t c memo united_states tax_court perry w browning petitioner v commissioner of internal revenue respondent docket no filed date in date p the principal_shareholder president and ceo of sbe a vermont-based manufacturing corporation on the advice of its 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 employee_leasing company that subleased his services back to sbe during the audit years in consideration of p’s services sbe paid l annual amounts equivalent to what sbe had paid p as wages in prior years l paid a portion of those amounts to p who reported those payments as wages l remitted the balance after deducting certain amounts including the payroll_taxes owed with respect to its payments to p to t for deposit in a deferred_compensation or retirement account for p’s benefit the retirement account the retirement account was opened in the name of a bahamas subsidiary of t p and his wife received and used during credit cards issued by a bahamas bank and backed by an account at the same bank in the name of the t subsidiary money from p’s retirement account funded the bank account used to pay the credit card charges many of which p recognized were personal during all of the audit years p continued to represent himself to third parties as an employee and president of sbe and he acted on behalf of sbe in the same manner as before adoption of the oel arrangement he also determined 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 he exercised his unrestricted access to the funds in the account by means of the bahamas bank credit cards both the and 6-year periods of limitations on assessment under sec_6501 and e had expired before r issued the notices of deficiency the notices to p r alleges that the notices were timely issued by reason of the application of sec_6501 which permits assessment of tax at any time in the case of a false_or_fraudulent_return r also alleges that for all open audit years p underreported his income is liable for the sec_6663 fraud_penalty and alternatively is liable for the sec_6662 accuracy-related_penalty held for all audit years p was in constructive receipt of amounts equal to the excess 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 the social_security and medicare taxes that l paid with respect to those reported wages and the capital_gains and investment_income generated by the assets in the retirement account held further p’s returns were fraudulent by reason of p’s concealment of the bahamas 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 supra held further p’s returns were not fraudulent with the result that r’s determinations and adjustments regarding those years are barred held further p is subject_to the sec_6663 fraud penalties for with respect to all the constructively received amounts described in holding supra held further because we apply the sec_6663 fraud penalties to p’s total underpayments for the sec_6662 accuracy-related_penalties do not apply for those years see sec_6662 flush language john m colvin and robert j chicoine for petitioner carina j campobasso and robert w dillard for respondent memorandum findings_of_fact and opinion halpern judge by two notices of deficiency dated date the notices respondent determined joint deficiencies in income taxes and related penalties for petitioner and his wife nancy l browning mrs browning as follows year deficiency dollar_figure big_number big_number big_number big_number big_number penalty sec_6663 dollar_figure big_number big_number big_number big_number big_number 1the deficiencies for all of the years are primarily attributable to the difference between what petitioner’s corporation s b electronics sbe deducted as payment for petitioner’s services and the wages petitioner reported by an amendment to amended answer respondent asserted an increased deficiency for of dollar_figure and a sec_6663 fraud_penalty of dollar_figure those increased amounts relate to dollar_figure of reported wages earned by either petitioner or mrs browning that the agent mistakenly attributed to a source other than sbe 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 because the parties in docket no filed a stipulation to be bound by any deficiency redetermined in this case we decided not to consolidate the two cases and we consider herein only petitioner’s case 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 whether the notices for one or more of the years the audit years were timely issued by reason of the application of sec_6501 which provides for assessment of tax at any time in the case of a false_or_fraudulent_return and if so whether petitioner 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 1in the stipulation respondent concedes that the fraud_penalty does not apply to mrs browning for any of the audit years reported as wages received from the leasing company had additional unreported capital_gains for one or more open audit years that were generated by an alleged deferred_compensation account had additional unreported dividends for and if open that were generated by the alleged deferred_compensation account as an alternative to issues through had additional unreported income for 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 and is liable for the sec_6663 fraud_penalty for one or more open audit years and as an alternative to issue is liable for the sec_6662 accuracy-related_penalty for one or more open audit years if we decide for petitioner with respect to issue then respondent is time barred from raising any of the other issues and we must decide the case in petitioner’s favor 2there are also certain computational adjustments that follow from the adjustments at issue but they are not in controversy and we need not discuss them 3both the general 3-year limitations_period on assessments provided by sec_6501 and the 6-year limitations_period on assessments provided by sec_6501 in the case of substantial omissions from gross_income which was potentially applicable to and had expired for all of the audit years by date both notices’ date_of_issuance findings_of_fact introduction 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 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 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 he participated in a management development program at the 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 through date 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 to persons mrs browning and the five 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 