tcmemo_2013_203 united_states tax_court stanley l alexander and ruth a alexander et al petitioners v commissioner of internal revenue respondent docket nos filed date david c greer and robert h hishon for petitioners richard j hassebrock timothy s sinnott david s weiner abigail raines and archana ravindranath for respondent cases of the following petitioners are consolidated herewith ruth a alexander docket no stanley l alexander docket no stanley l alexander docket no and fountain skin care cosmetic plastic reconstructive surgery inc docket no contents findings_of_fact dr and mrs stanley alexander fountain skin care cosmetic plastic reconstructive surgery inc stanley l alexander m d inc anthony kritt the cincinnati vein clinic the midwest vein center kenneth reiserer galen co da vinci group offshore employee_leasing transaction nationwide executive staff leasing inc professional leasing services inc montrain services inc international advisory services llc rosmol ruritania london capital associated_enterprises ltd blenheim fiduciary group ltd elfin trust group returns opinion i burden_of_proof ii deficiencies of dr and mrs alexander a statute_of_limitations b underpayment of wage income to dr alexander constructive receipt of money transferred into the deferred_compensation plan sec_402 and sec_83 economic_substance_doctrine c whether dr and mrs alexander are entitled to schedule f farming_loss deductions for and substantiation of deductions activity engaged in for profit d whether dr and mrs alexander are entitled to unsubstantiated schedule a mortgage interest deductions for and iii penalties and additions to tax for dr and mrs alexander a sec_6663 fraud penalties for the underpayments of tax associated with the oel transaction underpayment_of_tax fraudulent intent a analysis of fraudulent intent b badges_of_fraud i consistent pattern of underreporting ii lack of credibility of the taxpayer’s testimony iii concealment of income or assets iv dr and mrs alexander’s failure to maintain adequate_records pertaining to their participation in the oel transaction and to fully cooperate in the examination of their returns or in the litigation v failure_to_file a return for vi dr and mrs alexander’s attempts at distancing themselves from the oel transaction conclusion b sec_6662 penalty for underpayment_of_tax substantial_understatement reasonable_cause under sec_6664 c sec_6651 fraudulent_failure_to_file addition_to_tax for d sec_6651 and sec_6654 additions to tax for sec_6651 sec_6654 e sec_6651 failure_to_file addition_to_tax for and iv whether mrs alexander is entitled to innocent spouse relief under sec_6015 v fountain’s deficiencies a dr alexander was an employee of fountain during the oel transaction employment status relief under sec_530 b fountain is liable for employment_taxes with respect to dr alexander’s services during the taxable quarters ended date through date vi fountain’s penalties and additions to tax a fraud_penalty under sec_6663 b penalty under sec_6662 c sec_6656 penalty memorandum findings_of_fact and opinion goeke judge dr stanley alexander a plastic surgeon engaged in a transaction under which he used an offshore entity to purportedly lease back his services to his medical practice company in ohio ostensibly to facilitate a deferred retirement program in which a large part of his income rested untaxed his participation in this plan is the principal reason for respondent’s determinations of income_tax deficiencies against dr alexander and his wife ruth a alexander determinations of deficiencies against his medical practice company for employment_tax and determinations against all consolidated petitioners for various additions to tax and penalties including some for fraud unless 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 respondent determined deficiencies in and additions to tax with respect to petitioners’ federal_income_tax as follows docket no 7907-06--stanley l alexander ruth a alexander year deficiency additions to tax penalties sec_6651 sec_6662 sec_6663 dollar_figure dollar_figure dollar_figure dollar_figure big_number dollar_figure dollar_figure dollar_figure big_number dollar_figure dollar_figure dollar_figure docket no 7908-06--ruth a alexander year deficiency sec_6651 sec_6662 sec_6663 dollar_figure dollar_figure dollar_figure dollar_figure additions to tax penalties docket no 7909-06--stanley l alexander additions to tax penalties year deficiency sec_6651 sec_6662 sec_6663 dollar_figure dollar_figure dollar_figure dollar_figure docket no 7910-06--stanley l alexander year deficiency sec_6651 sec_6651 sec_6664 dollar_figure dollar_figure dollar_figure additions to tax penalties the addition_to_tax under sec_6651 remains to be computed on of the underpayment per month for a maximum of months not to exceed in the aggregate docket no 14047-07--fountain skin care cosmetic plastic reconstructive surgery inc quarter ended oasdi hospital insurance_income tax withholding penalty sec_6663 penalty sec_6656 penalty sec_6662 dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- -0- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- -0- -0- -0- dollar_figure dollar_figure dollar_figure dollar_figure after concessions the issues for decision are petitioners have conceded the following issues a charitable_contribution_deduction of dollar_figure claimed by dr and mrs alexander on continued whether the statutory period for assessment of income_tax has expired with respect to the taxable years and for dr and mrs alexander we hold that it has not continued schedule a itemized_deductions for the taxable_year is disallowed a dollar_figure loss reported on line of the alexanders’ form1040 u s individual_income_tax_return is disallowed a capital_loss deduction of dollar_figure on the alexanders’ and schedules d capital_gain and losses is disallowed dr alexander is liable for rental income of dollar_figure reported on schedule e supplemental income and loss and allowed schedule e expenses of dollar_figure for the taxable_year dr alexander is liable for a dollar_figure penalty for an early withdrawal of savings for the taxable_year the alexanders are allowed a schedule e partnership loss related to miami valley surgical of dollar_figure and the inclusion of dollar_figure in schedule e partnership income for mrs alexander related to the same partnership the determination to decrease dollar_figure of income reported on schedule c profit and loss from business for the taxable_year the alexanders are liable for income_tax on dollar_figure of unreported capital_gain income they received during the taxable_year and respondent properly disallowed a dollar_figure capital_loss deduction they claimed on their federal_income_tax return the alexanders are liable for income_tax on dollar_figure in additional wages paid_by fountain skin care cosmetic plastic reconstructive surgery inc fountain to ruth alexander for the taxable_year dr and mrs alexander are liable for additional self-employment_tax of dollar_figure and entitled to a corresponding self-employment_tax deduction of dollar_figure for the taxable_year the alexanders are liable for additions to tax pursuant to sec_6651 for the years the alexanders are liable for tax on the following additions to income a dollar_figure state_income_tax refund in b dividend income in the taxable years and of dollar_figure dollar_figure and dollar_figure respectively c interest_income for the taxable years and of dollar_figure and dollar_figure respectively d capital_gain of dollar_figure for the taxable_year e dollar_figure in farm income for the taxable_year and f dollar_figure in wage income received from fountain but paid through professional leasing services inc pls for the taxable_year petitioners also concede determinations respondent has made in their favor whether dr and mrs alexander are liable for income_tax for dr alexander’s unreported wage income of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for the taxable years and respectively we hold that they are liable whether dr and mrs alexander are entitled to deductions claimed for alleged farm-related expenses totaling dollar_figure and dollar_figure for the taxable_year sec_2001 and sec_2002 respectively we hold that they are not whether dr and mrs alexander are entitled to various deductions claimed on schedule a including mortgage interest for the year sec_2001 and sec_2002 we hold that they are not whether dr and mrs alexander are liable for fraud penalties pursuant to sec_6663 for the taxable years through we hold that they are not whether dr and mrs alexander are liable for accuracy-related_penalties pursuant to sec_6662 for the taxable years and and whether fountain is liable for accuracy-related_penalties pursuant to sec_6662 for the taxable quarters at issue during and we hold that they are liable whether anthony i kritt and kenneth reiserer are promoters and if so whether petitioners can rely in good_faith on any_tax advice provided by messrs kritt and or reiserer in furtherance of a reasonable_cause and good-faith defense to the penalties under sec_6663 and or a we hold that they were promoters and cannot be relied upon in good_faith whether dr alexander is liable for a fraudulent_failure_to_file addition_to_tax pursuant to sec_6651 for the taxable_year we hold that he is not whether dr alexander is liable for an addition_to_tax pursuant to sec_6651 for taxable_year we hold that he is whether dr alexander is liable for an addition_to_tax pursuant to sec_6654 for the taxable_year we hold that he is whether dr and mrs alexander are liable for additions to tax pursuant to sec_6651 for the taxable_year sec_2002 and we hold that they are whether mrs alexander is entitled to relief from joint_and_several_liability for the taxable years through pursuant to sec_6015 c and or f we hold that she is not whether dr alexander was an employee of fountain during the quarters ended date through and including date we hold that he was an employee of fountain whether fountain is entitled to relief under the revenue act of pub_l_no sec_530 stat pincite as amended sec_530 with respect to dr