Bank credit card. It was not until Ms. Evans met with Mr. Carstensen on August 14, 2002, and told him she was aware of 1°The record does not indicate when the audit was expanded The parties stipulate that each of to encompass petitioner and Mrs. Browning's 1995-98 taxable years. years was timely filed on or about Apr. 15 of which means that the normal 3-year limitations period on assessments, under sec. 6501(a), expired before the June 19, 2002, commencement of record also does not from petitioner agreements to extend the 3-year limitations period on assessments for 1999 and 2000 pursuant 6501(c) (4). indicate why respondent failed to obtain those years, had for each of the audit. the returns for those the following year, to sec. The - 23 - that credit card that the latter acknowledged its existence and explained its connection with the OEL program, which, until that moment, he also had not described to Ms. Evans. In the 2003 analysis of credit card charges submitted to Ms. Evans (see supra note 9), petitioner breaks down the charges not listed as "personal" as follows: $16,377 is listed as "ATM" charges and $10,662 as "meals/entertainment". The balance (or some 33 percent of the total) petitioner attributes to computer/office", "business gifts", "charitable", dues/[sub]scription", "travel auto", and "prod sup/oper supplies". Petitioner was unable to identify what portion, if any, of the "ATM" charges he considered business related, and he did not retain any records that might have substantiated as business expenses one or more of the listed "meals/entertainment" expenses in accordance with the requirements of section 274 (d) and the ·regulations thereunder.· - The 2008 analysis of credit card charges (also submitted to Ms. Evans--see supra note 9), covered Charges to the Leadenhall Bank credit card from November 27, 1998, through September 16, 2002. That analysis broke down the charges between business and personal with a separate column describing the nature of the alleged business charges. The vast majority of the business- denominated expenses were stated to be for tra el (including auto") and entertainment for which no section 274 (d) - 24 - substantiation was provided. As stated supra note 9, there are a number of inconsistencies between the 2003 and 2008 analyses of credit card charges in that many of the items listed as business expenses on one were listed as personal.expenses on the other. Moreover, on the 2008 analysis petitioner classified 30 of the 55 charges made after he sold SBE on June 30, 2002, as business expenses. OPINION I. Application of Section 6501(c) (1) A. Introduction Section 6501(a) provides, generally, that the amount of any tax must be assessed within 3 years of the filing of a return. Pursuant to section 6501(c) (1), ,however, if -a taxpayer files "a false or. fraudulent return with the intent to evade tax,.the tax may be assessed * * * at any time. Respondent argues that the income taxes due from petitioner for the audit years may be assessed at any time pursuant to section 6501(c) (1) "because petitioner knowingly filed false or fraudulent income tax returns for said years with intent to evade tax." Alternatively, respondent argues that Mr. Carstensen, on behalf of petitioner, acted with the requisite fraudulent intent in his preparation and filing of petitioner's returns for the audit years. He cites Allen v. Commissioner, 128 T.C. 37, 40-42 (2007), which holds that an underreporting of taxes attributable - 25 - to the return preparer's (rather than the taxpayer's) fraud is sufficient to invoke the application of section 6501(c) (1) . Petitioner disagrees with botih arguments . B. Proof of Fraudulent Return 1. Introduction Respondent must establish by clear and convincing.evidence that petitioner filed false and fraudulent returns with the intent to evade tax. See sec. 7454(a)'; Rule 42(b); Botwinik Bros, of Mass., Inc. v. Commissioner, 39 T.C. 988, 996 (1963). Respondent's burden of proof under section 6501(c) (1) is the same as that'imposed under section 6663, which provides for the imposition of a civil fräud penalty. See Penr ybaker v. Commissioner, T.C. Memo. 1994-303. To satisfy that burden, respondent must prove (1) that an underpayment exists and (2) that fraud exists, i.e., that petitioner intended to evade taxes known to be owing by conduct intended to conce 1, mislead, or otherwise prevent the collection of taxes . See Parks v. Commissioner, 94 T.C.· 654, 660-661 (1990) . Respondent must prove both of those elements of fraud by clear and convincing evidence. See DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989); Recklitis v. Commissioner, 91 T.C. 874, 909 (1988); Richardson v. Commissioner, T.C. Memo. 2006'69, affd. 509 F.3d 736 (6th Cir. 2007) . The existence of fraud is a question of - 26 - fact to be resolved from the entire record. Gaiewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978).. Respondent must meet his burden through affirmative evidence because fraud is never imputed or presumed. See Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992); Petzoldt v. Commissioner, supra at 699; Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Once respondent has produced sufficient evidence to establish that any portion of petitioner's underpayment was due to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion thereof that petitioner establishes, by a preponderance of the evidence, is not attributable to fraud. See sec. 6663 (b). The entire taxable year remains open under section 6501(c) (1) even if only a part of the deficiency for a year is attributable to fraud. Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir. 1961), affg. T.C. Memo. 1960-32. "Thus, where fraud is alleged and proven, respondent is free to determine a deficiency with respect to all items for the particular taxable year without regard to the period of limitations." Colestock v. Commissioner, 102 T.C. 380, 385 (1994). 2. Underpayment of Tax a. Introduction The first element necessary for finding a fraudulent return under section 6501(c) (1) (or fraud under section 6663(a)) is an - 27 - underpayment of tax. Section. 