years first in canada and beginning in in the united_states eventually becoming that company’s head of human resources for the united_states after retiring from air canada in 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 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 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 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 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 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 petitioner enters into an employment contract with an irish corporation irish corporation pursuant to which in exchange for petitioner’s 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 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 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 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 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 amounts set_aside in the deferred_compensation account until paid to him upon his retirement from sbe the written materials that messrs schmidt and drysdale presented to petitioner and mr carstensen represented that the oel plan was largely predicated on irs revenue rulings rev_rul 1974_2_cb_278 and revrul_74_331 c b 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 implemented so as to avoid falling within u s caselaw in which the employee_leasing arrangement eg of an athlete leased to his team was not respected for tax purposes although both petitioner and mr carstensen were very impressed by messrs schmidt and drysdale mr carstensen decided to seek a second opinion from a former vice president for tax at gbs who was then in private practice jim mccarthy mr mccarthy on date he sent mr mccarthy the promotional materials that had been furnished by messrs schmidt and drysdale thirteen days later mr mccarthy gave his response in which he expressed a number of misgivings regarding the efficacy of the oel plan the promoters’ failure to either obtain an irs ruling or guarantee the payment of penaltie sec_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 and interest that might result from the very real possibility of a successful irs challenge to petitioner’s and or sbe’s tax position 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 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 date after further discussions with mr carstensen and his estate_planning advisers petitioner decided to implement the oel plan implementation of the oel plan beginning in date petitioner with 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 an employment agreement with an irish corporation on behalf of sbe an agreement between sbe and u s leasing company and an sbe check for dollar_figure made out to transnational and mailed all three to transnational at a dublin ireland address the 5the record does not reveal the identity of the irish corporation with which petitioner contracted whereas both petitioner and mr carstensen believe it to have always been transnational leasing co transnational there is evidence that it was montrain services ltd which later was replaced by transnational also the parties appear to agree that at least three u s leasing companies were involved in purportedly implementing the oel plan during the audit years because it is the nature or substance of each entity’s participation in the execution and implementation of the plan that is germane to the legitimacy of the plan and the issue 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 in fact become the purported participating irish corporation as of date and we will generally refer to the u s leasing company as u s leasing company 6presumably mr schmidt’s reason for requiring petitioner to execute and mail documents to transnational from outside the united_states was in what appears to be an excess of caution to assure that the transaction would not endanger transnational’s assumed treaty exemption from united_states income_taxation see convention for the avoidance of double_taxation and the continued dollar_figure 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 employee_leasing program expenses and petitioner reported as wages from the various u s leasing companies by name the following amounts year sbe deductions petitioner’s reported wages from u s leasing company dollar_figure big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number 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 dollar_figure during the 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 to taxes on income and capital_gains u s -ir art date u s tax_treaties cch par providing in effect that the business profits of an irish enterprise are not taxable in the united_states unless those profits are attributable to a united_states permanent_establishment the amounts deposited in or withdrawn from the hd vest account were as follows year feb dec deposits dollar_figure big_number big_number --- --- --- big_number --- --- withdrawals --- --- --- dollar_figure big_number big_number big_number big_number big_number 1with two exceptions all of the withdrawals were used to pay the charges to the credit cards issued in connection with the hd vest account those exceptions were dollar_figure refunded to sbe in and the dollar_figure final distribution to petitioner in 2the date deposit was taken from the dollar_figure that petitioner mailed to ireland in date the date deposit like the subsequent deposits was derived from an sbe payment to u s leasing company and a u s leasing company payment to transnational or tlcm for the year of deposit during the period the hd vest account earned capital_gains in excess of dollar_figure and investment_income of dollar_figure it also incurred investment_expenses of dollar_figure tlcm was a corporation organized under the 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 dollar_figure investment loss during its existence 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 date and the last reported activity including the final distribution to petitioner occurred in date 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 and on various applications to open an ira or other 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 date petitioner did retain sample or draft contracts 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 significant changes were the substitution of u s leasing company for sbe in the handling of his salary fringe_benefits and payroll_taxes and 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 exercised any