Court Opinion

ID: 4337512
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:24:42.318579+00
Date Added: 2024-06-11T14:48:05.497739
License: Public Domain

T.C. Memo. 2009-68

                    UNITED STATES TAX COURT

MICHAEL SCOTT IOANE AND SHELLY JEAN OLSON-IOANE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

    Docket No. 9903-06.             Filed March 26, 2009.

         R determined deficiencies in Federal income tax
    for Ps’ 2002 and 2003 tax years. R also determined an
    addition to tax pursuant to sec. 6651(a)(1), I.R.C.,
    for Ps’ 2002 tax year and accuracy-related penalties
    pursuant to sec. 6662(a) for P’s 2002 and 2003 tax
    years.

         Held: Ps are liable for the deficiencies, addition to
    tax, and accuracy-related penalties. Ps are also liable for
    a penalty under sec. 6673(a)(1), I.R.C., because their
    position in this case is frivolous.

    Michael Scott Ioane and Shelly Jean Olson-Ioane, pro sese.

    Wesley J. Wong and David W. Sorensen, for respondent.
                               - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION

     WHERRY, Judge:   This case is before the Court on a petition

for redetermination of deficiencies concerning petitioners’ 2002

and 2003 tax years.   Respondent determined that petitioners are

liable for Federal income tax deficiencies of $2,104,868 and

$457,468 for their 2002 and 2003 tax years, respectively.

Respondent also determined a $314,754.30 addition to tax pursuant

to section 6651(a)(1)1   for their 2002 tax year and accuracy-

related penalties under section 6662(a) of $420,973.60 and

$91,493.60 for their 2002 and 2003 tax years, respectively.      On

brief, respondent concedes that petitioners are not liable for

unreported interest income of $1,060.26 in 2002 and $18 in 2003.

The issues remaining for decision are:

     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended and in effect for the tax years
at issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                              - 3 -

     1) Whether the income of various trusts2 and $140,711 in

distributions from a corporation are income to petitioners in

2002 and 2003;

     2) whether petitioners are liable for self-employment tax

for 2002 and 2003;

     3) whether petitioners are entitled to a $14,562 deduction

for 2002 and a $14,823 deduction for 2003, as claimed on

Schedules C, Profit or Loss From Business, for those tax years;

     2
      The following is a list of the “Unexplained Deposits” into
the trusts’ accounts that respondent has attributed as income to
petitioners:

         Entity               2002                  2003

First Amendment            $2,229,987             $838,890
  Publishers Trust

American Federal           $1,124,357             $55,700
  Trust

Charitable                 $1,309,482             $58,410
  Scholarship
  Foundation

Acacia Charitable           $496,066              $106,759
  Foundation

Paradise Solutions             ---                $19,922
  Trust

     Respondent also attributed to petitioners dividend income of
$15,287.90 in 2002 and $22,082.68 in 2003. Those amounts were
based on dividends deposited into accounts held by First
Amendment Publishers Trust, American Federal Trust, Charitable
Scholarship Foundation, and Acacia Charitable Foundation.
                               - 4 -

     4) whether petitioners are entitled to a deduction for a

$99,172,118 net operating loss (NOL) in 2002 and for a

$99,134,330 NOL carryover in 2003;

     5) whether petitioners are entitled to itemized deductions

of $8,840 for medical and dental expenses in 2002;

     6) whether petitioners are entitled to personal exemptions

of $15,000 in 2002 and $15,250 in 2003, an earned income tax

credit of $2,194 in 2003, and additional child tax credits of

$1,800 in 2002 and $1,377 in 2003;

     7) whether petitioners are liable for a $314,754.30 addition

to tax under section 6651(a)(1) for 2002; and

     8)   whether petitioners are liable for accuracy-related

penalties under section 6662(a) of $420,973.60 for 2002 and

$91,493.60 for 2003.

                         FINDINGS OF FACT

      At the time they filed their petition, petitioners, who are

husband and wife, resided in Nevada.