6664 (a) defines an "underpayment" for purposes of section 6663 (with exceptions not here relevant) essentially as a "deficiency".as defined by section 6211., As applicable herein, that is. the amount by whic the tax imposed by the Internal Revenue Code«exceeds the amount shown as the tax by petitioner on his return b. The Parties' Arguments Although respondent argues that the evidence -fails to support the existence of the OEL program.and that, even if the purported contractual arrangements did exist, they were shams without economic substance, we first address.his argument that "even if the Court accepted petitioner's.claims that.he was actually an employee of TransNational-* * * , all amounts * * * [SBE] paid into -the OEL arrangement are currently taxable to petitioner because he constructively received the payments."" the OEL funds [placed in i.e., "[p]etitioner gained in addition to his use of them to "As an alternative to his constructive receipt argument, respondent argues that petitioner is taxable on those amounts under the economic benefit doctrine; the financial and economic benefit of the HD Vest account] because, pay personal credit card bills * aside for him and were not subject. to" SBE, TransNational, or TLCM creditors, was opened) "if it existed at all, was a shell.?' Respondent also invokes the application of sec. 83 connection with the performance of services) funds to the HD Vest account, statin~g that "section 83 all but codifies the economic benefit doctrine in the compensation context" and noting that those funds were "either transferable or not subject that they are "includible in petitioner's income when earned by petitioner and 'set aside' by * to a substantial risk of forfeiture" with the result the last because TLCM (in whose name the account * *, the funds were * * * set (Property transferred in top the transfers of * * [SBE]." Because we find that (continued...) - 28 - Petitioner rejects the factual premises upon which respondent bases his finding of constructive receipt: (1) Petitioner's ability to direct Messrs. Carstensen and Cafferata. with regard to the use of the funds in the account, (2) his ability to terminate the account and retrieve the funds in it at any time, and (3) his unlimited access to those funds by means of the Leadenhall Bank credit cards. In each case, petitioner argues that there is inadequate factual support for respondent's characterization. Petitioner argues that unrelated third parties, not petitioner, owned and controlled the HD Vest account, and that ·the funds in the account were subject to a substantial risk of forfeiture. Petitioner also argues that his participation in the OEL program is governed by a series of cases in which an individual entertainer, artist, or athlete contracts with a personal service corporation (PSC), which he either controls or in which he has a significant interest, to lease his services to third parties with which he either previously had or could have had a direct relationship (the entertainer, artist, athlete cases). In each case, the Commissioner tried to attribute the PSC's income to the individual, and in each case the coùrt rejected the Commissioner's sham corporation and/or assignment of income arguments, in some cases despite the "(...continued) that petitioner was in constructive receipt of question, we do not address respondent's alternative arguments. the funds in - 29 - admitted existence of a tax avoidance motive, and respected the separate existence of the PSC for tax purposes. See Sargent v. Commissioner, 929 F.2d 1252 (8th Cir. 1991), revg. 93 T.C." 572 (1989); Laughton v.. Commissioner, 40 B.T.A. 101 (1939), remanded 113 F.2d 103 (9th Cir. 1940); Fox v. Commissioner, 37 B.T.A. 271 (1938); Estate of Cole v. Commissioner T.C. lÝ[emo. 1973-74. For the reasons set forth in section I.Bj2.c., infra, we hold that petitioner was in constructive rece$pt of and, therefore, understated his income for the audit years by (1) the amount by which SBE's payments to U.S. leasing company that it -- deducted as "Employee Leasing Program" expenses exceeded (a) the amounts that petitioner received from U.S. lea!sing company and reported as wages plus (b) the employer portions of the Social Security and Medicare taxes that U.S. leasing.bompany paid with respect to those reported wages (the excess SBE payments) , plus (2) the earnings (capital gains and investment income) on the HD Vest account. . c. Application of the Constructive Receipt Doctrine Under section 451(a), an individual taxpayer, like petitioner, who is on the cash method of accounting must include amounts in gross income in "the taxable year ir which received" . Section 1. 451-2 (a) , Income Tax Regs . , provides in pertinent part : Income although not actually reduced to a taxpayer' s possession is constructively received by him in the taxable year during which it is credited to his - 30 - account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of However, taxpayer's control of substantial income is not constructively received if the intention to withdraw had been given. limitations or restrictions. its receipt is subject * * to * .The evidence clearly and convincingly supports respondent's assertion that petitioner constructively received all of the excess SBE payments in the years in; which SBE made those payments. That is because those funds were deposited or were potentially available for deposit in the HD Vest account, which petitioner and Mr. Carstensen, on petitioner's behalf, effectively controlled. Although the HD Vest account was opened in TLCM's name, it is clear that Mr. Cafferata, TLCM's president, and the people in Texas facilitating the movement of funds out of and within the account were merely functionaries whose actions with respect to the account were dictated by petitioner or by Mr. Carstensen on petitioner's behalf. Moreover, because there is no evidence that TLCM, the nominal owner of the account, was other . than a shell.corporation wi_th no significant creditors, there was no meaningful risk (other than normal market risk) that the assets in the account would become unavailable to petitioner. Petitioner had unrestricted control over what went into the account and unrestricted access to funds placed in the account. He demonstrated the former by unilaterally determining what, if anything went into the account for a given year; and he - 31 - demonstrated the .latter, i.e., his unfettered access to the funds in the account, not only by directing the investment of funds placed therein, but also, in 2002, by directi g that $31, 000 be returned to SBE and, beginning "in 1998, by using the Leadenhall Bank credit cards for any expenditure, personal or business, he and Mrs. Browning chose to make. Amounts credited to a brokerage account (which is what the HD Vest account^, iu essence, was) owned and controlled by the 'taxpayer are constbructively received by him. See Mendes v. Commissioner, 121 T. C. ¡308, 313 (2003) . Because the amounts credited to the HD Vest account were "made available [to.petitioner] so that he * * * [was able to] draw upon * * * [them] rat any time", as required by section. 