TAX COURT OPINION

Case: Lynn D. & Juanita A. Stewart
Docket Number: 7869-10
Judge: Vasquez
Opinion Type: bench
Filed: 05/17/2011
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 LYNN D. & JUANITA A. STEWART, DEM Petitioners, v. ) Docket No. 7869-10. COMMISSIONER OF INTERNAL REVENUE, Respondent O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of transcript of Vasquez at Tampa, Florida, on April 29, 2011, containing his oral the trial. fact and opinion rendered at in the above case before Judge Juan F. the pages of the the trial findings of the conclusion of In accordance with the oral findings of fact and opinion, decision will be entered for petitioners. (Signed) Juan F. Vasquez Judge Dated: Washington, D.C. May 17, 2011 SERVED May 17 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge Juan F. Vasquez April 29, 2011 Stewart v. Commissioner Docket No. 7869-10 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 findings of fact and opinion shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the authority granted by Section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152, Tax Court Rules of Practice and Procedure. All section references are to the Internal Revenue Code as in effect for the years in issue, and all Sule references are to the Tax Court Rules of Practice and Procedure. By a notice of deficiency, dated January 7, 2010, respondent determined deficiencies of $839,196; $1,452,043; $2,262,951; and $3,830,173, in petitioners' Federal income tax for the years 1995, 1996, 1997, and 1998, respectively. Respondent also determined that for each of the years in issue petitioners are liable for a fraud penalty under section 6663(a), or, alternatively, for accuracy- related penalties under section 6662 for negligence or Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 disregard of rules and regulations or a substantial understatement of income tax. Additionally, respondent determined that for years 1996, 1997, and 1998, petitioners are liable for additions to tax under section 6651(a) (1) for failure to timely file their returns for those years. Lastly, respondent determined that petitioners are liable for additions to tax under section 6654 for failure to make estimated tax payments for the years 1995 through 1998. Respondent issued petitioners the notice of deficiency upon which this case was based on January 7, 2010, more than 10 years after petitioners filed their Federal income tax returns for the years in issue. Respondent argues that the general rule requiring him to assess any tax within three years of the filing of a return does not apply to the matter before us because petitioners' returns for the years in issue are false or fraudulent with the intent to evade tax. If respondent is correct, he may assess the tax for the years in issue at any time under section 6501(c) (1). Petitioners argue that the returns for the years in issue were not filed with the intent to evade tax, and therefore respondent is barred from assessing any tax for the years in issue Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 by section 6501(a). FACTS Certain facts have been stipulated by the parties and are adopted herein by this reference. Other pertinent facts are as follows. And I'd like to note that although petitioners submitted a proposed opinion and findings of fact this morning, the Court did not review it, nor has the Court relied on it. Petitioners resided in Florida at the time they filed their petition. Petitioner, Lynn D. Stewart, originally founded the Hooters restaurant chain, and in June 1995 he entered into a series of agreements to sell his interest in the business. In anticipation of realizing a substantial income from the sale of the Hooters business, petitioners sought the advice of their longtime advisor and independent CPA, Michael J. Maricle (Mr. Maricle), to assist them with planning for the long term protection of assets, succession planning, and income tax and estate planning. Also in 1995, Mr. Maricle, together with other competent professional advisors, including petitioners' legal counsel of several years, Dennis Repka (Mr. Repka) of Repka & Jennings, recommended that petitioners adopt the Common Law Business Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 Organization (CBO) Structure that would provide estate planning, asset protection, and legitimate income tax deferral benefits. The CBO Structure involved a series of domestic trust entities as developed by the Aegis Company. Petitioners adopted the CBO Structure at the end of 1995 and their involvement continued through 1998. Based on the advice of professional advisors, petitioners assigned their rights to the income derived from the sale of the Hooters business, as well as other income and business, investment, and personal assets, to the CBO trust structure. Petitioners did this under the belief that the structure represented a legally compliant means by which they could defer income taxation on such assets until the income or assets were distributed from the trusts to the holders of the CBO's certificate of beneficial interests (petitioners). On March 31, 2000, Federal officials raided Mr. Maricle's office in connection with matters involving the CBO Structure. Mr. Maricle later pleaded guilty to two counts of aiding and preparing a false tax return in violation of section 7206(2), one of the counts relating to petitioners' 1998 tax return. Mr. Maricle was ordered to be incarcerated Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 for 30 months as part of his sentence. As part of his plea agreement Mr. Maricle agreed to cooperate with Federal prosecutors. Mr. Maricle was a government witness in a number of Federal prosecutions of participants in the trust scheme promoted by the Aegis Company, including petitioner Lynn D. Stewart. See United States v. Lynn D. Stewart, Case Number 8:04-CR-527-T-24MSS. Prior to petitioner Lynn D. Stewart's criminal trial, Mr. Maricle revealed to Federal prosecutors that he had embezzled close to $1,000,000 from petitioner Lynn D. Stewart, during a five-year period beginning in either 1997 or 1998. Mr. Maricle's embezzlement was introduced at petitioner Lynn Stewart's criminal trial. Petitioner Lynn Stewart's criminal case ended with a hung jury, and the United States decided not to re-prosecute the case. DISCUSSION OF LEGAL AUTHORITIES For purposes of defining fraud, it is important to note that the definitions of fraud in sections 6663 and 6501(c) (1) have been held to be interchangeable. Rhone-Poulenc Surfactants v. Commissioner, 114 T.C. 533, 548 (2000). In order to extend the