     At the heart of this case are five trusts whose 2002 and

2003 income respondent has determined is attributable to

petitioners.   The five trusts are (1) First Amendment Publishers

(FAP); (2) American Federal Trust (AFT); (3) Charitable

Scholarship Foundation (CSF); (4) Acacia Charitable Foundation

(ACF); and (5) Paradise Solutions Trust (PST).
                                - 5 -

     Also at issue is a corporation, Acacia Corporate Management

(ACM), from which respondent determined petitioners received

distributions in 2003.    ACM was apparently incorporated in

Nevada.3

     Petitioners filed joint Forms 1040, U.S. Individual Income

Tax Return, for their 2002 and 2003 tax years.     The 2002 return

was prepared by “Mary R. Fuentez”.4     The 2003 return was self-

prepared.   Revenue Agent Dennis Brown (Agent Brown) examined

petitioners’ 2002 and 2003 returns.     Petitioners did not

cooperate with Agent Brown during the examination process, and

Agent Brown developed the case by contacting and issuing

summonses to third parties.    Although Agent Brown was unable to

identify any individual checking or savings accounts petitioners

used regularly, he identified entities with which petitioners

appeared to be associated.    He then summoned and received checks

and other records from financial institutions with which those

entities held accounts.    He requested but never received

formation documents relating to FAP, AFT, CSF, ACF, PST, and ACM.

     3
      We will take judicial notice of the Nevada secretary of
state’s business records, which appear to reflect that ACM was
incorporated on Nov. 20, 2000, and was dissolved on Mar. 18,
2005.
     4
      Although Mr. Ioane referred to Mary Fuentez as a certified
public accountant, there is no evidence that she was one.
                               - 6 -

      Because the parties have stipulated very little, most of the

relevant facts have been gleaned from trial testimony and from

exhibits admitted into evidence at trial.   Relevant facts

relating to petitioners’ relationship with each of the relevant

entities are provided below.

FAP

      During or around 1998 Richard Allen Ceraolo (Mr. Ceraolo)

was introduced to Mr. Ioane, who identified himself as a trust

expert.   Mr. Ceraolo and his wife, Angie (Mrs. Ceraolo),

eventually hired FAP to establish trusts and provide tax advice.

At some point, Mr. Ioane handed Mr. Ceraolo an engagement letter

addressed from FAP to Mrs. Ceraolo together with a cover letter

and an invoice both of which were dated October 19, 2000.     It was

common for Mr. Ceraolo to receive correspondence from Mr. Ioane

on FAP letterhead, and Mr. Ioane referred to FAP as a trust that

Mr. Ioane had established.

      Around that time, Mr. Ioane helped Jay M. Steuer (Mr.

Steuer) set up trusts for Cade Co. (a business in which Mr.

Steuer owned a 25 percent interest) and for Mr. Steuer

personally.   Cade Co. funds were then channeled through FAP.   Mr.

Steuer received his Cade Co. distributions through FAP and two

other trusts, North Bay Associates and Jewish Education

Foundation.   Mr. Ioane handled those funds.   It was Mr. Steuer’s

understanding that FAP was Mr. Ioane’s trust.
                                 - 7 -