1.451-2(a), Income Tax Regs.--which is all that is necessary for a finding of constructive receipt--we cbncludé that petitioner constructively received, and was therefore tax ble on, all,0f the money that was transferred (or available for transfer) to that account under the OEL plan (i.e., the excess SBE payments less U.S. leasing company's payment of various fees and health insurance premiums with funds derived from those payments) in the years in which excess SBE payments were- so transferred or available for transfer, together with the earnings (capital gains and investment income) accruing on the account jin the year (s) of accrual. Moreover, because the various fees and health insurance premiums thati U.S. leasing company paid were paid for - 32 - petitioner's benefit,.i.e., because those expenditures were an integral part of a program that was designed to provide a tax deferral benefit to petitioner, those. amounts also constituted income to petitioner." Presumably, the taxes that U.S. leasing company paid out of SBE's payments to. it were the payroll taxes, with respect to petitioner's reported wages. The parties agree.that all of the excess SBE payments, less the above-referenced fees, taxes, and health insurance premiums (totaling $163,463 for the 1995-2002 life of the OEL program), were ultimately deposited in the HD Vest account. Therefore, because we find that petitioner constructively received those payments and was also taxable on the above-referenced fees, taxes, and health·insurance premiums, we find that petitioner's underpayments for the audit years constituted the tax attributable to (1) the excess SBE payments plus (2) the capital gains and investment income generated by the assets in the HD Vest account. Our conclusion is unaffected by the entertainer,.artist, athlete cases that petitioner relies upon because they are inapposite. In each of those cases, the determinative issue is Petitioner does not argue and, therefore, we do not find that any health insurance premiums paid by U.S. leasing company on petitioner's behalf were excludable from petitioner's income under sec. 106. Moreover, there is nothing in the record as to the amount of any such premium payments. Therefore, we do not reduce petitioner's underpayment by an amoùnt attributable to payments of health insurance premiums on petitioner's behalf. - 33 - the viability, for Federal income tax purposes, of the purported employer corporation. We do not rest our conblusion herein on the sham nature of TransNational or U.S. leasing company, but on the fact that petitioner was in construct1ve recelpt of the SBE payments in excess of the amounts he reported as wages, which primarily consisted of funds placed by TransNÉtional in the HD Vest account. Unlike the facts in the entertainer, artist, athlete cases, there was no viable PSC standing between petitioner and the amounts in the HD Vest account. Because we agree with respondent that petitioner was in constructive receipt of all funds deposited in the HD Vest account, we do not address respondent's additional arguments to the effect that the entire OEL program, ·including the participation of TransNational,' TLCM, and U.S. leasing company, was a sham completely lacking in economic substance"." Respondent's argument that the entire OEL program must be therefore, without disregarded as solely tax motivated and, economic substance is based upon his allegations that petitioner's purported Irish employer did not exist when it supposedly contracted with petitioner to employ him, (2) petitioner never consciously complied with the;terms of alleged contract, nor was such-compliance required by his purported employer, throughout himself out and (4) petitioner retained control over and, by means of Leadenhall Bank credit card, was able to access the funds placed in the HD·Vest account. It is only necessary that we sustain (as we have) amounts deposited in the HD Vest account constftuted income to petitioner on the dates of. those deposits. to all third parties as still in the employ of SBE, the audit ,years,. working solely foriand holding the last of those allegations in order to find. that the (3) petitioner remained president of SBE (1) that the The other (continued...) . - 34 - d. Conclusion We hold that, for each of the audit years, petitioner's underpayment consisted of the amount of tax attributable to the excess SBE payments plus the earnings (capital gains and investment income) on the HD Vest account. 3. Fraudulent Intent a. Introduction The second element that we must consider in determining the application of section 6501(c) is petitioner's or Mr. "(...continued) leasing issue herein. tax purposes and in.findings that (1) that petitioner was the deemed arrangement it was SBE in substance, made the deposits in the HD Vest account. allegations, even if we were to sustain them, would presumably result in our disregarding TransNational, TLCM, and U.S. company for Federal petitioner continued in the employ of SBE and (2) that, But unless we were to find, as we have, taxable on those deposits when made, involving only SBE might very well have constituted the equivalent of a so-called rabbi trust whereby the Commissioner permits an employer to place a portion of in an irrevocable trust claims of employee) basis. 