TAX COURT OPINION

Case: Jeffrey S. & Mary F. Charlton
Docket Number: 19599-07
Judge: Foley
Opinion Type: memo
Filed: 03/01/2011
Pages: 13

T.C. Memo. 2011-51 UNITED STATES TAX COURT JEFFREY S. AND MARY F. CHARLTON, ET AL. etitione V. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 19599707, 19600-07, 19601-07, l'9602-07, 19603.-.07, 19604-07/ 19605-07. . Filed March 1, 2011. Narry Charles, for petitioners. James A. Kutten and Stephen A. Haller for reäpondent . Cases of the following petitioners are consolidated Graphip Connections Group herewith LLC, Jeffrey S a Charlton, Tax MÄtters Partner, docket Nos. 19600-07 and 19601-07; Wealth Buildèrs International, LLC, Jeffrey S. Charlton, 'Tax Matters Partnèr, docket Nos. 19602-07 and 19603-07; Golf Links Display Group 19604-07 and 19605-07. LLC, Jeffrey S. Char]ton, Tax Matters Partner, docket Nos. $ERVEó MAR - 1 2011 - 2 - MEMORANDUM FINDINGS OF FACT AND OPINION FOLEY, Judge: After concessions, the issues for decision are whether respondent issued petitioners an affected items notice of deficiency (notice) and notices of final partnership administrative adjustments (FPAAs) within the applicable limitations periods, and if so, whether petitioners are liable for deficiencies and fraud penalties. FINDINGS OF FACT In 1985, Jeffrey Charlton graduated from the University of Missouri with a degree in ci il engineering. After college, he worked for 3 years as an industrial engineer for Proctor & Gamble and then began work as a salesman for his father-in-law's printing business. In 1992, Jeffrey and his brother, Timothy Charlton, started their own printing business, Graphic Connections, Inc. Jeffrey and Timothy hired Charles Moore, a certified public accountant (CPA) with a bachelor's degree in accounting and a master's degree in business administration, to prepare their individual returns and Graphic Connections, Inc.'s corporate returns. Throughout his career, Jeffrey pursued a myriad of income- producing opportunities. His desire to earn large amounts of income with minimal effort led him to become involved with-Amway, Herbalife, and numerous othet multilevel marketing businesses (MLM). These endeavors were unsuccessful. In 1997, Jeffrey, - 3 - conti uing his fervente duest for easy money, wfote and published a book titled The Ultimate International Wealth Building System. In the boók, Jeffrey explained how to get out of debt,- make and invest money, reduce taxes, and pi-otectaassets.- Jefffey compiled this information! from sources on' the Internet and from his experxences. Jeffrey also created Wealth Buildérs International, an MLM that promoted his'international Wealth Building System and combiried his book, MLMS, and antail ordere into one system. Custoders paid Jeffrey upon putchasing- aabook or.joining an MLM listed int the book. Iin 1997, Jeffrey and Timothy -traveled to Phoenix, Arizona, to meet with, representatives ofoProTec Services ~(ProTec) , a compa y that- promoted trusts designed to protect assets and reduce tax liability (ProTec plan). * During^ the meeting,' ProTed representatives- explained the ProTec plan and assured Jeffrey and Timotl y that it was a legitiniate planning technique. On October 10, 1 97/, Jeffrey andeTimothy ekecuted an inst'allment agreement to pa ProTec $27,940.for a variety of services. These services included -the'initial setup of the ProTec plan and two trusts, Token International Trust (Token.Trust) and Ti~tan International 2ge'presenEatíŸes of ProT c routinely told potential clients that. dhe Internal Revenue Service had verified that the;ProTec plan domplied with tax laws. ProTeq pleaded guilty to a charge -of conspiracy tot defraud the United States in connection with their activities related to the promotion and marketing of In 2004, certain representatives of fraudulent trust schemes. - 4 - Trust (Titan Trust) (collectively, the domestic trusts), to implement the ProTec plan. In 1998, prior to imple enting. the ProTec plan, Jeffrey and Timothy were informed that ProTec had ceased operations. Jeffrey immediately searched for another company promoting a similar- system and found the Aegis Co. (Aegis). ,In August 1998, Jeffrey con.tacted William.Cover, a manager and promoter of Aegis, to inquire about becoming an Aegis