         A sampling of canceled checks5 and bank statements6 from

FAP’s accounts at (1) Saratoga National Bank (which subsequently

became part of San Jose National Bank), (2) California Federal

Bank, (3) Wells Fargo Bank, (4) Morgan Stanley, and (5) Charles

Schwab reflects that checks to Capital One, Nordstrom, Target,

Providian Financial, Merced Christian School, Stone Ridge

Christian High School, and Blue Cross of California were written

on petitioners’ behalf from those accounts.7      FAP also wrote a

check to Mr. Ioane for a “car purchase”, and Mrs. Ioane endorsed

an FAP check made payable to cash.       The checks were signed using

the signature stamps of “Laurel Fierro” or “Glen Halliday”.8

     5
      Attached as an appendix to this opinion is a table
containing examples of checks reflecting (on a preponderance of
available evidence) payments to petitioners, by petitioners, or
on behalf of petitioners from the entities’ accounts. Some of
those checks are also mentioned in this opinion.
     6
      At trial, petitioners objected to the admissibility of
exhibits containing checks, account applications, signature
cards, bank statements, and deposit slips. Although we overruled
petitioners’ objections as to the checks, we reserved judgment as
to the other documents and invited the parties to brief that
issue. We overrule petitioners’ objections to those documents,
as is explained later in this opinion. See infra pp. 13-19.
     7
      The memo sections of the checks paid to Capital One,
Nordstrom, Target, Providian Financial, and Blue Cross of
California reflect petitioners’ account numbers and sometimes
even their names. The memo sections of the checks paid to Merced
Christian School and Stone Ridge Christian High School reflect
notations such as “IOANE / Balance of tuition due + $1.50 Nov.
ECS” and one of petitioners’ children’s names followed by
“partial payment/tuition”.
     8
      In addition to the fact that checks were written from FAP’s
                                                   (continued...)
                               - 8 -

      In a prior Tax Court case at docket No. 21063-04 involving

FAP, Mr. Ioane signed a “Consent to Rescind Notice of

Deficiency”, which was filed as a petition on behalf of FAP.     In

that document Mr. Ioane referred to himself as “Michael S. Ioane,

general trustee For MICHAEL SCOTT IOANE, whom [sic] is the

underlying funding Source and POA for FIRST AMENDMENT

PUBLISHERS”.   In addition, FAP’s address, as listed on that

petition--108 East John Street, Carson City, Nevada    89706 (East

John Street address)--is the same address petitioners listed in

their petition in this case.

      Agent Brown used the bank deposits method to reconstruct

FAP’s income for 2002 and 2003.    He determined that FAP had

unexplained bank deposits of $2,229,987.48 in 2002 and of

$838,889.72 in 2003.   He also determined that FAP had received

$6,946.97 in dividends in 2002.9

AFT

      AFT held an account with Dean Witter Reynolds, Inc.(now

Morgan Stanley).   Mr. Ioane is listed as one of two grantors of

      8
      (...continued)
accounts for petitioners, checks payable to Mr. Ioane were
deposited into FAP’s account at Saratoga National Bank.
      9
      In one part of the Form 886-A, Explanation of Items,
attached to the notice of deficiency, the total dividends
received by FAP in 2002 add up to $6,947.18. This is apparently
due to a 21-cent error in the amount of dividends received from
Morgan Stanley. Respondent used the $6,946.97 figure in
computing all of the trusts’s 2002 dividend income.
                                 - 9 -

AFT on the account application.     “Eric Wennerstrand” is listed as

the trustee and “Laurel Fierro and/or Judie Rogers” are listed as

the successor trustees.10     The signature card of California

Federal Bank11 for AFT listed Mr. Ioane as an authorized signer.

AFT’s signature card for its account at Saratoga National Bank

listed petitioners as trustors of AFT.     Petitioners wrote checks

to FAP, CSF, and ACF from that account.     Those checks were signed

by Mrs. Olson-Ioane and with the signature stamp of Jeffrey P.

Rosenberg.

      On November 2, 2004, Mr. Ioane filed with the Tax Court a

“Consent to Rescind Notice of Deficiency”, which the Court

construed as a petition on AFT’s behalf and to which it assigned

docket No. 21065-04.     Therein, he referred to himself as “general

trustee” and “underlying funding Source and POA for AMERICAN

FEDERAL TRUST”.     He listed the East John Street address as AFT’s

address.

     Agent Brown used the bank deposits method to reconstruct

AFT’s income for 2002 and 2003.     He determined that AFT had

unexplained bank deposits of $1,124,356.69 in 2002 and of $55,700

in 2003.     He also determined that AFT had received $2,926.71 in

dividends in 2002.