direction 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 exercising 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 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 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 date 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 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 dollar_figure 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 he did not explain to her the circumstances of the issuance of the card nor did he place any restrictions on her use of the card during the period from date through date petitioner and mrs browning charged over big_number items to the leadenhall bank credit card during that period over dollar_figure 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 during the audit years in which petitioner 8the draft employment contract between the irish company employer and petitioner that mr schmidt left with petitioner provides for the issuance of a credit card to petitioner but it limits the use thereof to corporate presumably referring to the continued and mrs browning used the leadenhall bank credit cards their charges to those cards totaled dollar_figure dollar_figure dollar_figure and dollar_figure for respectively of that amount dollar_figure dollar_figure dollar_figure and dollar_figure for respectively constituted expenditures that petitioner considered personal for those same years the following amounts were withdrawn from the hd vest account to pay credit card charges continued irish company employer not sbe business_expenses all of which are subject_to the employer’s approval and to its prior written approval for expenses exceeding dollar_figure those conditions were routinely ignored by petitioner and mrs browning in connection with their use of the leadenhall bank credit cards issued to them 9for and we accept as recognized personal charges the charges petitioner listed as personal on a submission to respondent’s agent belinda evans ms evans who audited petitioner’s returns although there are discrepancies regarding the description of a particular charge as personal or as business between that submission and a submission to ms evans covering date through date we accept as an accurate reflection of what petitioner considered to be personal charges for and the earlier submission because it i sec_5 years closer to those years for the period from date to yearend we accept as what petitioner considered to be personal charges the charges petitioner identified as personal on the submission as it constitutes petitioner’s only analysis of his and mrs browning’s credit card expenditures during that period that is in evidence the record also contains leadenhall bank statements reflecting their credit card usage for june-august and part of date all but a very few of the charges reflected on those statements clearly are personal and those few are at best ambiguous in the absence of evidence to the contrary we have treated all of the credit card charges listed on those statements as charges petitioner would consider personal also because there is no evidence to the contrary we have assumed that for the rest of january-may and oct 1-nov the brownings either did not have leadenhall bank credit cards or did not use them and other bahamian fees dollar_figure dollar_figure and dollar_figure 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 expenditures in connection with the preparation of his income_tax returns line 7a of schedule b interest and ordinary dividends of the form_1040 u s individual_income_tax_return sometimes just line 7a asks at any time during the taxable_year did you have an interest in or a signature or other authority over a financial_account in a foreign_country such as a bank account securities account or other financial_account on their joint returns for the brownings answered no to that question termination of the oel program after sbe’s assets were sold on date to a new corporation owned in part by one of petitioner’s sons petitioner and mrs browning retired to florida in date the remaining investments in the hd vest account were sold and on date the asset remaining in the account dollar_figure 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 date respondent commenced an audit of petitioner and mrs browning’s and joint returnsdollar_figure 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 and list of all credit cards foreign or domestic under any name used by you to make purchases or to pay expenses for any purpose including personal or business use during the audit year s 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 date and told him she was aware of 10the record does not indicate when the audit was expanded to encompass petitioner and mrs browning’s taxable years the parties stipulate that each of the returns for those years was timely filed on or about apr of the following year which means that the normal 3-year limitations_period on assessments under sec_6501 for each of those years had expired before the date commencement of the audit the record also does not indicate why respondent failed to obtain from petitioner agreements to extend the 3-year limitations_period on assessments for and pursuant to sec_6501 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 analysis of credit card charges submitted to ms evans see supra note petitioner breaks down the charges not listed as personal as follows dollar_figure is listed as atm charges and dollar_figure as meals entertainment the balance or some 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 sec_274 and the regulations thereunder the analysis of credit card charges also submitted to ms evans--see supra note covered charges to the leadenhall bank credit card from date through date 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 travel including auto and entertainment for which no sec_274 substantiation was provided as stated supra note there are a number of inconsistencies between the and 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 analysis petitioner classified of the charges made after he sold sbe on date as business_expenses opinion i application of sec_6501 a introduction sec_6501 provides generally that the amount of any_tax must be assessed within years of the filing of a return pursuant to sec_6501 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 sec_6501 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 128_tc_37 which holds that an underreporting of taxes attributable to the return