alexander for the quarters ended date through and including date we hold that fountain is not entitled to relief under sec_530 whether fountain is liable for employment_taxes on the compensation it paid for dr alexander’s services during the taxable quarters ended date through and including date we hold that fountain is liable whether fountain is liable for fraud penalties pursuant to sec_6663 for the quarters ended date through and including date we hold that fountain is not liable whether fountain is liable for penalties pursuant to sec_6662 for the quarters ended date through date we hold that fountain is liable and whether fountain is liable for penalties pursuant to sec_6656 we hold that fountain is findings_of_fact some of the facts have been stipulated and are so found dr and mrs alexander resided in ohio when they filed their respective petitions fountain operated principally out of centerville ohio when its petition was filed dr and mrs stanley alexander dr alexander was born in and married mrs alexander in and they have a daughter who was born in dr alexander graduated from otterbein college in ohio in with a bachelor’s degree with distinction in chemistry and biology and a minor in mathematics dr alexander attended the ohio state university college of medicine and graduated in upon graduating from medical school dr alexander did a residency at university hospital at duke university north carolina did a fellowship at the national heart lung and blood institute in bethesda maryland did research in cardiovascular surgery at the ohio state university and in completed his general surgery residency and did a two-year fellowship in plastic and reconstructive surgery at the university of missouri in columbia dr alexander served as an officer and physician in the u s air force at the time dr alexander was on active_duty in san antonio texas he was a professor of plastic surgery at the air force medical training center dr alexander was honorably discharged from the air force in with the rank of lieutenant colonel mrs alexander received a bachelor’s degree in fine arts from wright state university in dayton ohio in addition mrs alexander took accounting and computer programming courses at sinclair community college during the late 1970s following his retirement from the military dr alexander purchased an acre farm during the years in issue five horses were on the farm the horses were never shown or sold by either dr or mrs alexander over acres of the farm consisted of either corn or beans planted and harvested by third parties mrs alexander spent substantial time daily working with the horses on the farm and she and dr alexander also raised hay on the farm mrs alexander did not keep regular records of the farm activity for through dr and mrs alexander attached schedules f profit or loss from farming to their form sec_1040 reporting farming activity as follows gross_receipts expenses depreciation other expenses net profit loss dollar_figure dollar_figure dollar_figure dollar_figure -0- -0- -0- -0- -0- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number for the farming activity expenses claimed the alexanders did not provide any substantiation mrs alexander provided dr alexander the information regarding the farm and rental activities for purposes of preparing their joint federal_income_tax returns fountain skin care cosmetic plastic reconstructive surgery inc fountain an s_corporation was incorporated in the state of ohio on date dr alexander is and has always been the sole shareholder and officer of fountain fountain’s primary place of business was in centerville ohio when fountain was established all employees of stanley l alexander m d inc slamd automatically became employees of fountain without any change in their job descriptions or duties dr alexander continued to perform the same supervisory duties over the staff at fountain as he had at slamd dr alexander had the right to hire and fire fountain’s employees fountain had four employees dr alexander elizabeth selm a registered nurse from through mary jo lambeth classified as a biller which position she continues to hold and mrs alexander dr alexander was the sole physician working at fountain dr alexander personally kept track of his basis in fountain during the years through mrs alexander worked part time at fountain and she continued to work there at the time of trial the wages she received from fountain from through were reported on her forms w-2 wage and tax statement and on her returns mrs alexander also had signatory authority on fountain’s bank account and has signed checks drawn on that account mrs alexander regularly signed checks from fountain’s bank accounts_payable to professional leasing services inc pls a nevada corporation pls was owned by anthony kritt an attorney and certified_public_accountant fountain had checking accounts with lebanon citizens national bank and liberty mutual_savings_bank dr alexander did not have a bank account in his name during the years in issue and up to the present mrs alexander had a bank account with lebanon citizens national bank both mrs alexander and sarah martens mrs alexander’s sister had signatory authority over the ruth anne alexander revocable trust’s raart bank account raart was created in date as a grantor_trust by mrs alexander in ms martens resigned and mrs alexander became solely responsible for maintaining the books_and_records for raart stanley l alexander m d inc after leaving the military in dr alexander opened a business as a sole_proprietorship providing plastic and reconstructive surgery services by dr alexander incorporated slamd his plastic and reconstructive surgery business dr alexander was the sole shareholder officer and doctor of slamd at all times slamd treated dr alexander as an employee dr alexander earned a salary of dollar_figure from slamd in mrs alexander testified that her monthly income of dollar_figure was paid_by dr alexander donald hoke a certified_public_accountant prepared some of slamd’s corporate tax returns mrs alexander did some recordkeeping for slamd and occasionally provided mr hoke with the information necessary to prepare slamd’s tax returns mrs alexander was the primary contact for mr hoke at slamd mr hoke prepared slamd’s form_1120s u s income_tax return for an s_corporation dr alexander signed all federal tax returns filed on behalf of slamd dr alexander had overall supervision of employees who worked at slamd the office space in centerville ohio where slamd was run was owned by raart beginning in dr and mrs alexander were named as the original trustees in the trust agreement drafted by william montague an estate_planning attorney who assisted the alexanders in the formation of their trusts in date dr and mrs alexander removed themselves as trustees from raart and appointed ms martens the younger sister of mrs alexander as trustee through a memorandum of trust prepared by mr montague slamd owed delinquent employment_taxes for april august october and date and as a result respondent seized funds from slamd’s bank accounts the corporation was dissolved by the state of ohio in anthony kritt mr kritt had a degree in accounting and became a certified_public_accountant in but he stopped practicing accounting in he went to law school and he became an attorney in mr kritt was not a financial investment professional and never held a license to sell securities or offer investment advice in addition mr kritt does not hold a medical license or any kind of formal training or education in medicine or health care mr kritt did not prepare the alexanders’ tax returns before the years in issue dr ronald bush a colleague and future business partner of dr alexander introduced mr kritt to david tedder an attorney with a firm in florida while visiting mr tedder in florida mr kritt met kenneth reiserer an attorney at mr tedder’s law firm the cincinnati vein clinic the midwest vein center dr alexander and dr ronald bush an ohio vascular surgeon whom dr alexander first met in the mid-1990s became business partners in date at the cincinnati vein clinic the midwest vein center cvc dr alexander nesl and or pls allegedly held the exclusive right to lease dr alexander’s services during the period that he worked at cvc however there were no signed agreements between cvc and or midwest vein center and either nesl or pls to lease dr alexander’s services kenneth reiserer kenneth reiserer is an attorney who had his own law firm in seattle washington during the mid-1990s his clients participated in offshore employment leasing oel transactions the first time dr alexander met mr reiserer was at an date galen co galen seminar in the bahamas before the galen seminar mr reiserer never did any legal work for dr alexander however mr reiserer provided dr alexander with documentation about the oel transaction at the date galen seminar in the bahamas galen co da vinci group galen was a side business of dr bush that put on seminars in the bahamas in the mid-1990s primarily intended for medical professionals the seminars featured presentations on topics including captive insurance_income deferral programs and oel transactions dr bush was in charge of the overall organization of galen’s seminars galen later became known as da vinci group but no substantive changes came as part of the name change dr bush asked mr kritt to attend a galen seminar at the initial seminar mr kritt learned about the oel transaction from mr reiserer dr bush asked mr kritt to make presentations at future seminars which he did on several occasions mr kritt also made presentations on oel transactions at seminars in the united_states through his presentations at the galen seminars mr kritt obtained new clients including four individuals who set up the oel transactions mr kritt’s promotional materials described the tax benefits associated with the oel transactions in addition to mr kritt mr reiserer and ken wheeler a tax attorney who practiced in florida for approximately years including years with the internal_revenue_service irs made presentations at galen seminars mr wheeler’s relationship with galen consisted