     10
          “Jeffrey P. Rosenberg” was also named as a trustee of AFT.
     11
          California Federal Bank is now a part of Citigroup.
                              - 10 -

CSF

      CSF held an account with A.G. Edwards.   Mr. Ioane is listed

as CSF’s employer on the account application.   A “Resolution for

Association or Other Non-Corporate Organization” associated with

that account was signed by Mr. Ioane in his capacity as

“Secretary” of CSF.

      CSF also held an account with Morgan Stanley.12   In the

investment powers portion of the application for that account,

Mr. Ioane was listed as “successor trustee” of CSF.     Mr. Ioane

was authorized to trade in and withdraw assets from that account.

      Canceled checks from CSF’s account at Morgan Stanley reflect

payments to the Merced Christian School and Stone Ridge Christian

High School.   Canceled checks from CSF’s account at A.G. Edwards

reflect payments to Merced Christian School.

      Agent Brown used the bank deposits method to reconstruct

CSF’s income for 2002 and 2003.   He determined that CSF had

unexplained bank deposits of $1,309,482.22 in 2002 and of $58,410

in 2003.   He also determined that CSF had received $5,036.41 in

dividends in 2002 and $10,613.64 in dividends in 2003.

ACF

      ACF held an account at Citibank.   Petitioners both possessed

signature authority over that account.   ACF also held an account

      12
      That account was started with Dean Witter, Inc., before it
merged with Morgan Stanley.
                              - 11 -

at A.G. Edwards.   Mr. Ioane is listed as CSF’s employer on the

account application.   A “Resolution for Association or Other Non-

Corporate Organization” associated with that account was signed

by Mrs. Olson-Ioane in her capacity as “Secretary” of CSF and by

Mr. Ioane in his capacity as “President” of ACF.   Petitioners

both had check-writing authority over that account.   In addition,

ACF held an account with Morgan Stanley.   In the application for

that account, petitioners were listed as trustees of ACF.

Petitioners were the only persons authorized to trade in that

account.

      Mrs. Olson-Ioane wrote check No. 1027 dated December 8,

2003, for $1,295 payable to cash from ACF’s Citibank account.

Canceled checks Nos. 2002 and 2003 from ACF’s account at A.G.

Edwards reflect payments of $100 and $600, respectively, to

Merced Christian School and Stone Ridge Christian High School.

Petitioners both signed those checks.

      Agent Brown used the bank deposits method to reconstruct

ACF’s income for 2002 and 2003.   He determined that ACF had

unexplained bank deposits of $496,066.32 in 2002 and of

$106,759.12 in 2003.   He also determined that ACF had received

$377.81 in dividends in 2002 and $11,469.04 in dividends in 2003.

PST

      On a Schedule B, Interest and Ordinary Dividends, attached

to their 2002 joint Federal income tax return, petitioners
                              - 12 -

reported having received $481 from PST.    On a Schedule C, Profit

or Loss from Business, attached to that return petitioners

reported $40,000 in gross receipts.    In a supporting statement

also attached to that return, petitioners attributed $20,000 of

those gross receipts to “MANAGEMENT FEE PST”.

      On November 2, 2004, Mr. Ioane filed with the Tax Court a

“Consent to Rescind Notice of Deficiency”, which the Court

construed as a petition on PST’s behalf and to which it assigned

docket No. 21064-04. Therein, he referred to himself as “general

trustee” and “underlying funding Source and POA for PARADISE

SOLUTIONS”.   He listed the East John Street address as PST’s

address.

      Agent Brown’s bank deposits analysis led him to determine

that PST had unreported income of $19,922 in 2003.

ACM

      ACM held an account at Wells Fargo Bank.13   A check made

payable to Mr. Ioane was deposited in that account.14    Canceled

checks reflect payments to Capital One, Target, Providian

Financial, and Blue Cross of California on petitioners’ behalf

from that account.   They also reflect payments to Mr. Ioane from

      13
      Although Agent Brown identified a number of other accounts
held by ACM doing business as one of the five aforementioned
trusts, he treated those accounts as belonging to the relevant
trust and not to ACM.
      14
      That check, No. 0862982, was a $30 check from “Topics
Entertainment”.
                                  - 13 -

that account.     Those checks were all signed using the signature

stamp of “Laurel Fierro”.