preparer’s rather than the taxpayer’s fraud is sufficient to invoke the application of sec_6501 petitioner disagrees with both arguments b proof of fraudulent return 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 rule b 39_tc_988 respondent’s burden_of_proof under sec_6501 is the same as that imposed under sec_6663 which provides for the imposition of a civil_fraud penalty see pennybaker v commissioner tcmemo_1994_303 to satisfy that burden respondent must prove that an underpayment exists and that fraud exists ie that petitioner intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes see 94_tc_654 respondent must prove both of those elements of fraud by clear_and_convincing evidence see 96_tc_858 affd 959_f2d_16 2d cir 92_tc_661 91_tc_874 richardson v commissioner tcmemo_2006_69 affd 509_f3d_736 6th cir the existence of fraud is a question of fact to be resolved from the entire record 67_tc_181 affd without published opinion 578_f2d_1383 8th cir respondent must meet his burden through affirmative evidence because fraud is never imputed or presumed see 99_tc_202 petzoldt v commissioner supra pincite 55_tc_85 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 the entire taxable_year remains open under sec_6501 even if only a part of the deficiency for a year is attributable to fraud 288_f2d_517 2d cir affg tcmemo_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 102_tc_380 underpayment_of_tax a introduction the first element necessary for finding a fraudulent return under sec_6501 or fraud under sec_6663 is an underpayment_of_tax sec_6664 defines an underpayment for purposes of sec_6663 with exceptions not here relevant essentially as a deficiency as defined by sec_6211 as applicable herein that is the amount by which 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 11as an alternative to his constructive receipt argument respondent argues that petitioner is taxable on those amounts under the economic_benefit_doctrine ie p etitioner gained the financial and economic benefit of the oel funds placed in the hd vest account because in addition to his use of them to pay personal credit card bills the funds were set_aside for him and were not subject_to sbe transnational or tlcm creditors the last because tlcm in whose name the account was opened if it existed at all was a shell respondent also invokes the application of sec_83 property transferred in_connection_with_the_performance_of_services to the transfers of funds to the hd vest account stating that sec_83 all but codifies the economic_benefit_doctrine in the compensation context and noting that those funds were either transferable or not subject_to a substantial_risk_of_forfeiture with the result that they are includible in petitioner’s income when earned by petitioner and ‘set aside’ by sbe because we find continued petitioner rejects the factual premises upon which respondent bases his finding of constructive receipt petitioner’s ability to direct messrs carstensen and cafferata with regard to the use of the funds in the account his ability to terminate the account and retrieve the funds in it at any time and 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 court 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 the funds in question we do not address respondent’s alternative arguments admitted existence of a tax_avoidance motive and respected the separate existence of the psc for tax purposes see 929_f2d_1252 8th cir revg 93_tc_572 40_bta_101 remanded 113_f2d_103 9th cir 37_bta_271 estate of cole v commissioner tcmemo_1973_74 for the reasons set forth in section i b c infra we hold that petitioner was in constructive receipt of and therefore understated his income for the audit years by 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 leasing company and reported as wages plus b the employer portions of the social_security and medicare taxes that u s leasing company paid with respect to those reported wages the excess sbe payments plus the earnings capital_gains and investment_income on the hd vest account c application of the constructive_receipt_doctrine under sec_451 an individual taxpayer like petitioner who is on the cash_method_of_accounting must include amounts in gross_income in the taxable_year in which received sec_1_451-2 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 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 intention to withdraw had been given however income is not constructively received if the taxpayer’s control of its receipt is subject_to substantial limitations or restrictions 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 with 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 demonstrated the latter ie his unfettered access to the funds in the account not only by directing the investment of funds placed therein but also in by directing that dollar_figure be returned to sbe and beginning in 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 in essence was owned and controlled by the taxpayer are constructively received by him see 121_tc_308 because the amounts credited to the hd vest account were made available to petitioner so that he was able to draw upon them at any time as required by sec_1_451-2 income_tax regs --which is all that is necessary for a finding of constructive receipt--we conclude that petitioner constructively received and was therefore taxable on all of the money that was transferred or available for transfer to that account under the oel plan ie 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 in the year s of accrual moreover because the various fees and health insurance premiums that u s leasing company paid were paid for petitioner’s benefit ie 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 petitionerdollar_figure 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 dollar_figure for the 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 the excess sbe payments plus 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 i sec_12petitioner 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 amount attributable to payments of health insurance premiums on petitioner’s behalf the viability for federal_income_tax purposes of the purported employer_corporation we do not rest our conclusion herein on the sham nature of transnational or u s leasing company but on the fact that petitioner was in constructive receipt of the sbe payments in excess of the amounts he reported as wages which primarily consisted of funds placed by transnational 