solely of speaking at several seminars regarding tax planning and the legal requirements associated with offshore financial activity mr wheeler never made presentations or entered into any agreements to participate in the oel program it was mr wheeler’s understanding that mr reiserer was the architect of the oel transaction offshore employee_leasing transaction dr alexander and dr bush discussed the concept of an oel transaction in the early 1990s dr bush was a client of mr kritt dr bush was knowledgeable about how the oel transaction operated and had also participated in an oel transaction subsequently dr bush invited dr alexander to a seminar in the bahamas that included an oel presentation mrs alexander attended the bahamas seminar with dr alexander in date and both attended a presentation made by mr reiserer on oel transactions after leaving the bahamas in date dr alexander had extensive discussions with mr kritt dr bush and mr reiserer about the oel transactions before agreeing to go forward with such a transaction before participating in the oel transaction dr alexander had never conducted any business with or worked for an offshore entity after the seminar dr alexander paid dollar_figure through slamd to messrs kritt and reiserer through a domestic leasing company called nationwide executive staff leasing inc nesl to start the oel transaction messrs kritt and reiserer structured implemented and managed the alexanders’ oel transaction mr kritt managed and made all contacts with the offshore entities involved with dr alexander’s oel transaction on his behalf mr kritt explained in detail to dr alexander how the oel transaction worked dr and mrs alexander agreed to retain mr kritt’s services to implement an oel transaction in date dr alexander began participation in the oel transaction in date the following steps were involved in dr alexander’s oel transaction dr alexander signed a contract with an oel company granting that company exclusive right to offer his services to an employer in exchange for wages and additional compensation upon retirement dr alexander’s services were assigned to a u s employee_leasing company by the oel company dr alexander’s corporation signed a contract with a domestic u s leasing company for the right to use dr alexander’s services in exchange for an agreed-upon fee the domestic leasing company paid a portion of the funds received from dr alexander’s corporation as wages the domestic leasing company paid the remainder of the funds received from dr alexander’s corporation to the offshore leasing company after withholding a fee and the offshore leasing company withheld its fee and then transferred the funds to other offshore entities which after taking their fees would eventually place the funds into an offshore_account for dr alexander dr alexander continued to participate in the oel program through in date mr kritt became aware of notice_2003_22 2003_1_cb_851 and had a discussion with dr alexander explaining that the notice indicated that the irs considered the oel program abusive mr kritt indicated potential penalties that dr alexander could face if he continued with the oel transaction although mr kritt made dr alexander aware of notice_2003_22 supra dr alexander never read it however mr kritt assured dr alexander that in his opinion the program was legitimate and did not involve any aspects that should invalidate it dr alexander relied upon the opinion of mr kritt blenheim elfin the company that helped facilitate loans in dr alexander’s oel transaction informed mr kritt in an email dated date that the irs was likely to challenge the legitimacy of the loans obtained through an oel transaction and that the irs would find that any such challenge would most likely be an insurmountable uphill battle the record is unclear as to whether dr alexander saw this correspondence in the irs initiated a criminal investigation of mr kritt related to his involvement with oel transactions and seized a number of records including some related to dr alexander’s oel transaction mr kritt was charged with criminal_tax_evasion and conspiracy as a result of his involvement with oel transactions however after a trial which took place after the years in issue in these cases mr kritt was found not guilty of any criminal misconduct in connection with his involvement in oel transactions nationwide executive staff leasing inc nationwide executive staff leasing inc nesl a nevada corporation was owned by mr kritt and by mr reiserer mr kritt was an officer and held the title of vice president nesl was set up solely to facilitate messrs reiserer and kritt’s clients’ participation in oel transactions nesl acquired rights to the services of other oel clients and leased those rights to clients’ businesses for a fee as part of oel transactions the fee was split evenly between messrs kritt and reiserer who subtracted the funds paid to nesl by fountain mr kritt had access to all financial records maintained by nesl on behalf of dr alexander despite the contractual terms which required that dr alexander be paid a minimum wage of dollar_figure in both and nesl paid dr alexander only dollar_figure and dollar_figure respectively when mr reiserer became aware that nesl had fallen behind on its obligations to pay dr alexander’s wages mr reiserer suggested that mr kritt could have dollar_figure recently sent offshore returned to nesl a disagreement arose between mr kritt and mr reiserer as a result dr alexander issued a letter drafted by mr kritt to mr reiserer dated date terminating fountain’s agreement with nesl as a result mr reiserer faxed a settlement agreement terminating the relationship dated date to dr alexander and mr kritt professional leasing services inc pls was incorporated on date in nevada pls was owned by mr kritt who was also its sole officer following the end of mr kritt and mr reiserer’s professional relationship mr kritt formed pls to replace nesl as the domestic employee_leasing company component in oel transactions with his clients mr kritt maintained all books_and_records for pls including ledgers and spreadsheets reflecting oel transactions on these ledgers and spreadsheets there was a column titled salary which represented the funds transferred to dr alexander as wages out of the amount of funds originally transferred from fountain to pls pls kept of the fees paid_by fountain after pls replaced nesl as the domestic leasing company in dr alexander’s oel transaction montrain services inc montrain services inc montrain was an entity formed in ireland which obtained the rights to services provided by u s citizens and then leased them back to businesses in the united_states neither dr alexander nor mr kritt considered any offshore leasing company other than montrain when dr alexander initially agreed to participate in the oel transaction the contract between dr alexander and montrain was a pro forma document used by messrs kritt and reiserer for all of their oel clients at the time dr alexander agreed to participate in the oel transaction he was aware that he would continue to work for fountain as he had previously the terms of his contract with montrain purportedly restricted access to his offshore_account until his retirement dr alexander repatriated his transferred funds to raart through a line of credit with an offshore entity the remainder was to be put aside for dr alexander’s benefit although he knew he could access the funds before his retirement if necessary although the contract signed with montrain prohibited the borrowing of funds from dr alexander’s offshore_account dr alexander was aware at the time he agreed to participate in the oel transaction that montrain was going to assign the rights to his services to nesl the contract between montrain and nesl was another pro forma document used by messrs kritt and reiserer for all of their oel clients dr alexander did not receive a copy of this contract fees were subtracted from the funds paid from fountain to either nesl or pls and then transferred offshore dr alexander and mr kritt terminated their agreement with montrain in date dr alexander understood that terminating his agreement was a mere formality because the funds would remain in place and the oel transaction retained the same terms but with a different offshore company on date mr reiserer sent a letter to joe kenney at montrain transmitting a copy of a letter by dr alexander terminating the agreement between dr alexander and montrain effective date after he terminated his contract with montrain dr alexander’s day-to-day duties at fountain did not change international advisory services llc international advisory services limited_liability co ialb a hungarian company was set up to be an employee_leasing company designed to obtain the rights to the services of u s citizens and lease those services back to companies and corporations in the united_states dr alexander never visited hungary or ialb’s offices mr kritt was aware that ialb replaced montrain in his oel transaction as of the effective date of the employment contract dr alexander signed with ialb he knew that ialb would be assigning the rights to his services to pls pursuant to the terms of the contract between ialb and dr alexander ialb would have sole discretion to decide whether to pay any money to dr alexander as part of a postretirement income program however ialb ceded control_over dr alexander’s retirement benefits in its agreement with rosmol commercial co ltd rosmol dr alexander’s contract also required ialb to provide dr alexander with an annual report on the fund balance in his offshore_account ialb failed to do so in addition the contract provided that dr alexander was not allowed to borrow moneys from his offshore_account rosmol rosmol was a cyprus corporation set up as a conduit to assist individuals participating in oel transactions from offshore employee companies to ruritania the purpose of rosmol in the oel transaction was to allow montrain to avoid irish taxes on the funds that it received in the oel transaction although dr alexander agreed for rosmol to be a party to the oel transaction he never