39230 (Jan. 20, 1984). have been with SBE's deduction of a rabbi trust, which is in essence a grantor trust, set-aside of deductions only as the funds are distributed or made available to the beneficiary/employee. Litig. Trust 2006). for deposit payments were made is not at in the HD Vest account for the years in which those funds by the grantor/employer who is entitled to the employer's creditors) on a tax-free (to the (In re IT Group, Inc.), 448 F.3d 661, 665 (3d Cir. See Rev. Proc. 92-64, 1992-2 C.B. 422; oG.C.M. SBE's deduction of its payments to U.S. leasing company - (the assets of which remain subject to the employee's salary In that event, respondent's quarrel would the deposits when made because is merely a See, e.g., sec. 671; Accardi v. IT Carstensen's" state of mind; to.wit, whether either intended to evade tax believed to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of tax. See, e.g., Recklitis· v. Commissioner, 91 T.C. at 909. A fraudulent state of mind may be proved by circumstantial evidence! because direct proo f o f the · taxpayer ' s int ent is rarely available . See , e . g . , id. at 910. Over the years, courts have developed a nonexclusive list of factors that demonstrate fraudulent intent. Those badges of "As we stated in Allen v. Commissioner, 128 T. C. 37, 40 (2007) : The statute keys the e:Étension to the fraudulent nature of the perpetrator of the return, not to the identity of the fraud. * * the special disadvantage to the Com issioner in investigating fraudulent returns is present if the income tax return preparer commiitted the fraud that caused the taxes on the returns to be understated. Accordingly, our obligation to construe statutes bf limitation strictly in favor of we conclude that the limitations period for assessing * extended if the taxes were understated due to fraud of taking into account [the taxpayer's] the Government, the preparer. taxes is * * - In Allen, we specifically noted that "seeking to collect only the deficiency in tax from * * taxpayer]" and was "not asserting the fraud penalty", implying that collection of the 3- year limitations period on assessments would depend upon proof of the taxpayer's, not merely the preparer's, appears to be the Commissioner's position. Advisory 200126019 (Mar. 30, 2001) . thus the latter after e:kpiration of Seë Field Service That also fraud. the. Commissioner was [the * - 36 - fraud include: (1) Understating income, (2) maintaining inadequate records, (3) failing to file tax returns, (4) implausible or inconsistent explanations of behavior, (5) concealment of income or assets, (6) failing. to cooperate with ' tax authorities, (7) engaging in illegal activities, (8) an intent to mislead which may be inferred from a pattern of conduct, (9) lack of credibility of the taxpayer's testimony, (10) filing.false documents, and (11) dealing in cash. See Spies v. United States, 317 U.S. 492, 499 (1943); Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); ·Bradford v.· · - Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Recklitis v. Commissioner, supra at 910. Although no single factor is necessarily sufficient to establish fraud, a combination of factors is more likely to constitute persuas1ve evidence. Solomon v. Commissioner, 732 F.2d l'459, 1461 (6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603. A taxpayer's intelligence, education, and tax expertise are also relevant for purposes of determining fraudulent intent. See Stephenson v. Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984); Iley v. Commissioner, 19 T.C. 631, 635 (1952). - 37 - b. Discussion (1) Introduction For the 1998-2000 audit years, there exist at least four indicia of fraud, all of which relate to the establishment and use of the Leadenhall Bank.account and credit cards: (1) Concealment of assets, (2) intent to mislead, (3) lack of credibility of petitioner's and Mr. Carstensen's testimony, and (.4) intentional understatement of income. We shall consider each in turn. (2) Concealing the Existence of the Leadenhall Bank Account and Associated Credit Cards As noted supra, on line 7a·of Schedule B of petitioner's 1998-2000 returns, petitioner answered "no" to the question asking -whether at any time during the taxable year he had "an interest in or a signature or other authority lover a financial account * * * such as a bank account" in a foreign·country. Petitioner testified that he did, in fact, check "no" on line 7a, and he defended that answer on the ground that he did not have si'gnature authority over the Leadenhall Bank account associated with his and Mrs. Browning's use ofi the Leadenhall Bank credit cards, and on the further ground that "it was never * * * [his] intent to hide' that money that was down there"; i.e., in the Bahamas bank account. Mr. Carstensen testified that he merely followed his tax preparation software, which automatically - 38 - defaulted to a "no" answer, and that he never considered whether that response was correct. He further testified that he still believed that "no" was the correct answer to line 7a because petitioner lacked "control" over the account. We find the testimony of both men to be incredible. Line 7a plainly asks whether the taxpayer has "an interest in * * * or other [than signature] authority over a [foreign] financial account * * * such as a bank account". It is inconceivable that either petitioner, a college graduate with a successful business background, or Mr. Carstensen, an experienced tax return preparer and business consultant, could misinterpret or, in Mr. Carstensen's .case, ignore that language. Moreover, the notion that petitioner lacked control over the Leadenhall Bank account is patently unsupportable in the light of: (1) The certainty that-Mr. Cafferata would respond to petitioner's directions to move funds from the HD Vest account to that bank account as necessary to cover petitioner's and Mrs. Browning's credit card charges and (2) petitioner's unrestricted ability to obtain funds from the account, for any purpose, by use of his credit card. Direct evidence of an intent to conceal the existence of the Leadenhall Bank credit cards is furnished