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 dollar_figure 13respondent’s argument that the entire oel program must be disregarded as solely tax motivated and therefore without 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 petitioner never consciously complied with the terms of that alleged contract nor was such compliance required by his purported employer petitioner remained president of sbe throughout the audit years working solely for and holding himself out to all third parties as still in the employ of sbe and petitioner retained control_over and by means of the 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 the last of those allegations in order to find that the amounts deposited in the hd vest account constituted income to petitioner on the dates of those deposits the other continued 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 fraudulent intent a introduction the second element that we must consider in determining the application of sec_6501 is petitioner’s or mr continued allegations even if we were to sustain them would presumably result in our disregarding transnational tlcm and u s leasing company for federal tax purposes and in findings that petitioner continued in the employ of sbe and it was sbe that in substance made the deposits in the hd vest account but unless we were to find as we have that petitioner was taxable on those deposits when made the deemed arrangement 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 the employee’s salary in an irrevocable_trust the assets of which remain subject_to claims of the employer’s creditors on a tax-free to the employee basis see revproc_92_64 1992_2_cb_422 g_c_m date in that event respondent’s quarrel would have been with sbe’s deduction of the deposits when made because a rabbi_trust which is in essence a grantor_trust is merely a set-aside of funds by the grantor employer who is entitled to deductions only as the funds are distributed or made available to the beneficiary employee see eg sec_671 448_f3d_661 3d cir sbe’s deduction of its payments to u s leasing company for deposit in the hd vest account for the years in which those payments were made is not at issue herein carstensen’s14 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 eg recklitis v commissioner t c pincite a fraudulent state of mind may be proved by circumstantial evidence because direct proof of the taxpayer’s intent is rarely available see eg id pincite over the years courts have developed a nonexclusive list of factors that demonstrate fraudulent intent those badges of 14as we stated in 128_tc_37 the statute keys the extension to the fraudulent nature of the return not to the identity of the perpetrator of the fraud the special disadvantage to the commissioner in investigating fraudulent_returns is present if the income_tax_return_preparer committed the fraud that caused the taxes on the returns to be understated accordingly taking into account our obligation to construe statutes of limitation strictly in favor of the government we conclude that the limitations_period for assessing the taxpayer’s taxes is extended if the taxes were understated due to fraud of the preparer in allen we specifically noted that the commissioner was seeking to collect only the deficiency in tax from the taxpayer and was not asserting the fraud_penalty thus implying that collection of the latter after expiration of the year limitations_period on assessments would depend upon proof of the taxpayer’s not merely the preparer’s fraud that also appears to be the commissioner’s position see field_service_advisory date fraud include understating income maintaining inadequate records failing to file tax returns implausible or inconsistent explanations of behavior concealment of income or assets failing to cooperate with tax authorities engaging in illegal activities an intent to mislead which may be inferred from a pattern of conduct lack of credibility of the taxpayer’s testimony filing false documents and dealing in cash see 317_us_492 899_f2d_164 2d cir 796_f2d_303 9th cir affg tcmemo_1984_601 recklitis v commissioner supra pincite although no single factor is necessarily sufficient to establish fraud a combination of factors is more likely to constitute persuasive evidence 732_f2d_1459 6th cir affg per curiam tcmemo_1982_603 a taxpayer’s intelligence education and tax expertise are also relevant for purposes of determining fraudulent intent see 79_tc_995 affd 748_f2d_331 6th cir 19_tc_631 b discussion introduction for the 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 concealment of assets intent to mislead lack of credibility of petitioner’s and mr carstensen’s testimony and intentional understatement of income we shall consider each in turn concealing the existence of the leadenhall bank account and associated credit cards as noted supra on line 7a of schedule b of petitioner’s 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 over 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 signature_authority over the leadenhall bank account associated with his and mrs browning’s use of the leadenhall bank credit cards and on the further ground that it was never his intent to hide that money that was down there ie in the bahamas bank account mr carstensen testified that he merely followed his tax preparation software which automatically 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 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 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 date requesting a list of all credit cards foreign or domestic under any name used by petitioner for any purpose 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_security_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 petitioner’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 intent to mislead the revenue_agent the incomplete answer to ms evans’ date 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 date she again asked him to list all the credit cards that petitioner and mrs browning used during the audit years at that time and and again mr carstensen failed to reveal the existence of the leadenhall 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 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 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 chargesdollar_figure 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 15petitioner was apparently unaware of the illusory distinction between his personal and business-related credit card