visited cyprus nor had any communications with anyone from rosmol ruritania ruritania was an entity formed in the isle of jersey to aid individuals wanting to participate in oel transactions dr alexander never visited the isle of jersey or communicated with ruritania dr alexander knew that ruritania’s role in the oel transaction was to be the repository of his offshore funds ruritania was the name of dr alexander’s offshore bank account dr alexander had control_over his funds and investments made with the funds held in ruritania before dr alexander’s participation in the oel transaction he understood that he could have access to his offshore funds through loans the transaction with associated_enterprises ltd discussed infra section is an example of the use of a credit line to finance access to the offshore funds dr alexander could also cause investments to be made in mr kritt at the request of dr alexander directed that dollar_figure in his offshore_account ruritania be invested in ecotyre technologies inc ecotyre london capital london capital was an investment firm in london england london capital met with clients who participated in oel transactions to discuss their investment strategies and the disposition of their portfolios london capital provided investment advice to dr alexander regarding the funds he held in his offshore_account and actively managed his account london capital provided mr kritt with copies of dr alexander’s offshore_account investment statements associated_enterprises ltd associated_enterprises ltd ael was an offshore shell company organized under the laws of the isle of man it existed to create loans for clients involved with oel transactions dr and mrs alexander did not have any direct contact with anyone at ael all communication related to ael was through mr kritt mr kritt made arrangements to document the alleged line of credit to raart from ael for dr and mrs alexander although mrs alexander also filled out some of the documentation to finalize specific transactions the initial request to obtain a line of credit with ael was from dr and mrs alexander subsequently the line of credit was taken out in the name of raart however ael’s internal documentation including references to dr alexander’s passport reflects that dr alexander was the sole party to the agreement mr kritt drafted the secured revolving line of credit agreement and promissory note between raart and ael both of which were dated date and signed by peter howe managing director of ael on behalf of ael and ms martens mrs alexander’s younger sister and a trustee of raart ms martens had no duties as a trustee of raart but she was named as trustee by dr and mrs alexander mrs alexander was responsible for obtaining ms martens’ signature on documents related to raart ms martens suffered from serious health problems and died in blenheim fiduciary group ltd elfin trust group elfin trust group elfin was an entity headquartered on the isle of guernsey and wholly owned by the blenheim fiduciary group blenheim blenheim is an entity also headquartered on the isle of guernsey the two entities share the same address elfin is the former name of blenheim which changed its name sometime in the late 1990s or early 2000s elfin’s promotional materials stated that it would not accept new clients without receiving a due diligence declaration however dr alexander became a client of elfin more than six months before providing a due diligence declaration blenheim offered services to prepare paperwork and file registration documentation to establish businesses or other entities in various foreign countries although blenheim did not have any of its own employees in any foreign countries blenheim acted as the registered officer for dozens of companies based on the isle of guernsey blenheim’s promotional materials contained a section on loans to beneficiaries which made both mr kritt and dr alexander aware of the possibility of obtaining funds from the offshore_account set up as part of the oel transaction before dr alexander’s becoming a participant in the transaction during the irs audit of dr and mrs alexander’s returns the irs obtained documents through the tax_information_exchange_agreement u s -guernsey date tax_treaties cch para u s -guernsey agreement pursuant to the convention for the avoidance of double_taxation and the prevention of fiscal evasion with respect to taxes on income and on capital_gains u s -u k art date tax_treaties cch para big_number u s -u k convention returns dr alexander prepared the joint and form sec_1040 for himself and mrs alexander neither dr alexander nor mrs alexander filed a tax_return for dr alexander reported wage income on their form sec_1040 for of dollar_figure dollar_figure dollar_figure and dollar_figure respectively from nesl despite having an offshore_account dr alexander did not attach a schedule b interest and ordinary dividends to his or tax_return on hi sec_2001 tax_return despite having an offshore_account dr alexander checked both boxes on the return indicating that he did not have an interest in an offshore_account however dr alexander attached a form_8886 reportable_transaction_disclosure_statement prepared by mr kritt to his form_1040 for describing the oel transaction dr and mrs alexander attached schedules f to their form sec_1040 for reflecting income and expenses from a farming activity by mrs alexander mr kritt advised dr alexander that he had an income_tax return filing requirement for for and dr alexander requested extensions of time to file but he did not file the returns until several months after the extended date in the case of the return the return was not filed until over a year after the extended dates mrs alexander did not review the and tax returns and simply relied upon her husband and his advisers mr kritt also did not review the returns before they were filed a form_872 consent to extend the time to assess tax for years ended date and was executed by dr and mrs alexander on date extending the assessment_period through date a form ss-10 consent to extend the time to assess employment_taxes for the periods ended january through date was executed by mr kritt on behalf of fountain on date extending the assessment_period through date mrs alexander reported on her form_8857 request for innocent spouse relief filed date that she continued to operate her farming activity on her form_8857 mrs alexander stated that her monthly income was dollar_figure and that her monthly income was received from dr alexander she claimed monthly expenses of dollar_figure but no gross_receipts from the farming activity i burden_of_proof opinion the commissioner’s determinations in the notice_of_deficiency are presumed correct and the taxpayer bears the burden of proving by a preponderance_of_the_evidence that the determinations of the commissioner are incorrect rule a 290_us_111 however sec_7491 provides that subject_to certain limitations where a taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability for tax the burden_of_proof shifts from the taxpayer to the commissioner as to the factual issue sec_7491 sets forth requirements the taxpayer must meet before the burden_of_proof will shift petitioners have not met these requirements in these cases ii deficiencies of dr and mrs alexander a statute_of_limitations tax generally must be assessed within three years after the return was filed sec_6501 the alexanders assert the limitations_period for assessment of income taxes has expired with respect to dr and mrs alexander’s taxable years and for and dr and mrs alexander executed a form_872 extending the assessment_period through date dr and mrs alexander did not file their return until date respondent mailed a notice_of_deficiency on date less than three years after dr and mrs alexander filed their return and before the extended assessment_period for the and returns expired therefore the limitation periods have not run for assessing tax for and see sec_6503 b underpayment of wage income to dr alexander respondent determined dr alexander had unreported wage income of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for and respectively dr alexander contends that the unreported wages were part of a nonqualified_deferred_compensation_plan designed to defer the receipt and taxation of the wages received by dr alexander respondent contends that dr and mrs alexander constructively received the money placed in the offshore_account when it was transferred into the account respondent additionally contends that the oel arrangement is a sham and should be disregarded under the economic_substance_doctrine as a transaction to avoid federal taxation constructive receipt of money transferred into the deferred_compensation plan the alexanders’ argument that the oel transactions were part of a deferred_compensation plan fails because the alleged plan violates the doctrine_of constructive receipt income will be deemed to be constructively received by a taxpayer in the taxable_year in 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 sec_1_451-2 income_tax regs only when a taxpayer’s control of the receipt of income is subject_to substantial limitations will it not be deemed to have been constructively received see id the constructive_receipt_doctrine requires a taxpayer who is on the cash_method_of_accounting to recognize income when the taxpayer has an unqualified vested right to receive immediate payment of income see palmer v commissioner tcmemo_2000_228 under the constructive_receipt_doctrine a taxpayer may not deliberately turn his back on income otherwise available see 96_tc_814 petitioners argue the contracts restrict dr alexander’s access to the funds until he reaches the age of or retires however the evidence shows that he had access to and control_over the funds at the time the money was placed into the ruritania account he was able to give investment directives as evidenced by the investment in ecotyre dr alexander also accessed the funds through a line of credit between ael and raart though the evidence does not establish that dr alexander understood that the line of credit was a sham