limitations period under section 6501(c) (1) or to impose the fraud Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 penalty under ection 6663, respondent must establish by clear and convincing evidence that for the year in issue an underpayment of tax exists and that some portion of the underpayment is due to fraud. See Price v. Commissioner, T.C. Memo. 2004-103; Wickersham v. Commissioner, T.C. Memo. 1996-276; Petzoldt v. Commissioner, 92 T.C. 661, 669 (1989). A taxpayer's attempts to conceal income, mislead the Internal Revenue Service, or prevent the collection of income tax may establish the requisite fraudulent intent. See Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). Over the years, courts have developed a nonexclusive list of factors to demonstrate fraudulent intent. These "badges of fraud" include: FW (1) Understating income; (2) maintaining inadequate records; (3) implausible or inconsistent explanations of behavior; (4) concealment of income or assets; (5) failing to cooperate with tax authorities; (6) engaging in illegal activities; (7) an intent to mislead which may be inferred from a pattern of conduct; (8) lack of credibility of the taxpayer's testimony; (9) filing false returns; (10) failing to file a tax return; and (11) dealing in cash. Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992). Although no single factor is necessarily sufficient to Heritage Reporting Corporation (202) 628-4888 / 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 establish fraud, the combination of a number of factors constitutes persuasive evidence. Section 6501(c) (1) provides that in the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed at any time. In Allen v. Commissioner, 128 T.C. 37, 42 (2007), we held that the limitations period for assessment is extended under 6501(c) (1) if the return is fraudulent, even though it was the preparer rather than the taxpayer who had the intent to evade tax. In the case before us, we hold the respondent has not shown by clear and convincing evidence that either petitioners or Mr. Maricle had the requisite intent to evade tax when petitioners' returns for the years in issue were filed. Petitioners provided their accountant, Mr. Maricle, with all of the information necessary to compute gross income and taxable income for all of the years in issue, including all information relating to petitioners' sale of their interest in the Hooters restaurants. A taxpayer's reliance on his accountant to prepare accurate returns may indicate an absence of fraudulent intent. Marinzulich v. Commissioner, 31 T.C. 487, 490 (1988). However, the taxpayer must provide his accountant "with all of the data necessary Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 for maintaining complete and accurate records." Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), affg. T.C. Memo. 1959-1972; Rao v. Commissioner, T.C. Memo. 1996-500. Petitioners willingly provided Mr. Maricle with whatever information he requested, and Mr. Maricle had all of the information necessary to accurately prepare petitioners' returns. Petitioners credibly testified to this and it was corroborated by Mr. Maricle. Petitioners also credibly testified that they believed the Aegis CBO system was a legitimate way to defer taxes and they based that reliance on professional advisors, including Mr. Maricle and Mr. Repka. Mr. Maricle credibly testified that based on his 1995 review of the Aegis material and on his own independent research, he concluded that the Aegis CBO system was a legitimate way to defer taxes. He also based that conclusion on the opinion of Mr. Repka, who passed away in 1996. Mr. Maricle further credibly testified in that preparing petitioners' Forms 1040 and the various trusts' Forms 1041, U.S. Income Tax Return for Estate and Trusts, he attempted to report all income on those returns by following the Aegis system as he understood it. Mr. Maricle also testified that he had never before prepared 1041s and Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 he attempted to learn as much about them as possible. Additionally, Mr. Maricle's conviction under section 7206(2) does not require us to find that he had the intent to evade tax when he prepared petitioners' returns. Similar to a conviction under 7206(1), a conviction under 7206(2) is a factor to be considered in deciding whether someone has fraudulent intent, but it is not dispositive. See Wright v. Commissioner, 84 T.C. 636, 639-644. The reason for this is that section 6501(c) (1) requires a specific intent to evade tax believed to be owing, while a conviction under section 7206(2) does not require any such specific intent. Aside from Mr. Maricle's conviction under section 7206(2), the other badges of fraud are noticeably absent from the case at hand. After reviewing all of the facts and circumstances, we conclude that respondent has failed to prove clearly and convincingly that Mr. Maricle intended to evade petitioners' taxes for the years in issue. We further note that respondent's two employees, Revenue Agent. Christopher Angelo and Special Agent Richard Goodwill, contradicted each other. While Revenue Agent Angelo testified that all gross receipts were either reported on petitioners' Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 12 Form 1040s or the trust's Forms 1041, Special Agent Goodwill disagreed. We find that any mistakes that Mr. Maricle may have made on petitioners' returns were attributable to his lack of familiarity with the returns and not due to an intent to evade taxes. Accordingly, petitioners' returns for the years in issue are not false or fraudulent with the intent to evade tax, and respondent may not rely on section 6501(c) (1) to keep open indefinitely the limitations periods. CONCLUSION We conclude that respondent has not shown by clear and convincing evidence that petitioners' returns for 1995, 1996, 1997 and 1998, are false or fraudulent with the intent to evade tax. Because respondent did not assess the tax for the years in issue within three years from the filing of petitioners' returns as required by section 6501(a), respondent is barred from assessing the tax for the years in issue. As a result we need not decide whether petitioners are liable for the deficiencies, penalties, or additions to tax determined by respondent. This concludes this Bench Opinion. // Heritage Reporting Corporation (202) 628-4888 1 2 3 4 s 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 3:23 p.m., the bench opinion in the above-entitled matter was concluded.) 13 // // // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628 -4888