member. Jeffrey and Timothy hig ly valued Mr. Moore's professional judgment and, in October 1998, invited Mr. Moore to accompany them to an Aegis seminar in Chicago, Illinois (Aegis seminar), to evaluate the legitimacy of the Aegis trust system (Aegis system) and to question Aegis representatives. During the Aegis seminar, Aegis representatives explained the Aegis. system's use of business trusts to reduce income tax liability and protect assets. Aegis representatives readily acknowledged the possibility of Internal Revenue service (IRS).audits but assured seminar participants of the Aegis system's legitimacy and Aegis' ability to successfully navigate clients through IRS audits. Jeffrey, Timothy, and Mr. Moore left the Aegis seminar convinced that the Aegis system was a legitimate tax minimization and asset protection plan. Mr. Moore expressed his support for the Aegis system and infožmed Jeffrey and Timothy that the system appeared to be thorough and in compliance with relevant tax - 5 - rules. Jeffrey and «Timothy proceeded to use Aegis' customized forms and instructions to implement the Aegis system. Pursuant to the Aegis system, e each brother' s wife conveyed all of her lifetine servioes to her hüsband. Jeffrey and Timothy each then transferred all of their respective real property, personar property, and lifetime services to Token Trust and Titan Trust,a respectivelyi The domestic trusts' beneficial interests were then transferred to= offshore trusts ein Belizet (Belize trusts) . / 1 During 19987 Jef frey and Timothy formed Graphic Connections Group, LLC; Wealth Builders. International, LLC; and Golf Links Display Group, LLC (collectively, the "partnerships) . Pursuant to the partnerships' operating agreements, Jeffrey and Timothy each had a 1-peraent interest, and tihe domestici trusts had a 98- percent interest, in each of the partnerships. The domestic trusts paidsthe personal expenses of Jeffrey's and Timothy's families and distributed income to thetBelize trusts.5 Jeffrey and Timothy used foreign bank accounts in Belize and Antigua to access the income . -On August '1, 1999, Tdked Trust 'purchased Titan Trust' s and Timothy' s interests"in othe partnerships . a Øn April 6, 2000, Michael -Vallone, 'the executive director and a founder of Aegis, sent Jeffrey a letter-(April 2000 letter) in which Mr. Vallone provided Jeffrêy ïth'audit defeÊse strategies, advised Jeffrey to retain certaïn attorneys, and - 6 - assured Jeffrey that Aegis was using "inside information" from the IRS to successfully courgter IRS audits. In 1999 and 2000 (years in issue), Jeffrey sold, through direct mail solicitations, over 40,000 copies of his book. During the years in issue, Jeffrey and Timothy maintained ledgers of ,income and sexpenses relating to their respective .trusts and- provided these ledgers to Mr. Moore to assist him in preparing the' domestic trusts' returns . Using the ledgers and the advice of Aegis' trust expert, Mr. Cover, Mr. Moore prepared and signed Je f f rey' s , Timothy' s , the partnerships ' , and the domestic trusts ' returns relating -to the years in issue. Jeffrey, as the partnerships' tax matters p(rtner, signed each of the partnership returns relating to the years in issue. Minimal liability was reported on the individual,- partnership, and trust returns relating to the years in issue.A After the filing of these - a returns, Mr. Moore, on July 15, 2001, became trustee of Jeffrey's trust (i . e . , Token Trust) . On January 8, 2002, respondent mailed Jeffrey -and his wife, Mary Charlton, a preliminary notice (i.e., relating to 1998, 1999, and 2000) in which respondent asserted that Jeffrey and 30n Oct. 15, 2000, the partnerships each filed Forms 1065, U.S. Partnership Return of 2000, Jeffrey and Timothy each filed 1999 joint Federal tax returns with their resp ctive wives. Jeffrey and his wife, Mary Charlton, income tax return. Forms 1065, U.S. Return of Partnership Income, relating to 2000. filed a 2000 joint Federal Income, relating to 1999. On July 11, 2001, the partnerships filed On Oct. 17, income On July 8, 2001, - 7 - Mary' s trust arrangement was abusive and used for tax aîroidance purposes . MOn "January 22 2002, Scott Gross Jeffrey and Mary' s attorney who had been recommended