the record reflects that the money received in the form of a line of credit from ael actually came from the ruritania account and was not a commercial loan as the alexanders contend consequently we conclude that the money fountain transferred as part of the oel transactions was constructively received by dr and mrs alexander in the years it was transferred and therefore is includable in dr and mrs alexander’s income for those years under sec_451 sec_402 and sec_83 under sec_402 or sec_83 funds set_aside by an employer for services performed by an employee are income to the employee only when the funds are not transferable or there is a substantial_risk_of_forfeiture will there be no income to the employee dr alexander could transfer these funds through the use of a line of credit therefore the funds paid_by fountain for the services of dr alexander for the years were income to dr alexander in the year they were paid economic_substance_doctrine in determining whether to attribute income to a taxpayer the code evaluates substance over form asking not what the surface of a transaction suggests but what the economic realities of the transaction show 509_f3d_736 6th cir aff’g tcmemo_2006_69 see 324_us_331 income is taxed to the person who earns it and enjoys the benefit of it when paid see 311_us_112 281_us_376 cf 356_us_260 279_us_716 moreover the taxpayer who earns income may not avoid taxation through anticipatory arrangements no matter how clever or subtle 281_us_111 in these cases there is no economic_substance outside the avoidance of tax no substantial changes were made to the business practices of fountain and dr alexander still maintained control_over the funds fountain paid the leasing agency for his services the economic reality of this situation is that dr alexander received and controlled the funds paid to the leasing agencies for his services the alexanders contend the transaction was motivated by a desire to create a retirement fund for dr alexander however the evidence shows that the motivation behind the transaction was the avoidance of tax and outside of the tax consequences there was no meaningful economic_substance to the transaction mr kritt testified that but for the tax benefits associated with the oel transaction it would not be cost effective for dr and mrs alexander or anyone else to participate in the transaction additionally there was no change in the way fountain or dr alexander conducted business aside from the payment to the leasing agency the only substantive changes that resulted from this activity were the taxable_income dr and mrs alexander reported and the amount of employment_tax fountain paid as evidenced by the constructive receipt of the money in the offshore_account dr and mrs alexander had control of the funds paid to the leasing agencies the substance of this transaction was merely avoidance of taxation c whether dr and mrs alexander are entitled to schedule f farming_loss deductions for and substantiation of deductions dr and mrs alexander have not substantiated any of the deductions on their schedules f in justifying a deduction the burden_of_proof is on the taxpayer rule a taxpayers have no inherent right to deductions they are matters of legislative grace 319_us_590 292_us_435 the taxpayer must be able to point to some specific statute to justify his deduction and establish that he comes within its terms 308_us_488 305_us_281 62_tc_834 additionally sec_6001 requires all taxpayers to keep records of their activities in a manner that will enable the determination of the correct amount of income subject_to tax dr and mrs alexander have not substantiated any of the deductions resulting from the losses sustained from their farming activities and thus are not entitled to any of the claimed deductions for the year sec_2001 and sec_2002 activity engaged in for profit dr and mrs alexander reported a grain farming activity on schedules f of their and income_tax returns for these years they reported annual gross_income of dollar_figure they also reported expenses of dollar_figure and dollar_figure respectively resulting in losses of dollar_figure and dollar_figure respectively for those years for them to claim these as business deductions under sec_162 the farming activity must be an activity engaged in for profit however because they have failed to substantiate the expenses there is no need to reach this issue d whether dr and mrs alexander are entitled to unsubstantiated schedule a mortgage interest deductions for and dr and mrs alexander have failed to substantiate mortgage interest deductions for and of dollar_figure and dollar_figure respectively for the same reasons that we did not allow the schedule f deductions lack of substantiation we do not allow the unsubstantiated amounts of schedule a mortgage interest deductions iii penalties and additions to tax for dr and mrs alexander a sec_6663 fraud penalties for the underpayments of tax associated with the oel transaction for dr and mrs alexander underpaid a substantial amount of tax for each year because of dr alexander’s participation in the oel transaction sec_6663 imposes a penalty of of any portion of an underpayment that is attributable to fraud the commissioner has the burden of proving fraud by clear_and_convincing evidence sec_7454 rule b to satisfy his burden_of_proof the commissioner must show an underpayment_of_tax exists and the taxpayer intended to evade taxes known to be owing by conduct intended to conceal mislead or otherwise prevent the collection_of_taxes 113_tc_99 94_tc_654 underpayment_of_tax the clear_and_convincing standard applies not merely to whether an underpayment is attributable to fraud but also to whether an underpayment exists parks v commissioner t c pincite di ricco v commissioner tcmemo_2009_300 where fraud is determined for each of several years the commissioner’s burden applies separately for each roth v commissioner tcmemo_1998_28 we have already established that an underpayment_of_tax exists for each of the years because of the unreported income attributable to the services dr alexander provided to fountain fraudulent intent the commissioner must prove by clear_and_convincing evidence that a portion of the underpayment for each taxable_year in issue was due to fraud 79_tc_888 once the commissioner establishes that any portion of an underpayment is attributable to fraud the entire underpayment is subject_to the penalty except with respect to any portion of the underpayment that the taxpayer establishes is not attributable to fraud sec_6663 and b the existence of fraud is a question of fact to be resolved upon consideration of the entire record 98_tc_511 the taxpayer’s entire course of conduct may establish the requisite fraudulent intent 56_tc_213 because direct proof of a taxpayer’s intent is rarely available fraud may be proven by circumstantial evidence and reasonably inferred from the facts 317_us_492 99_tc_202 80_tc_1111 certain indicia commonly known as badges_of_fraud constitute circumstantial evidence which may give rise to a finding of fraudulent intent 796_f2d_303 9th cir aff’g tcmemo_1984_601 although no single factor is necessarily sufficient to establish fraud the existence of several indicia is persuasive circumstantial evidence of fraud 92_tc_661 a analysis of fraudulent intent in determining that dr and mrs alexander had fraudulent intent to evade taxes respondent places a great deal of emphasis on their education and understanding of the oel transaction and uses this to show their awareness of the badges_of_fraud respondent contends that dr and mrs alexander are highly educated people who knew that the oel transaction was a tax-avoidance scheme to make this point respondent relies on the following facts and assertions the education of dr and mrs alexander allowed them to understand the tax implications of the transaction the fact that dr alexander prepared both his personal and fountain’s corporate tax returns demonstrates an understanding of income_tax mrs alexander did bookkeeping work for fountain and slamd and the knowledge of messrs kritt and reiserer should be imputed to dr and mrs alexander while dr alexander is highly educated and a very accomplished medical doctor respondent did not establish that he understood complex tax law issues to be sure dr alexander has a basic understanding of corporate structures and filed his own tax returns but nothing in the records establishes that he understood the complex tax laws involved with the oel transaction nor that he possessed the knowledge to determine that the oel transaction did not comply with applicable tax laws similarly mrs alexander does have some accounting education but she does not possess the education or experience for the court to hold her to a higher level of understanding when it comes to the oel transaction the evidence shows that messrs kritt and reiserer explained the oel transaction in detail to dr alexander and assured him the plan complied with the tax laws there is nothing in his education or experience that would indicate that he should have known differently messrs reiserer and kritt structured and implemented every aspect of the oel transaction dr and mrs alexander relied upon the assurance of messrs reiserer and kritt that the oel plan conformed to the tax laws dr and mrs alexander do not possess the education and experience to understand that the plan did not conform to the applicable tax laws respondent also states that the knowledge and expertise of messrs kritt and reiserer should be imputed to dr and mrs alexander citing the general_rule that a principal is charged with the knowledge of an agent in the course of the principal’s business see 680_f2d_451 6th cir citing 262_us_215 in this situation dr and mrs alexander were clients of messrs kritt and reiserer and were part of the oel transaction owned and operated by messrs kritt and reiserer messrs kritt and reiserer were not employees or agents participating in the business of dr alexander or fountain and thus the general principle does not apply in this situation the limited ability to understand the tax laws associated with