by petitioner and Mr. Carstensen's response to Ms. Evans' IDR dated June 19, 2002, requesting a list of "all credit * * * cards, foreign or domestic, under any name" used by·petitioner "for any purpose, - 39 - including personal or business use, during the [audit] years" . That response consisted of a credit report that listed credit cards issued under petitioner's Social Securi y number, which did not include the Leadenhall Bank credit cards. The language of Ms . Evans' IDR clearly encompasses the Leadenhall Bank credit cards. Therefore, we conclude that petitione 's and Mr. Carstensen's failure to include those cards in their response to Ms. Evans' IDR constitutes clear and convincing evidence of their attempt to conceal the cards' existence. (3) Intent To Mislead the Revenue Agent The incomplete answer to Ms . Evans' June 19, 2002, IDR also furnishes clear and convincing evidence of an intent to mislead Ms. Evans regarding the existence of the Leadenhall Bank credit cards. Moreover, Ms. Evans testified that, at her first face-to- face meeting with Mr. Carstensen on August 14, 2002, she again asked him to list all the credit cards that Ipetitioner and Mrs.. Browning used during the audit years (at that time, 1999 and 2000) and, again, .Mr. Carstensen failed to reveal the existence of the Leaàenhall Bank.credit cards. It was not until.Ms. Evans advised Mr. Carstensen that she was aware of those credit cards that he acknowledged their existence and, for the first time, the existence of the OEL program. - 40 - (4) Lack of Credibility of Petitioner's and Mr. Carstensen's Testimony As discussed supra, we find incredible both petitioner's and Mr. Carstensen's testimony that they believed a "no" answer to line 7a of petitioner's 1998-2000 returns was proper. We find equally incredible petitioner's testimony that he believed he would have to repay TransNational the amounts corresponding to his and Mrs. Browning's personal use of the Leadenhall Bank credit cards. In fact, petitioner never reconciled, for TransNational, his business versus personal charges.15 Moreover, petitioner, by his own admission at trial, knew that no representative of TransNational would ever require a reconciliation because TransNational had no economic interest in the HD Vest account from which the funds were drawn to pay the 1SPetitioner was apparently unaware of the illusory The draft employment contract distinction between his personal and business-related credit card expenditures, assuming that he believed he was participating in a valid employee leasing program. between petitioner and the Irish company authorized petitioner's use of a credit card for "corporate business expenses". Because, under the OEL program as described to petitioner by Messrs. Schmidt and Drysdale, petitioner was no longer an SBE employee, " and because his Irish company employer had no contractual relationship with SBE, the referenced business expenses had to relate to the business of petitioner's Irish company employer. Thus, any of petitioner's credit card expenditures relating to SBE's business must be considered after-tax capital contributions to SBE by petitioner (who still remained a controlling shareholder therein), and all of his credit card expenditures must be considered personal expenditures. of the program, constitute a nondeductible use of petitioner. funds to pay the credit card charges would, under the HD Vest As a result, the use those funds by - 41 - Leadenhall Bank credit card charges. Petitioner fully recognized that the money in that account was his money. Petitioner further admitted at trial that had TransNational required him to reimburse the HD Vest account for personal credit card expenditures, the effect would have been like taking money from one of his pockets and placing it in another; i.e., there would be no economic impact on petitioner. (5) Intentional Understatèment of Income Petitioner believed that a substantial amount of his and Mrs. Browning's Leadenhall Bank Credit card charges were for their personal benefit because they were unrelated to SBE's business and that, absent an accounting to TrÅnsNational for those expenditures, he would be required to pay taxes thereon. Yet, as of the date of trial, he had never made such an accounting and.he had> never- paid tax on.any amount of his and Mrs. Browning's Leadenhall Bank credit'card charges." "We do not find that the inconsistencies between the 2003 the Brownings' Leadenhall Bank credit card and 2008 analyses of charges regarding the identity of certain charges as being business related or personal constitute evidence that petitioner intentionally understated his income. Petitioner testified that he prepared the 2008 analysis without referring to the 2003 analysis, and the passage of 5 years between the two explains those inconsistencies to our satisfaction. relatively few inconsistencies, but, volume of his realization that there was no need to make a meaningful accounting of the charges that petitioner believed to be personal, those charges to anyone, and his demonstrated lack (continued...) It is not those rather, it is the sheer , - 42 - Ms. Evans' testimony regarding her audit meeting with petitioner.further indicates that petitioner intended to understate his income by hiding from respondent his and Mrs. Browning's 1998-2000 expenditures of unreported excess SBE payments by means of their personal charges to the Leadenhall Bank credit cards. That testimony was as follows: Q Okay. So, Ms. Evans, what was the nature of your conversation with Mr. Browning regarding his use of the Leadenhall credit card? the deferred compensation when he withdrew it as We had asked him if it was his intent to A report taxable income, of personal charges at that time on his tax return. Mr. Carstensen stated that -- then why didn't he report the amounts Q Mr. Carstensen or Mr. Browning? A Mr..Carstensen stated that everybody does it. Mr. Browning then stated that this is the standard way of using credit cards. Mr. Browning then went on to say it's like running a red light or going the speed limit. You do things you shouldn't while you can. When asked by counsel whether he had ever told the agents