     Agent Brown’s bank deposits analysis led him to conclude

that petitioners had $140,710.68 in distributions from ACM for

2003.

     On March 1, 2006, respondent issued the aforementioned

notice of deficiency.       Petitioners then filed a timely petition

with this Court.       A trial was held on January 7, 10, and 18,

2008, in Reno, Nevada.

                                  OPINION

I.   Evidentiary Issues

        Received into evidence at trial were a number of exhibits

consisting of checks, account applications, signature cards, bank

statements, and deposit slips pertaining to FAP, AFT, CSF, ACF,

PST, and ACM.     Mr. Ioane objected to the admissibility of those

exhibits on the grounds of relevance, authentication, and

hearsay.     We overruled his objections as to the checks but

reserved ruling on the admissibility of the account applications,

signature cards, bank statements, and deposit slips.       As

explained below, we will now overrule his objections as to those

documents and admit them into evidence.

        A. Relevance

        We apply the Federal Rules of Evidence applicable in nonjury

trials in the U.S. District Court for the District of Columbia.
                               - 14 -

Sec. 7453; Rule 143(a); see Clough v. Commissioner, 119 T.C. 183,

188 (2002).

     Rule 401 of the Federal Rules Of Evidence defines “Relevant

evidence” as “evidence having any tendency to make the existence

of any fact that is of consequence to the determination of the

action more probable or less probable than it would be without

the evidence.”    The account applications, signature cards, bank

statements, and deposit slips are clearly relevant to whether

FAP, AFT, CSF, ACF, and PST had unreported income in 2002 and

2003 and whether such income is attributable to petitioners.    The

documents pertaining to ACM are clearly relevant to whether

petitioners received distributions from ACM in 2003.

     B. Authentication

     Rule 901(a) of the Federal Rules of Evidence provides that

“The requirement of authentication or identification as a

condition precedent to admissibility is satisfied by evidence

sufficient to support a finding that the matter in question is

what its proponent claims.”   Rule 901(b) of the Federal Rules of

Evidence sets forth a nonexclusive list of “examples of

authentication or identification conforming with the requirements

of [Rule 901]”.   Among them is subdivision (b)(4), which provides

that the authentication requirement can be satisfied by

“Appearance, contents, substance, internal patterns, or other
                              - 15 -

distinctive characteristics, taken in conjunction with

circumstances.”

     The authenticity of the disputed documents is supported by

Agent Brown’s testimony that he received them in response to

summonses issued to financial institutions with which FAP, AFT,

CSF, ACF, PST, and ACM held accounts.15   Their authenticity is

also supported by their content, analyzed in connection with the

circumstances of this case.   See Alexander Dawson, Inc. v. NLRB,

586 F.2d 1300, 1302 (9th Cir. 1978) (“The content of a document,

when considered with the circumstances surrounding its discovery,

is an adequate basis for a ruling admitting it into evidence.”).

In that regard, we agree with respondent that the checks (which

have already been admitted), account applications, signature

     15
      Under Fed. R. Evid. 902(11), if certain conditions are
satisfied, domestic records of regularly conducted activity are
self-authenticating. To qualify, such records must be
accompanied by a written declaration of their custodian or
another qualified person.