the oel transaction and the reliance upon their tax advisers to have the plan comply with the tax laws show the alexanders did not have fraudulent intent b badges_of_fraud respondent cites numerous badges_of_fraud to show circumstantial evidence of fraud in his conclusion that dr and mrs alexander had fraudulent intent however the record shows that the fraudulent intent element is missing i consistent pattern of underreporting dr and mrs alexander underreported their income for four consecutive years a consistent pattern of underreporting large amounts of income is evidence of fraud garcia v commissioner tcmemo_2012_155 citing 348_us_121 however the reason for the underreporting was their reliance on the legitimacy of the oel plan this does not support a finding of intent to evade taxes known to be owed because dr and mrs alexander did not know that they owed additional tax at the time after notice_2003_22 supra was released describing oel transactions as abusive dr and mrs alexander were again assured by both mr kritt and a group of lawyers that mr kritt’s oel transaction conformed to the applicable tax laws and treaties while the reliance by the alexanders may not have been reasonable their reliance was not fraudulent ii lack of credibility of the taxpayer’s testimony we found dr and mrs alexander to be credible in their testimony mr kritt implemented the oel plan and dr and mrs alexander relied upon him to make the plan conform to the applicable tax laws the record and their testimony reflect this reliance iii concealment of income or assets respondent claims dr and mrs alexander took affirmative steps to conceal their income and assets and misled respondent as to their actual taxable_income dr and mrs alexander used the oel transaction to lower their taxable_income and they denied the existence of an offshore_account on the tax_return while these facts are potential badges_of_fraud the record does not establish these acts were intentionally designed to deceive or conceal on their income_tax return not filed until may of but before the notice_of_deficiency in dr and mrs alexander disclosed the oel transaction in a form_8886 attached to their tax_return the raart trust was created in several years before dr and mrs alexander’s introduction to the oel transaction finally we find that while he had access to financial statements of the ruritania account dr alexander did not actually understand that he had an ownership_interest or any signatory authority over the account his misunderstanding alleviates fraud in these cases iv dr and mrs alexander’s failure to maintain adequate_records pertaining to their participation in the oel transaction and to fully cooperate in the examination of their returns or in the litigation because he was unable to obtain information from dr and mrs alexander respondent was forced to obtain many documents through the u s - guernsey agreement and article of the u s -u k convention failing to cooperate with the authorities is a badge of fraud in these cases it appears that dr alexander may have had access to some information regarding their offshore accounts but dr and mrs alexander did not possess many of the documents respondent requested v failure_to_file a return for failing to file a return is a badge of fraud and dr and mrs alexander did not file any return for dr alexander testified that he had concerns that filing any postchallenge return would be construed as either an admission or a continuation of the improper transaction though this concern is no excuse for not filing a tax_return dr alexander’s testimony explains that the reason for not filing did not include the intent to commit fraud and evade taxes vi dr and mrs alexander’s attempts at distancing themselves from the oel transaction fraudulent intent can be inferred from the willful_blindness of the taxpayer see fields v commissioner tcmemo_1996_425 respondent bases his argument that dr and mrs alexander were willfully blind on several facts dr and mrs alexander did not directly communicate with anyone offshore dr alexander did not request offshore_account statements from montrain and ialb mrs alexander did not review her joint tax_return before it was filed finally after learning of the irs’ concern over oel transactions and the criminal investigation of mr kritt dr alexander did not seek independent advice we believe dr and mrs alexander distanced themselves from the transaction because messrs kritt and reiserer planned structured and implemented the entire oel transaction dr and mrs alexander relied on these individuals to implement the transaction it is reasonable that they would have left the communication with the offshore persons to messrs kritt and reiserer dr alexander’s lack of concern over the criminal investigation of mr kritt and the fact that the irs disfavored the oel transactions is troubling but not evidence of fraudulent intent conclusion we find that dr and mrs alexander did not intend to evade taxes that they believed to be owed dr and mrs alexander placed a great deal of reliance on mr kritt and believed the oel transaction complied with the tax laws they do not possess the education or experience that would allow them to know that they should have reported the additional income even though their reliance in mr kritt was misplaced and many badges_of_fraud do exist in this situation respondent has not proven fraud by clear_and_convincing evidence b sec_6662 penalty for underpayment_of_tax as we have found no fraud for which the penalty under sec_6663 could apply dr and mrs alexander may be liable for a accuracy-related_penalty under sec_6662 and b for an underpayment_of_tax attributable to a substantial_understatement_of_income_tax under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose in at least two other cases involving similar schemes to allegedly lease services to offshore entities we have sustained additions to tax for fraud see browning v commissioner tcmemo_2011_261 foxworthy inc v commissioner tcmemo_2009_203 however we must analyze the facts of the case before us and we find that dr alexander’s decision to engage in the transactions at issue is based on misguided reliance on his advisers and not the intent to fraudulently evade tax penalties see 116_tc_438 however once the commissioner has met the burden of production the burden_of_proof shifts to the taxpayer including the burden of proving that the penalties are inappropriate because of reasonable_cause under sec_6664 see rule a higbee v commissioner t c pincite substantial_understatement a substantial_understatement_of_income_tax exists where the understatement exceeds the greater of dollar_figure or of the tax required to be shown on the return sec_6662 and ii for all years between dr and mrs alexander’s understatements exceed of the tax required to be shown on the returns which is greater than dollar_figure therefore respondent has met the burden of production in these cases reasonable_cause under sec_6664 the alexanders assert good-faith reliance upon their tax advisers messrs kritt and reiserer for their reasonable_cause defense to a sec_6662 penalty no penalty shall be imposed under this part with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6664 good-faith reliance on professional advice may provide a basis for a reasonable_cause defense however certain opinions may not be relied upon a tax adviser who is a material_advisor within the meaning of sec_6111 and participates in the organization management promotion or sale of the transaction may be a source of advice that may be relied upon to avoid the penalty for negligence sec_6664 and ii the advice must be from competent and independent parties not from promoters of the investment or advisers who have a conflict of interest swanson v commissioner tcmemo_2009_31 citing 94_tc_637 aff’d without published opinion 956_f2d_274 9th cir see 471_f3d_1021 9th cir aff’g tcmemo_2004_269 courts have repeatedly held that it is unreasonable for a taxpayer to rely on a tax adviser actively involved in planning the transaction and tainted by an inherent conflict of interest 135_tc_199 see also 990_f2d_893 6th cir aff’g donahue v commissioner tcmemo_1991_181 laverne v commissioner t c pincite a promoter is ‘an adviser who participated in structuring the transaction or is otherwise related to has an interest in or profits from the transaction’ 136_tc_67 quoting tigers eye trading llc v commissioner t c memo aff’d 684_f3d_84 d c cir a promoter’s self interest makes ‘advice’ inherently unreliable tigers eye trading llc v commissioner tcmemo_2009_121 in these cases messrs kritt and reiserer cannot be relied upon for a good- faith reliance defense under sec_6664 messrs kritt and reiserer planned structured and implemented every part of the oel transaction they were the owners of nesl and pls the domestic leasing agencies that employed dr alexander during the transaction most importantly they were paid only for implementing the plan and the continued participation in the plan messrs kritt and reiserer received of the money placed into a deferred_compensation plan and dr alexander was aware that the more money he placed into the plan the more money messrs kritt and reiserer would receive dr alexander also understood that the domestic leasing agencies used in the transaction were owned by messrs kritt and reiserer the record shows that the tax advisers messrs kritt and reiserer were promoters of the oel transaction they implemented this type of transaction for numerous other medical professionals who were introduced to it at medical conferences there was a serious conflict of interest between the tax advisers and the alexanders as the tax advisers’ profit increased for every additional dollar placed into the transaction we conclude that messrs kritt and reiserer may not be relied upon for purposes of a reasonable_cause defense under sec_6664 thus the alexanders have not met their burden of proving the sec_6662 penalty is inappropriate c sec_6651 fraudulent_failure_to_file addition_to_tax for sec_6651 imposes an addition_to_tax of up to of the amount of tax required to be shown