expenditures assuming that he believed he was participating in a valid employee_leasing program the draft employment contract 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 as a result the use of the hd vest funds to pay the credit card charges would under the program constitute a nondeductible use of those funds by petitioner 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 ie there would be no economic impact on petitioner intentional understatement 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 transnational 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 chargesdollar_figure 16we do not find that the inconsistencies between the and analyses of the brownings’ leadenhall bank credit card 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 analysis without referring to the analysis and the passage of years between the two explains those inconsistencies to our satisfaction it is not those relatively few inconsistencies but rather it is the sheer volume of the charges that petitioner believed to be personal his realization that there was no need to make a meaningful accounting of those charges to anyone and his demonstrated lack continued 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 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 a we had asked him if it was his intent to report the deferred_compensation when he withdrew it as taxable_income then why didn’t he report the amounts of personal charges at that time on his tax_return mr carstensen stated that -- 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 the statement quoted by ms evans only that he did not recall making such a statement we find 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 accountdollar_figure that finding was based upon our preliminary finding that petitioner had unrestricted access 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 petitioner knew 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 17as we noted supra amounts that u s leasing company did not deposit in the hd vest account it spent on petitioner’s behalf and therefore those amounts also were constructively received by him to the excess sbe payments during 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 excess sbe payments as a result remain open under sec_6501 and respondent is free to determine deficiencies with respect to any item for those years see lowy v commissioner f 2d pincite colestock v commissioner t c pincite application of sec_6501 to a introduction because the leadenhall bank account and credit cards did not exist until 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 we strongly suspect that had messrs schmidt and drysdale been able to comply with petitioner’s request for an offshore credit card at the time of that request the pattern of tax_evasion that petitioner and mr carstensen exhibited during would have been present during and ie that the restriction of that behavior to was merely fortuitous this court however will not sustain a finding of fraud based upon circumstances which at the most create only suspicion 90_tc_1130 moreover our suspicion is not reinforced by anything that occurred before with respect to the then-pending offshore credit card although petitioner testified that having a credit card 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 date or indeed until the card was issued in 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 usedollar_figure petitioner also testified that he made the decision in 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 at a time when sbe was profitable and in a stronger financial condition therefore we must find clear and 18in 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 to facilitate the payment of many of these fringe_benefits the company can provide you with a credit card the charges of which are paid from abroad by the company emphasis added 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 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 the lack of substance of the oel program petitioner’s noncompliance with any of the terms of the purported contracts the fact that petitioner’s relationship with sbe remained unchanged throughout the period of the oel program the fact that the funds representing the allegedly deferred amounts ended up in a u s brokerage account under petitioner’s control 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 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 he lacked control_over the hd vest account he did not know why mr carstensen was chosen to manage that account and mr cafferata had control_over the hd vest account respondent also points to what he considers petitioner’s incredible testimony regarding his faith in the oel program as a valid income deferral program the absence of financial records contracts or correspondence with any employees of transnational and petitioner’s submission of false and misleading answers to ms evans’ interrogatories during her audit respondent concludes overall as in foxworthy v commissioner tcmemo_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 sham 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 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 to which he transnational and or the u s leasing company were parties his indifference to the actual terms of any such agreement to which 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 is 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 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 returns sbe specifically included as one of its other deductions on line 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 that the 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 ie to what he characterized as the small print and is further proof of the program’s lack of economic_substance as implemented 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 there is no clear_and_convincing evidence that petitioner intended to access the funds in the account ie 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 as unnecessary after the sale of sbe’s business in 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 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 tcmemo_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 taxpayer 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 sec_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 dollar_figure 19another similarity between foxworthy inc v commissioner tcmemo_2009_203 and this case is the manner in which the oel