that using the Leadenhall Bank credit card "was like speeding and hoping not to get caught, something to that effect", petitioner responded: "I have no recollection of that, that doesn't sound like anything I would say." Thus, petitioner did not deny making "(...continued) of any intention of ever paying taxes on the amounts in question that provide the requisite clear and convincing evidence of fraudulent intent. - 43 - the statement quoted by Ms. Evans, only that he~did not recall making such a statement. We fi'nd Ms. Evans to have been a -credible witness and accept her testimony as an accurate description of her'conversation with petitioner and Mr. Carstensen, c. Conclusion We have found that, for each of the audit years, petitioner was in constructive receipt of the excess SBE payments, most of which were deposited in the HD Vest account, plus the earnings on that account." That finding was based upon our preliminary finding that petitioner had unrestricted acceÊs to and control over the funds in the HD Vest account, and, therefore, to the SBE excess payments, which funded that account. He and Mrs. Browning exercised that access by means of- the Leadenhall Bank account and credit cards. That account and.those credit cards were, in effect, the spigot through which the SBE excess payments flowed (via the HD Vest account).to petitioner. Pet¾tioner knéw that, to the extent he was able to access those funds (particularly for what he knew to be personal purposes), he was taxable on them. We surmise that it was for that reason that he (and Mr. Carstensen) intentionally hid from respondent his means of access As we noted supra, amounts that U.S. leasing company did not deposit behalf and, received by him. in the HD Vest account it spent on petitioner's therefore, those amounts also were constructively - 44 - to the excess SBE payments during 1998-2000. Thus, the evidence clearly and convincingly demonstrates that both petitioner and Mr. Carstensen intentionally sought to evade tax on all or a portion of the 1998-2000 excess SBE payments. As a result, 1998- 2000 remain open under section 6501(c), and respondent is free to determine deficiencies with respect to any item for those 3 years. See Lowy v. Commissioner, 288 F.2d at 520; Colestock v. Commissioner, 102 T.C. at 385. 4. Application of Section 6501(c) (1) to 1995-97 a. Introduction . Because the Leadenhall Bank account and credit cards.did not exist until 1998, the tax evasion that is evidenced by. - petitioner's concealment of that account and those credit cards does not pertain to the earlier audit years, 1995-97. We . . strongly suspect that had Messrs. Schmidt and Drysdale been able to comply with petitioner's 1996 request for an offshore credit card at the time of that request, the pattern of tax evasion that petitioner and Mr. Carstensen exhibited during 1998-2000 would have been present during 1996 and 1997; i.e., that the restriction of that behavior to 1998-2000 was merely fortuitous. "This Court, however, will not sustain a finding of fraud based upon circumstances which at the most create only suspicion." Katz v. Commissioner, 90 T.C. 1130, 1144 (1988). Moreover, our suspicion is not reinforced by anything that occurred before 1998 - 45 - with respect to the then-pending offshore credit card. Although petitioner testified that having a credit car was a "very important" consideration in his determination of whether to embark upon the OEL program as outlined by Messrs. Schmidt and Drysdale, it was not clear, at" that time (De~cember 1995) or, indeed, until the card was issued in 1998, that the charges to the card would be funded by the excess SBE payments via the HD Vest account rather than by petitioner's ostensible Irish employer or directly by SBE, or that those charges would, in significant part, be for personal use.M Petißioner also testified that he made the decision,~ in 1998, to fund those charges from his ostensible deferred compensation account rather than from SBE because, at that time, SBE was starting to have financial problems and he did not want to further weaken the company. That testimony indicates that a different credit card funding arrangement might have occurred had the card been issued before 1998 at a time when SBE was profitable and in a stronger financial condition. Therefore, we must find clear and "In fact, the promotional materials that Mr. Schmidt furnished to petitioner and Mr..Carstensen contained the following representation: The Irish corporation will pay your business expenses, including providing you with a variety of! fringe benefits * these fringe benefits, a credit c.ard, abroad by the company * To facilitate the payment of many of the charges of which are paid from the company can provide you with * *. * * [Emphasis added.] - 46 - convincing evidence of fraud, unrelated to petitioner's contemplated use of an offshore credit card, that existed either throughout the audit years or, specifically, during one or more of the pre-1998 audit years (1995-97). b. Respondent's Arguments . Respondent argues that "the evidence of fraud is overwhelming." He points to a number of alleged indicia of fraud unrelated to the Leadenhall Bank account and credit cards: (1) The "lack of substance" of the OEL program, (2) petitioner's noncompliance "with any of the terms of the purported contracts", (3) the fact that petitioner's relationship with SBE remained unchanged throughout the period of the OEL program, (4) the fact that the funds representing the allegedly deferred amounts ended up in a U.S. brokerage account under petitioner's control, (5) the fact that petitioner never dealt with anyone^known by him to be from Ireland or to be an officer or employee of his alleged Irish company employer, TransNational, and (6) petitioner's inability to produce any evidence of an agreement with TransNational, the company he claimed was always his employer. Respondent also alleges fraud in that petitioner lied in stating that (1) he lacked control over the HD Vest account, (2) he did not know why Mr. Carstensen was chosen to manage that account, and (3) Mr. Cafferata had control over the HD Vest account. Respondent also points to: (1) What he considers petitioner's incredible testimony regarding his faith in the OEL prograin as a valid income deferral program, (2) the absence of financial records, contracts, or correspondence with any employees of TransNational, .and (3) petitioner's submissioh of false and ' misleading answers to Ms.