on the return when the failure_to_file a federal_income_tax return timely is due to fraud in considering whether dr alexander is subject_to the addition_to_tax for fraudulent_failure_to_file under sec_6651 for we note that we have already determined the addition_to_tax for fraud under sec_6663 is not applicable in the prior years the commissioner bears the burden of establishing fraud by clear_and_convincing evidence sec_7454 rule b 781_f2d_1566 11th cir aff’g tcmemo_1985_63 102_tc_632 92_tc_661 we find no fraudulent intent in dr alexander’s failure_to_file a return for and the addition_to_tax under sec_6651 is not sustained d sec_6651 and sec_6654 additions to tax for sec_6651 respondent determined that dr and mrs alexander are liable for a sec_6651 addition_to_tax for the taxable_year sec_6651 imposes an addition_to_tax for failure to pay the amount shown as tax on a return on or before the due_date prescribed unless the taxpayer can establish such failure was due to reasonable_cause and not willful neglect the addition is equal to of the amount shown as tax on the tax_return but not paid with an additional each month or fraction thereof during which the failure to pay continues up to a maximum of see 120_tc_163 ndollar_figure sec_7491 places the burden of production on the commissioner to present sufficient evidence showing that the addition_to_tax is appropriate 116_tc_438 once the commissioner meets this burden the taxpayer has the burden_of_proof with respect to exculpatory factors such as reasonable_cause id pincite in these cases respondent has met his burden dr alexander did not file a tax_return for his reasoning for not filing was a concern that filing any postchallenge return would be construed as either an admission or a continuation of the improper transaction while this may have negated any fraudulent intent it is not a reasonable_cause to not file a tax_return dr alexander understood he had taxable_income for and was informed by mr kritt the tax adviser he relied upon that a tax_return needed to be filed for therefore dr alexander is liable for the sec_6651 addition_to_tax sec_6654 respondent also determined that dr and mrs alexander are liable for an addition_to_tax under sec_6654 for failure to pay estimated_tax for sec_6654 imposes an addition_to_tax for failure to make timely and sufficient payments of estimated_tax a taxpayer has an obligation to pay estimated_tax for a particular year only if he has a required_annual_payment for that year sec_6654 a required_annual_payment is equal to the lesser_of of the tax shown on the taxpayer’s return due for the year in issue or if no return is filed of the tax for such year or if the taxpayer filed a return for the immediately preceding_taxable_year of the tax shown on that return sec_6654 generally sec_6654 provides no exception for reasonable_cause sec_1_6654-1 income_tax regs see also bray v commissioner tcmemo_2008_113 the alexanders made no estimated_tax payments for and therefore such payments were less than of the amount of tax for that year additionally they do not meet any exceptions provided in sec_6654 therefore the alexanders are liable for the sec_6654 addition_to_tax e sec_6651 failure_to_file addition_to_tax for and as an alternative to sec_6651 respondent contends that dr and mrs alexander are liable for additions to tax pursuant to sec_6651 for and sec_6651 provides for an addition_to_tax for failure to timely file a federal_income_tax return determined with regard to any extension of time for payment unless the taxpayer shows that such failure was due to reasonable_cause and not willful neglect 121_tc_308 the alexanders did not provide any reasonable_cause for their tardiness for therefore we find they are liable for the sec_6651 addition_to_tax for the same reasons we did not find any reasonable_cause in the sec_6651 analysis we do not find any reasonable_cause under sec_6651 therefore dr and mrs alexander are liable for the addition_to_tax pursuant to sec_6651 for iv whether mrs alexander is entitled to innocent spouse relief under sec_6015 under sec_6015 a requesting spouse may be relieved of joint_and_several_liability from an understatement_of_tax to the extent that the understatement was attributable to the nonrequesting spouse to qualify for relief sec_6015 provides that the taxpayer must establish that a a joint_return has been made for a taxable_year b on such return there is an understatement_of_tax attributable to erroneous items of individual filing the joint_return c the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it is inequitable to hold the other individual liable for the deficiency in tax for such taxable_year attributable to such understatement and e the other individual elects in such form as the secretary may prescribe the benefits of this subsection not later than the date which i sec_2 years after the date the secretary has begun collection activities with respect to the individual making the election the requirements of sec_6015 are conjunctive and therefore the failure of a taxpayer to satisfy any one of the elements precludes relief haltom v commissioner tcmemo_2005_209 respondent concedes that mrs alexander satisfies the requirements of sec_6015 and e however respondent maintains she failed to establish that she satisfies the requirements of sec_6015 c and d accordingly the burden is on mrs alexander to establish that she is entitled to relief under sec_6015 mrs alexander is eligible for relief only if the understatement_of_tax is attributable to erroneous items of dr alexander we have already determined that the schedule f farm_losses are not deductible for and the disallowed losses and the resulting portion of each understatement are attributable to mrs alexander mrs alexander was in charge of the farm business and reported the profits and losses to her husband for the purpose of filing the tax returns we find that mrs alexander is not entitled to relief for the portions of the and understatements attributable to the disallowed schedule f losses because they are attributable to her see sec_6015 under sec_6015 mrs alexander is eligible for relief only if she did not know or have reason to know at the time she signed the joint_return that there was an understatement_of_tax on the return the court_of_appeals for the sixth circuit is the likely venue for any appeal of these cases that court_of_appeals has held that knowledge of the transaction giving rise to the understatement will establish knowledge in an omitted income situation in 826_f2d_470 6th cir aff’g 86_tc_228 the court_of_appeals held that knowledge of the transaction giving rise to omitted income was sufficient to bar relief under former sec_6013 in 509_f3d_736 6th cir aff’g tcmemo_2006_69 the court_of_appeals followed purcell in a case where the taxpayer sought relief under sec_6015 from a tax_deficiency arising from the use of alleged trusts to shield income the trusts in question were held to be a sham in 595_f3d_338 6th cir aff’g tcmemo_2009_20 the court_of_appeals adopted the analysis of 887_f2d_959 9th cir to analyze the reason to know requirement in price the court_of_appeals for the ninth circuit explained that a test should be applied in deduction cases different from the test in omissions- from-income cases because the present cases involved omitted income the knowledge of the transaction standard is appropriate mrs alexander clearly had knowledge of this transaction but even if we applied the deduction standard of price mrs alexander would not be eligible for innocent spouse relief in price and greer the courts of appeals held that ‘ a spouse has ‘reason to know’ of the substantial_understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the substantial understatement’ greer v commissioner f 3d pincite quoting price v commissioner f 2d pincite mrs alexander is a very intelligent person who well knew the implications of the oel transaction she also knew about the methods to obtain cash for the family from the funds purportedly transferred to the control of the overseas entities we follow the law in the sixth circuit in applying the knowledge of the transaction test to omitted income situations see 54_tc_742 aff’d 445_f2d_985 10th cir mrs alexander attended the oel seminar in the bahamas where she and dr alexander learned of the oel transaction she understood her husband would be working for a foreign_entity as a result of the transaction and much of his money would be sent offshore mrs alexander also participated in the transaction through her role as trustee of the raart trust we find that mrs alexander had knowledge of the oel transaction and thus she is not entitled to relief from joint_and_several_liability under sec_6015 for deficiencies that arose from that transaction for the alexanders also assert that it would be inequitable to deny mrs alexander innocent spouse relief sec_6015 provides an alternative means of relief for a requesting spouse who does not otherwise qualify for relief under subsection b of sec_6015 sec_6015 sec_6015 permits relief from joint_and_several_liability where it is inequitable to hold the individual liable for any unpaid tax or any deficiency or any portion of either sec_6015 under sec_6015 the secretary may grant equitable relief to a requesting spouse on the basis of the facts and circumstances of the requesting spouse’s case except as otherwise provided in sec_6015 the taxpayer bears the burden_of_proof see rule a 119_tc_306 aff’d 101_fedappx_34 6th cir pursuant to sec_6015 the commissioner has prescribed revenue_procedure guidelines to help irs employees determine whether a requesting spouse is entitled to relief from joint_and_several_liability see revproc_2003_61 2003_2_cb_296 modifying and superseding revproc_2000_15 2000_1_cb_447 revproc_2003_61 supra lists the factors that irs employees should consider and the court considers those same factors when reviewing the irs’ denial of relief see 120_tc_137 on date the commissioner issued notice_2012_8 i r b announcing a proposed revenue_procedure updating revproc_2003_61 2003_2_cb_296 that proposed revenue_procedure if