     Respondent initially offered (and, on the basis of the
attached affidavits, the Court admitted) the disputed documents
into evidence with the supporting affidavits. However, it
eventually came to light that, contrary to the Court’s initial
understanding, respondent had provided the disputed documents--
but not the attached affidavits--to petitioners before trial.
This had the effect of denying petitioners the opportunity
mandated by Fed. R. Evid. 902(11) to review and (if they desired)
challenge the documents. The Court then indicated that it
intended to reverse its initial decision to admit the evidence
under Fed. R. Evid. 902(11). Respondent withdrew the evidence
and resubmitted it without the affidavits. The disputed
documents therefore do not qualify for admission pursuant to Fed.
R. Evid. 902(11).
                              - 16 -

cards, bank statements, and deposit slips serve to reinforce each

other’s authenticity.   We therefore find that the disputed

documents bear sufficient guaranties of trustworthiness for

admissibility under rule 901 of the Federal Rules of Evidence and

overrule petitioners’ authentication objections as to the

admissibility of those documents.16

     C. Hearsay

     Rule 801(c) of the Federal Rules of Evidence defines

“Hearsay” as “a statement, other than one made by the declarant

while testifying at the trial or hearing, offered in evidence to

prove the truth of the matter asserted.”   Hearsay is generally

excluded from evidence unless an exception applies.17   See Fed.

R. Evid. 802; Snyder v. Commissioner, 93 T.C. 529, 532 (1989).

     Respondent argues on brief that the bank statements and

deposit slips “are not needed to prove the truth of any

particular deposit or other transaction from any of the

     16
      Although respondent argues tersely that the disputed
documents are documents relating to commercial paper under Fed.
R. Evid. 902(9), we need not rely on that proposition.
     17
      Fed. R. Evid. 803(6) is a hearsay exception for records of
regularly conducted activity that operates together with Fed. R.
Evid. 902(11). In fact, this Court often merges its analyses of
admissibility under those provisions. See Stang v. Commissioner,
T.C. Memo. 2005-154, affd. 202 Fed. Appx. 163 (9th Cir. 2006);
Major v. Commissioner, T.C. Memo. 2005-141, affd. 224 Fed. Appx.
686 (9th Cir. 2007); Spurlock v. Commissioner, T.C. Memo. 2003-
124. Because Fed. R. Evid. 803(6) incorporates the certification
requirement of Fed. R. Evid. 902(11), the disputed documents do
not qualify for admission under Fed. R. Evid. 803(6).
                              - 17 -

accounts.”   Instead, respondent contends that those documents

“can be admitted for non-hearsay purposes such as showing that a

trust had a particular bank account, that respondent’s

determinations in the notice of deficiency were not arbitrary and

capricious, and to provide an evidentiary foundation connecting

petitioners to the unreported income.”   Respondent does not

address the account applications and the signature cards.

     We agree with respondent regarding the bank statements and

the deposit slips and conclude that all of the disputed documents

(including the account statements and signature cards) are

hearsay and so cannot be admitted for the truth of their

contents, but they are admissible to establish a minimal

evidentiary foundation for the unreported income.   See Avery v.

Commissioner, 574 F.2d 467, 468 (9th Cir. 1978) (affirming this

Court’s decision to admit hearsay evidence for the limited

purpose of demonstrating that the Commissioner’s determination

was not arbitrary but not as substantive proof of the amount of

the deficiency), affg. T.C. Memo. 1976-129; Costa v.

Commissioner, T.C. Memo. 1990-572 (“In establishing the necessary

evidentiary predicate, hearsay evidence may be admissible for

purposes of showing that the notice was not arbitrary,

particularly when that evidence is buttressed by other

substantive evidence”.).
                              - 18 -

     In addition, rule 807 of the Federal Rules of Evidence, a

residual exception to the hearsay rule, provides a sound basis

for admitting those documents to prove the truth of the matters

asserted therein.   The core of that rule is that hearsay not

specifically covered by the exceptions in rule 803 or 804 of the

Federal Rules of Evidence is not excluded from evidence if it

bears “equivalent circumstantial guaranties of trustworthiness”.

Fed. R. Evid. 807; see United States v. Sanchez-Lima, 161 F.3d
545, 547 (9th Cir. 1998) (“Hearsay evidence sought to be admitted

under Rule 807 [of the Federal Rules of Evidence] must have

circumstantial guaranties of trustworthiness equivalent to the

listed exceptions to the hearsay rule.”).