·Evans' interrogatories during her audit. Respondent concludes overall: As in'Foxworthy v. Commissioner, T.C. Me o. 2009-203, the whole scheme was aimed at concealing petitioner's untaxed compensation in a nominee account that he controlled and to which he had access through his advisor Carstensen and through the credit card. * * * With respect to Mr. Carstensen,.respondent cites, as "the most obvious aspect of his fraud", the fact that he knew from Mr. McCarthy's pre-implementation analysis "that the scheme was a shath", and, even without that analysis, that ·"the OEL scheme lacked substance." Respondent ties Mr. Carstensen to many of the allegedly fraudulent features of petitioner's conduct in concluding that he too acted fraudulently in helping to implement the OEL program and in preparing and signing petitioner's 1995- 2000 returns "which he knew to be false, with intent to evade tax." c. Discussion We agree with respondent that petitioner s failure to - produce copies of actual written agreements tá which he, TransNational, and/or the U. S. leasing companý were parties, his indifference to the actual terms of any such ágreement to which - 48 - he was a party, and his effective control over the funds in the HD Vest account, are among the factors indicating that the OEL program lacked economic substance.-. Respondent's problem iss that, even if we were to·make that finding,. before petitioner's concealment of the Leadenhall Bank account and credit cards, which pertains only to 1998-2000, there. is no clear and convincing evidence that any of petitioner's or Mr. Carsenten's actions demonstrated an intent to conceal income and; thereby, evade tax. . On its 1995-97 returns, SBE specifically included as one of its "other deductions" on.line 19 "Employee Leasing Program".. expenses, and petitioner reported as wages from the various U.S. leasing companies, by name, amounts that were substantially'less than SBE's leasing program deductions for·those years. Thus, it cannot be said thatsthe existence of some_form of leasing program involving both SBE and petitioner and the non-U.S.·taxation of a substantial portion of SBE's payments for petitioner's services was intentionally hidden from respondent. Both petitioner and Mr. Carstensen appeared to believe that the OEL program, as constructed and explained to them by Messrs. Schmidt and Drysdale, would result in the sought-after tax deferral for petitioner.. Petitioner trusted Mr. Schmidt and viewed him as the principal architect of. the program. Petitioner thought he understood the basics of.the program and that it was being followed, even though he had not read and, therefore, was unfamiliar with (and even indifferent to) the actual terms of the contracts pursuant to .which the program was supposed to be implemented. He testified that his failure to read the contracts was based upon his assumption that Mr. Schmidt would advise him of anything he needed to know. He also testified that he believed that he was in compliance with the requirements of the program so long as he adhered to any and all requests that Messrs. Schmidt and Drysdale made in connection with the program. That he continued to identify himself to third parties as president and as an employee of SBE exemplifies his indifference to the actual requirements of the OEL program (i.e., to what he characterized as the "small print") and is further proof of the program's lack of economic substance as implem!ented by petitioner, but it is not proof of fraudulent intent. . Petitioner viewed the HD Vest account as something akin to a pension plan account or IRA that would be available when he needed it . As in the case of an IRA, petitioner apparently believed he had a·right to participate in or even control his investment or risk profile in the account. Moreover, before his and Mrs. Browning's use of the Leadenhall Bank credit cards, beginning in 1998, there is no clear and convincing evidence' that petitioner intended to access the funds in the account; i.e., - 50 - that he intended to treat the account as other than a retirement account. The record is, at best, ambiguous regarding whether petitioner's answers to Ms. Evans'.written interrogatories were purposely misleading; or merely reflective of his understanding of what he believed to be a legitimate deferral. arrangement the actual details of which, because he viewed them as insignificant, were largely unknown to him. Also, to the extent that respondent sees dishonesty and fraud in petitioner's interrogatory response wherein he states that he could not "control or access the money" in the HD Vest account,.or in his response that TransNational "possessed full control and discretion over the account", it is possible that.petitioner viewed control as synonymous with signature authority,.and because he lacked the latter, he honestly (if unrealistically) believed he also lacked the former. Petitioner testified that the absence of SBE's financial records, correspondence, etc. for examination by Ms. Evans resulted from their disposal, in 2003, as unnecessary after the sale of SBE's business in 2002. He further testified to his belief that none of those documents was relevant to Ms. Evans' audit. We find no clear and convincing evidence that petitioner's testimony was untrue or intended to be misleading. Moreover, there is nothing inherently fraudulent in setting up a deferral account in the United States. From petitioner's - 51 - standpoint, signatory authority over the HD Vest account by a third party (foreign or domestic) appeared sufficient to justify petitioner's ostensible lack of control and, hence, the sought- after deferral. Finally, we reject respondent's argument that the OEL program in this case is similar to the OEL program that we held to be fraudulent in Foxworthy,. Inc. v. Commissioner,.T.C. Memo. 2009-203. In Foxworthy, the money transferred to the offshore deferred compensation account was almost immediately transferred out of that account to other investment accounts in various corporate names but used by the individual ta payer for his own purposes.