finalized will revise the factors that the irs will use to evaluate requests for equitable relief under sec continued according to revproc_2003_61 sec_4 c b pincite mrs alexander as a requesting spouse must satisfy threshold conditions in order to be eligible to submit a request for equitable relief under sec_6015 mrs alexander does not satisfy all of the threshold requirements for equitable relief under sec_6015 revproc_2003_61 sec_4 requires that no disqualified assets have been transferred from dr alexander to mrs alexander a disqualified_asset means any property transferred to an individual making the election under sec_6015 if the principal purpose of the transfer was the avoidance of tax or payment of tax sec_6015 dr alexander’s wages that were repatriated through the use of the oel loans were transferred into raart mrs alexander’s trust the assets were transferred in order to make capital improvements on the alexanders’ home and farm and she well knew about the offshore transactions which generated the funds mrs continued f in sriram v commissioner tcmemo_2012_91 slip op pincite n we stated that we would continue to apply the factors in revproc_2003_61 2003_2_cb_296 in view of the fact that the proposed revenue_procedure is not final and because the comment period under the notice only recently closed see also cutler v commissioner tcmemo_2013_119 continuing to apply revproc_2003_61 supra williamson v commissioner tcmemo_2013_78 alexander fails this prong of the analysis and thus is not eligible for relief under sec_6015 v fountain’s deficiencies respondent contends that fountain has deficiencies for employment_taxes for the years at issue the deficiencies stem from the oel transaction and the fact that fountain did not treat dr alexander as an employee for the years at issue a dr alexander was an employee of fountain during the oel transaction employment status respondent had determined that dr alexander was an employee of fountain during the oel transaction and fountain is liable for employment_taxes for the wages paid for dr alexander’s services paragraphs and of sec_3121 describe other individuals who are considered employees regardless of their status under the common_law individuals described in those paragraphs are commonly referred to as statutory employees 119_tc_121 aff’d 93_fedappx_473 3d cir one such category of statutory employees consists of under sec_3121 the term employee includes any individual who has the status of an employee under the common_law because dr alexander is a statutory_employee we do not find it necessary to discuss his status as a common_law_employee officers of corporations sec_3121 sec_31_3121_d_-1 employment_tax regs limits that category as follows b corporate officers --generally an officer of a corporation is an employee of the corporation however an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive directly or indirectly any remuneration is considered not to be an employee of the corporation a director of a corporation in his capacity as such is not an employee of the corporation during the entire time the oel transaction was in place dr alexander was the sole officer at fountain dr alexander does not meet the exception provided in sec_31_3121_d_-1 employment_tax regs for officers who provide limited or no services to the corporation and receive no remuneration dr alexander received remuneration for his services indirectly through nesl and pls he exercised authority over the workplace evidenced by his power to hire and fire employees he was also the sole practitioner working at fountain and performed the essential service of the business during the periods in issue dr alexander was a statutory_employee of fountain because of his position as an officer who performed substantial services for the corporation petitioners argue that dr alexander and fountain signed away dr alexander’s employee status by agreement and he had no employment contract with fountain in foxworthy v commissioner tcmemo_2009_203 aff’d per curiam 494_fedappx_964 11th cir we found that the leased_employee in an oel transaction was an employee of his own business rather than the leasing company and that the lease payments were his wage income dr alexander is a statutory_employee of fountain thus fountain is liable for employment_taxes for the wages that it paid for dr alexander’s services for the same reasons that the lease payments were income to dr alexander the lease payments are wages subject_to employment_taxes relief under sec_530 petitioners argue that fountain is entitled to treatment under sec_530 which provides relief from employment_tax liability taxpayers are entitled to relief under sec_530 if they demonstrate that they did not treat an individual as an employee for employment_tax purposes for any period sec_530 they filed all required federal tax returns consistent with their treatment of the individual id and they had a reasonable basis for not treating an individual as an employee sec_530 a taxpayer is deemed to have a reasonable basis if the taxpayer established its treatment of such individual was in reasonable reliance on judicial precedent published rulings technical_advice with respect to the taxpayer or a letter_ruling to the taxpayer a past irs audit of the taxpayer in which there was no assessment attributable to the treatment for employment_tax purposes of the individuals holding positions substantially_similar to the position held by this individual or a longstanding recognized practice of a significant segment of the industry in which such individual was engaged id in addition to the safe harbors of sec_530 a taxpayer may demonstrate any other reasonable basis for the treatment of an employee for tax purposes see eg 88_f3d_750 9th cir 77_f3d_236 8th cir the legislative_history reveals that the reasonable basis inquiry is to be liberally construed in favor of the taxpayer see h_r rept no pincite 1978_3_cb_629 sec_530 added by the small_business job protection act of pub_l_no sec a stat pincite places the burden_of_proof on the secretary if the taxpayer establishes a prima facie case that it was reasonable not to treat an individual as an employee and the taxpayer has complied with the secretary’s reasonable requests for tax periods at issue we have already established that any reliance on advice from messrs kritt and reiserer was not reasonable in addition dr alexander was treated as an employee in all circumstances before the oel transaction the transaction created no changes in the business practices of slamd and outside of dr and mrs alexander no other employee had any knowledge that slamd no longer considered dr alexander an employee for employment_tax purposes because there was no change in the way slamd and dr alexander went about their day- to-day business there is no reasonable basis for slamd to treat dr alexander as anything but an employee for employment_tax purposes the transition from slamd to fountain created no change in the way the business operated and provides no reasonable basis for dr alexander to be treated as anything other than an employee additionally the contracts between dr alexander and the leasing agencies were not followed by the parties dr alexander worked at cvc without any agreement from any of the leasing agencies that had contracted for exclusive rights to his services the disregard of the terms of the employment contracts show petitioners do not have a reasonable basis for believing dr alexander was not an employee because of the contracts as there is no reasonable basis for dr alexander not to be treated as an employee fountain is not entitled to sec_530 treatment b fountain is liable for employment_taxes with respect to dr alexander’s services during the taxable quarters ended date through date we have determined that dr alexander was an employee of fountain for all quarters from date through date sec_3101 imposes a tax on employees under the federal_insurance_contributions_act fica based on their wages paid which the employer is required to collect under sec_3102 the term wages as used in these statutes generally encompasses all remuneration for employment sec_3121 sec_3306 fountain paid nesl and pls as remuneration for dr alexander’s services we have found that dr alexander was in constructive receipt of all the funds paid for his services to nesl and pls by fountain because dr alexander was an employee of fountain and was in receipt of the funds paid as remuneration for his services fountain is liable for all employment_taxes on the amounts paid for dr alexander’s services from date through date vi fountain’s penalties and additions to tax a fraud_penalty under sec_6663 respondent determined that a fraud_penalty was applicable to fountain on the basis of the activity of dr alexander the sole shareholder officer and principal of fountain for the same reasons we did not find dr and mrs alexander liable for the fraud_penalty under sec_6663 we do not find fountain liable for the fraud_penalty b penalty under sec_6662 fountain has not paid employment_taxes for dr alexander’s services for any of the quarters from date through date therefore during these periods there have been substantial understatements of more than of the employment_tax required to be paid for the same reasons discussed regarding dr and mrs alexander fountain does not have a good-faith-reliance defense and is liable for penalties under sec_6662 c sec_6656 penalty if a taxpayer is more than days late in depositing employment_taxes sec_6656 imposes a penalty sec_6656 see also 117_tc_263 the taxpayer is not liable for the sec_6656 penalty if the late deposit was due to reasonable_cause and not due to willful neglect sec_6656 fountain failed to make employment_tax deposits for amounts paid for dr alexander’s services while reliance upon the advice of a professional can constitute reasonable_cause reliance on the professional’s advice in good_faith is required for the defense fountain is not entitled to this defense for the same reasons dr and mrs alexander were not entitled to the sec_6664 defense to reflect the foregoing decisions will be entered under rule