program was launched in both cases the program was initiated by a transfer of funds to the irish employer_corporation and a reduced salary payment to the taxpayer employee in december of the initial implementation year in foxworthy continued 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 the individual taxpayer reported for that entire year only the wages received from the u s leasing company for december petitioner reported total wages of dollar_figure for the initial year of which dollar_figure was received from the u s leasing company for december although that essentially split of petitioner’s taxable wage payments between sbe and the u s leasing company was obviously unrealistic it was not as aggressive as reporting no wages from the taxpayer’s former employer for whom he had worked for months during the year as occurred in foxworthy 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 responding 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 years of petitioner’s participation in the oel program d conclusion respondent has failed to provide clear_and_convincing evidence that petitioner’s returns were fraudulent accordingly the extended limitations_period provided in sec_6501 is inapplicable and respondent’s determinations and adjustments relating to those years are barred ii application of the sec_6663 fraud_penalty for 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 attributable to his and mr carstensen’s concealment of the leadenhall bank account and credit cards we determined that that concealment on petitioner’s 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 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 sec_6663 fraud_penalty on the entire amount of the underpayment for each of the years see sec_6663 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 that in an our estimation is why he and mr carstensen endeavored to hide the leadenhall bank account and credit cards from respondent b conclusion the entire amount of petitioner’s underpayment for each of his years is subject_to the sec_6663 fraud_penalty iii application of the sec_6662 accuracy-related_penalty because we have applied the sec_6663 fraud penalties to petitioner’s total underpayments for the sec_6662 accuracy-related_penalties do not apply for those years see sec_6662 flush language decision will be entered under rule


internal_revenue_service number release date index number 860d ------------------------------ --------------------------------------------- -------------------------------------------- -------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ---------------------- id no ------------- telephone number --------------------- refer reply to cc fip plr-108823-06 date date ------------------------------------------------------------- ------------------------ ------------------------------------------------------------- ------------------------ ------------------------ ------------------------------------------------------------- ------------------------ -------------------------------------------------------------- ------------------------------------------------------------- ------------------------ ------------------------ ------------------------------------------------------------ -------------------------- ------------------------------------------------------------- -------------------------- ------------------------------------------------------------- ------------------------------------------------------------ ------------------------ ------------------------ ------------------------------------------------------------- - legend trust trust trust trust trust trust trust trust trust trust ------- ------------------- ----------------------- ----------------------- ----------------------- -------------------------- --------------------------- ----------------------------------------------------- ------------------------------------------------------------- ------------------------ --------------------- plr-108823-06 trust date date date date date date date year bank corporation consultant firm dear ------------------- this is in reply to a letter requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations for trust sec_1 and collectively the trusts to file elections under sec_860d of the internal_revenue_code to be treated as real_estate mortgage investment conduits remics facts trust sec_1 and were established on or about date trusts and were established on or about date and trusts and were established on or about date the creation of each trust is evidenced by prospectus supplements and pooling and servicing agreements which state the intention of the trust to make a remic election and designate the regular interests and residual interests created by the trusts ---------------------------------------- ------------------------------------ ---------------------- plr-108823-06 at the time of closing bank was appointed as trustee for the trusts and corporation was appointed as tax_matters_person for the trusts as trustee bank is required to sign the remic tax returns as tax_matters_person the pooling and service agreements require corporation to make the remic elections and to prepare sign and file the remic returns on behalf of the trusts corporation engaged consultant to prepare the year remic tax returns for the trusts corporation also engaged firm to perform a technical review of the year remic tax returns and sign as paid tax preparer firm timely filed forms application_for automatic_extension of time to file u s returns for a partnership remic or for certain trusts and forms application_for an additional extension of time to file u s returns for a partnership remic or for certain trusts for the trusts the filing of these extension forms evidence the intention of the trusts to file forms and make remic elections firm reviewed and signed as paid tax preparer the year remic tax returns for the trusts on date and forwarded the tax returns to bank via delivery service on date firm’s transmittal letter instructed bank to sign and file the year remic tax returns bank did not recognize the transmittal as a request for imminent filing and did not take the appropriate action to sign the year remic tax returns and timely file or forward the tax returns to the tax preparer or tax_matters_person for timely filing bank discovered the failure to timely file forms on or about date when it contacted firm to discuss the filing of the year remic tax returns bank promptly signed and filed the year