* The evidence supported our finding that, from the beginning, the individual taxpayer intended to hide those funds from the Commissioner and to use them in furtherance of a number of schemes designed to generate false deductions, all of which actions clearly constituted tax evasion subject to the section 6663 fraud penalty., Petitioner's only activity that may have resembled the individual taxpayer's actions in Foxworthy was his use of the Leadenhall Bank credit card, and that,activity did not begin until 1998. "Another similarity between Foxworthy, IËc. v. Commissioner, T.C. Memo. 2009-203, and this case is the manner which the OEL program was launched. was initiated by a transfer of corporation and a reduced salary payment to the taxpayer employee in December of the initial implementation year. funds to the Irish "employer" In both cases, the program in In Foxworthy, (continued...) - 52 - As noted supra, Mr. Carstensen, like petitioner, appeared to believe that the OEL program, as implemented by petitioner with his participation, would legitimately accomplish the desired tax deferral. There is nothing in the record to indicate that Mr.. Carstensen, although a professional preparer of income tax returns, had any experience in the evaluation of tax deferral schemes or programs. That appears to be why he sought Mr. McCarthy's advice regarding the merits of the OEL program. Respondent argues that, on the basis of Mr. McCarthy's concerns regarding the likelihood of an IRS attack, Mr. Carstensen "knew from the very outset * * * that the scheme was a sham." We disagree. Mr. McCarthy did indeed have concerns that the authorities cited in the promotional materials supplied by Messrs. Schmidt and Drysdale were distinguishable from the OEL program as described in those materials, but those concerns did not amount to a conclusion that the program was a sham that could not withstand IRS scrutiny. Rather, it was a warning that a successful IRS challenge represented a distinct possibility. The (...continued) taxpayer reported, for that entire year, only the leasing leasing company for December. the individual wages received from the U.S. Petitioner reported total wages of $323,887 for the initial year, 1995, of which $150,000 was received from the U.S. company for December. Although that essentially 50-50 split of petitioner's 1995 taxable wage payments between SBE and the U.S. leasing company was obviously unrealistic, aggressive as reporting no wages from the taxpayer's former employer, as occurred in Foxworthy. for whom he had worked for 11 months during the year, it was not as -.53 - fact that Mr. Carstensen, in the face of that.warning, still chose to rely upon the assurances of Messrs. Schmidt and Drysdale that the program would withstand such a challenge, while perhaps demonstrating poor professional judgment on his part, does not amount to fraud. Similarly, we do not believe that Mr. Carstensen's alleged recalcitrance in respond ng,to Ms. Evans' requests for documents or the minor inconsistencies in his testimony identified by respondent.amounted to clear.and convincing evidence of fraud applicable to the first 3 years of petitioner's participation in the OEL program. d. Conclusion Respondent has failed to provide clear and convincing evidence that petitioner's 1995-97 returns were fraudulent. Accordingly, the extended limitations period provided in section 6501(c) is inapplicable, and respondent's determinations and adjustments relating to those. years are barred. II. Application of the Section 6663 Fraud Penalty for 1998-2000 A. Discussion We have found that, for each of.the audit years, petitioner's underpayment of tax equaled the excess SBE payments plus the capital gains and investment income on the HD Vest account. We have also concluded that petitioner filed fraudulent returns for 1998-2000 attributable to his (and Mr. Carstensen's) concealment of the Leadenhall Bank account and credit cards. We - 54 - determined that that concealment, on petitioner's 1998-2000 returns and during the audit of those returns, clearly and convincingly demonstrated that petitioner knew that his and Mrs. Browning's unrestricted access to the 1998-2000 excess SBE payments for any purpose (and, in particular, for personal expenses) was inconsistent with the deferral of the excess SBE payments for those years and was, therefore, a fraudulent attempt to evade tax on those amounts. Moreover, petitioner has not persuaded us by a preponderance of the evidence that his affirmative attempts to hide the Leadenhall Bank account and credit cards do not justify imposing the section 6663 fraud penalty on the entire amount of the underpayment for each of the 1998-2000 years. See sec. 6663 (b). We do not find incredible petitioner's testimony that he believed any business-related expenses to be deductible so that it was of no tax consequence that he failed to include the excess SBE payments to be used for business purposes in income. But we find it more likely that that testimony was part of a contrived, overall explanation designed to falsely justify petitioner's failure to include any portion of the excess SBE.payments in income despite his unrestricted access to the entirety of those funds, by means of the Leadenhall Bank credit cards, and his knowledge that that unrestricted access rendered him taxable on those payments for 1998-2000. That, in an our estimation, is why he and Mr. Carstensen endeavored to hide the Leadenhall Bank - 55 - account and credit cards from respondent. B. Conclusion The entire amount of petitioner' s underpayment for each of his 1998-2000 years is subject to the section 6663 fraud penalty. III. Application of the Section 6662 Accuracy-Related Penalty Because we have applied the section 6663 fraud penalties to petitioner's total underpayments for 1998-2000, the section 6662 accuracy-related penalties do not apply for those years. See sec. 6662(b) (flush language). Decision will be entered under Rule 155.