by Aegis, asent respondent a- letter in response to the prehiminary notice. In the letter, Mr. Gross, following the Aegin audit stràtegy and citing legal precedent set forth in the Aprisl 2000 letter, reeuested a "clarification as: to how your Privacy Act Notice applies' to your request to examine" certain information delineated in thea preliminary notice. On January* 30, 2002, Jeffrey sought Mr. Moore's advice regarding the appropriate course of abtion -and: informed Mr . Moore that, consistent with Mr. Cover's and Mr. Gross' recommendations, Jeffrey planned to refuse to cooperate -wit-h?IRS auditors and would establish in the 'Tax Court the Ilégitimacy- of the Aegis system. Mr. Moore was ambivalent in 1is responses to Jeffrey's inquir ies . Cn March 11, '2002 respondent mailed each' of the partnershipsda notide of beginning of administrative proceeding reláting' to 1999 and .2000 Soon thereafter,arespondent issued administrative summonses ice e,a -relating "to certain records , documents, and testimony) to Jeffrey; Timothy; Graphic Connec t ions , Inc . ; and the partnerships . At the direction of 46n Oct. 7, 2002, respondentimailed eachspartnership á second notice of beginning of administrative sproceeding relating to 1999 and 2000. - 8 - Aegis and Mr. Gross, Jeffrey and Timothy resisted respondent's summonses; transferred the t usts' records to newly appointed trustees; and, using forms prepared by Aegis, filed criminal complaints against IRS emplo ees involved in the audit. In May 2002, the IRS Chief Counsel filed with the U.S. District Court for the Easte n District of Missouri -(District y Court) civil actions against Jeffrey and Timothy to enforce the summonses, and in February 2 03, the District Court found Jeffrey and Timothy in contempt of court for failing to fully comply, with the summonses. In March 2003, Jeffrey and Timothy complied with the IRS' summonses, and the District -Court dismissed the summons enforcement actions. On June 19, 2007,- respondent issued Jeffrey and Mary the notice-relating to 1999 and 000. In the notice, respondent determined that, in accordance with an examination of Token Trust, income and expenses of Token Trust relating to the years in issue were attributable to Jeffrey and therefore shouldt have been reflected on his individual returns relating to those years. As a result, respondent determined that Jeffrey and Mary were liable for deficiencies in tax and section 6663(a)? fraud penalties relating to the ydars in issue. e, sUnless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. - 9 - On June 20, 72007e respondent issued each of the partnerships an FPA relating to 1999 and 'an FPAA relating to 2000 . In the FPAAs, respondent "made adjustments and imposed fraud pen'alties in accordande .with the determinations . that" the domestic trusts were sham entities and .should be disregarded and that the domestic - trusts' interests in the partnerships should be reallocated to - Jeffre and Timothy. On August 29, 2007, lieffrey and Mary, while- residing in . Missouri, filed their petition with the Court. That same- day, Jeffrey, as tax matters partner for the partnerships, filed petitions seeking readjustment of respondente' s FPAAs . On December 10, 2007, the 'Court filed respondent's motion to dismiss and strike as to certain partnership and affected items relating to 1999. The Court, on December 17, 2007, .grante'd respondent' s motion. n May' 19, 2008, -Mr. Vallone, aMr.- Cover, and four.'other principals of Aegis were conv'icted of conspiracy to -defraud the United States in connection with their actiyities related to the promotion and marketing of fraudulent trust aschemes OPINION Section 6501.