remic tax returns on date furthermore on date firm submitted requests for a reasonable extension of time for the trusts to elect to be treated as remics the bank submitted the affidavit of the vice president of the bank in support of these requested rulings law and analysis sec_860d of the code provides that an entity otherwise meeting the requirements of a remic under sec_860d may elect to be treated as a remic for its first taxable_year by making an election on its return for that year sec_1_860d-1 of the regulations provides that a qualified_entity elects remic status by timely filing a form_1066 u s real_estate_mortgage_investment_conduit income_tax return by the 15th day of the fourth month following the close of the first tax_year of its existence this regulation also provides a reference to sec_301_9100-1 for rules regarding extensions of time for making elections sec_1_860f-4 of the regulations provides that the due_date and any extensions for filing a remic’s annual tax_return are determined as if the remic were a partnership therefore pursuant to sec_1 e a remic’s annual return must be plr-108823-06 filed on or before the 15th day of the fourth month following the close of the taxable_year unless an extension is granted sec_301_9100-1 of the regulations provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the code except e g h and i sec_301_9100-3 through c i of the regulations set forth rules that the internal_revenue_service generally will use to determine whether under the particular facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money conclusion based on the information submitted and representations made we conclude that the trusts have satisfied the requirements for granting a reasonable extension of time to allow them to make elections under sec_860d of the code to be treated as remics for year and subsequent taxable years therefore the trusts are granted a period of time not to exceed days from the date of this letter to submit forms this ruling is limited to the timeliness of making the election under sec_860d of the code this ruling does not relieve the trusts from any penalties they may owe as a result of their failure_to_file their federal_income_tax return on time this ruling’s application is limited to the facts representations code sections and regulations cited herein while this office has not verified any of the material submitted in support of the request_for_ruling it is subject_to verification on examination no opinion is expressed with regard to whether the trusts qualify as remics under subchapter_m part i of the code no opinion is expressed with regard to whether the trusts’ tax_liability is not lower in the aggregate for all years to which the election applies than such tax_liability would have been if the election had been timely made taking into account the time_value_of_money plr-108823-06 upon audit of the federal_income_tax returns involved the director’s office will determine the trusts’ tax_liability for the years involved if the director’s office determines that the trusts’ liability is lower that office will determine the federal_income_tax effect a copy of this letter is being forwarded to the service_center where the trusts file their returns with instructions that although their forms were not timely filed the trusts are treated as having made timely elections under sec_860d of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayers requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely _________ s __________________ elizabeth a handler branch chief branch office of associate chief_counsel financial institutions and products enclosures copy of this letter copy for sec_6110 purposes


of f i c e of c h i ef c ou n sel number info release date conex-121514-09 department of the treasury i n t e r n al r e v e n u e s e r v i c e w ashington d c date uil the honorable earl blumenauer u s house of representatives washington dc dear mr blumenauer this letter responds to your inquiry dated date you wrote on behalf of your constituent -------------------------- ----------------and other taxpayers may not be able to complete a like-kind_exchange under sec_1031 of the internal_revenue_code code due to the bankruptcy of the qualified_intermediary qi used to facilitate the like-kind_exchange sec_1031 of the code permits a taxpayer to defer the recognition of gain_or_loss on the like-kind_exchange of property to qualify for deferral a taxpayer must obtain replacement_property by the earlier of days after the date the taxpayer transfers the relinquished_property or the due_date determined by extension of the taxpayer’s federal_income_tax return for the year in which the transfer of the relinquished_property occurs sec_1031 of the code regulations allow a taxpayer to exchange property through a third party facilitator a qi when using a qi a taxpayer will generally transfer its relinquished_property to the qi who will sell the property and use the proceeds of the sale to purchase replacement_property for the taxpayer if the taxpayer receives the replacement_property within the period prescribed in sec_1031 of the code and meets the other requirements of sec_1031 the taxpayer will not recognize gain_or_loss on the like-kind_exchange however if the qi fails to complete the transactions the taxpayer cannot satisfy the requirements for deferral under sec_1031 in the situation ----------------describes the exchanging taxpayer has sold its property but the qi has failed to complete the sec_1031 exchange by purchasing replacement_property the taxpayer cannot defer gain conex-121514-09 on the sale under sec_1031 even though the qi has not returned the proceeds of the sale to the taxpayer we appreciate the hardship caused by failed like-kind_exchanges regrettably the day period for reinvesting proceeds in a like-kind_exchange is prescribed by statute and cannot be extended by the irs a modification of the 180-day requirement would require legislation we understand that a bill pending in the house of representatives h_r would suspend the 180-day period in the case of bankrupt qis we are independently coordinating with the office of tax policy at the treasury_department to determine whether we can provide relief through published guidance or other administrative means i hope this information is helpful if we can assist you further please contact me or ------ ---------------------at --------------------- sincerely george j blaine associate chief_counsel income_tax accounting