(a) provides that, generally, the« amount of any tax must abe assessed within 3 years of the filing of a' return. If, -however, a taxpayer files a false or fraudulent return with the intent to evade tax, the tax may be asse~ssed at any time . I - 10 - Sec.. 6501(c) (1) . Similarly, section 6229 (a) provides. that, generally, othe amount of any tax .with respect to any person which is attributable to a partnership item or an affected item relating to a partnership taxable year must be assessed within 3 years after the later of the, date the partnership return is filed or the last' day for -filing .the return. See also sec. 6501(n) (2) . If, however, any partner has, with the intent to evade tax, signed or participated diredtly or indirectly in the .preparation of a partnership return which includes a false or fraudulent item, the tax may be assessed at any time. Sec. 6229(c) (1). Respondent contends .that the period to assess Jeffrey and . Mary's 2000 tax liability is open because Jeffrey and Mary's underpayment of tax is due to fraud and thus is not subject to the 3-year limitation period. See sec. 6501(c) (1) . Respondent also contends that the FPAAs were timely because the partnerships' returns were false or fraudulent and thus not subject to the applicable 3/year limitation period. See sec. 6229 (c)s(1) . Respondent must establish by clear and convincing evidence that Jeffrey and Mary filed false or fraudulent returns with the intent to evade tax. See sec . 7454 (a) ; Rulé 142 (b) ; Botwinik Bros. of Mass., Inc. v. Commissioner, 39 T.C. 988, 996 (1963) . This burden is met where respondent proves that: the taxpayer intended to evade taxes known to be owing by conduct - 11 - intended tö conceal, mislead, or'otherwise prevent the collection of taxes. See Parks v. Commissioner, 94 T.C. 654, 661 '(1990). Simply put, 'respondent has failed to meet his burden. See Petzoldt v. Commissioner, 92 T.C. 661 700 (1989) (providing that the ekistence of fraud day not be found under "icircumstances which at the most -create only suspicion.-'" (quoting Davis v. Commissióner, 184 F.2d-86, 87 (10th Cir. 1950), remanding a Memorandum Opinion öf this Court) ) ; Beaver v. Commissioner, 55 T.C. 85, 92 (1970). To the contrary, Jeffrey did not intend to evade tax but wrongfully believed that the'ProTec plan and the Aegis system were legitimate tax avoidance techniques. Indeed, Jeffrey, -Timothy, and Mr. Moore all believed that the Aegis system was legistimate and that -the returns were accurate. See Gaiewski v. Comdissioner, 67 T.C. 181, 199 (1976) (stating that the-existence of fraud is a question of fact to be determined upon consideráEion'of the entire record), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978). Mr. Moore, respondent's primary witness, provided convincing testimony regarding the perceived legitimacy of the techniques and accuràdy of othe returns. His testimony-relating to his advice to Jeffrey and Timotdy, however, was inconsistent, incoherent, and-at times incom rehensible. Nevertheless, Jeffrey, through his credible· testinonyy established that'Mr. Moore did not express any doubt regarding the legitimacy of the tax planning arranéements. In - 12 - fact, Mr. Moore was so comfdrtable with the tax planning arrangements that, after preparing the domestic trusts' returns relating to the years in isspe, he became, a trustee of Jeffrey's domestic trust (i..e., Token grust) . Jeffrey, who undoubtedly had a penchant for fast and easyi money, f oolhardi~Ly f ollowed the Aegis system (i . e . , structuring the transactions and resisting the IRS audit) . See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Gaiewski v. Commissioner, supra. Nevertheless, Jeffrey maintained adequate records and made all pertinent information available to .Mr. Moore, his longtime trusted,[yet imprudent, .CPA. See Niedringhaus v. Commissionei, supra at 211. ,To his detriment, Jeffrey relied on the professional judgment of Mr. Moore, who inexplicably believed in and acquiesced to an elaborate scheme, designed by con artists. See Estate of Temple v., Commissioner, 67 T.C. 143, 162 (1976) (holding that reliance upon an accountant to prepare accurate returns may negate fraudulent intent if the accountant was supplied with all the information necessary to - prepare the returns) ; Marinzulich v. Commissioner, 31 T.C. 487/, 490 (1958) (holding that a taxpayer' s reliance upon his accountant to prepare an accurate return may indicate-an absence of fraudulent intent-),. Accordingly, the extended limitations periods set forth in sections-6501(c) (1) and.6229(c) are not,applicable, and - 13 - respordent's determinations and adjustments relating to 1999 and 20 0 0 'are barred dontentions we have not addressed are irrelevant, moot, or meritless. o reflect the foregoing, Decisions will be entered for petitioners.