     Under rule 807 of the Federal Rules of Evidence, hearsay not

covered by the exceptions in rule 803 or 804 of the Federal Rules

of Evidence is not excluded by rule 802 of the Federal Rules of

Evidence if the Court determines that: (1) The statement is

evidence of a material fact; (2) the statement is more probative

on the point for which it is offered than any other evidence

which the proponent can procure through reasonable efforts; and

(3) the general purposes of the Federal Rules of Evidence and the

interests of justice will best be served by admitting the

statement into evidence.   Rule 807 of the Federal Rules of

Evidence also requires notice to the adverse party before trial

of the proponent’s intent to offer the statement into evidence.
                               - 19 -

     We are convinced that the disputed documents possess

circumstantial guaranties of trustworthiness equivalent to those

in the other hearsay exceptions.    As we have already observed,

those documents were produced by financial institutions in

response to summonses and their veracity is reinforced by other

evidence already of record.    See supra pp. 6-13.   As for the

other requirements of rule 807 of the Federal Rules of Evidence,

the disputed documents are material and are more probative than

any other evidence of record on the unreported income issue.

Finally, petitioners received adequate notice of respondent’s

intent to introduce the disputed documents into evidence at

trial.    In fact, petitioners actually received the documents

themselves and respondent’s 27-page pretrial memorandum well in

advance of trial.18   We therefore overrule petitioners’ hearsay

objections and admit the disputed documents into evidence.19

     18
      The only items that petitioners did not receive before
trial were the supporting affidavits. Petitioners were certainly
on notice of respondent’s intent to offer the account
applications and signature cards into evidence at trial.
     19
      On brief, petitioners appear to object to the
admissibility of the copies of the checks on the basis of the
best evidence rule. Those checks are properly admissible
electronic duplicates of the paper originals and their admission
does not run afoul of the best evidence rule. Fed. R. Evid.
1003.
                                   - 20 -

II.   Unreported Income

      A.   Burden of Proof

      Section 61(a) specifies that “Except as otherwise provided”,

gross income includes “all income from whatever source

derived”.    The Commissioner’s determination of a taxpayer’s

liability for an income tax deficiency is generally presumed

correct, and the taxpayer bears the burden of proving that the

determination is improper.    See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).

      Where unreported income is involved, the Court of Appeals

for the Ninth Circuit20 has held that the presumption of

correctness applies once the Commissioner introduces some

substantive evidence reflecting that the taxpayer received

unreported income.    Hardy v. Commissioner, 181 F.3d 1002, 1004

(9th Cir. 1999), affg. T.C. Memo. 1997-97.      If the Commissioner

introduces such evidence, the burden shifts to the taxpayer to

show by a preponderance of the evidence that the deficiency was

arbitrary or erroneous.21 Id.    As explained below, respondent

      20
      Absent stipulation to the contrary, the appropriate venue
for an appeal of the decision in this case is the Court of
Appeals for the Ninth Circuit. See sec. 7482(b)(1)(A), (2).
      21
      Although sec. 7491(a) may shift the burden of proof to the
Commissioner in specified circumstances, petitioners have fallen
far short of satisfying the prerequisites under sec. 7491(a)(1)
and (2) for such a shift. Petitioners did not present any
credible evidence at trial, and Mr. Ioane’s testimony lacked any
semblance of credibility. In addition, petitioners did not
                                                   (continued...)
                              - 21 -

has introduced sufficient evidence connecting petitioners with

the unreported income.   Consequently, respondent’s determination

is entitled to the presumption of correctness.

     B. Bank Deposits Method of Proof

     Respondent used the bank deposits method of proof to

reconstruct the incomes of FAP, AFT, CSF, ACF, and PST for 2002

and 2003.   Respondent also used that method to determine the

amount of distributions from ACM to petitioners in 2003.

“Deposits in a taxpayer’s bank account are prima facie evidence

of income, and the taxpayer bears the burden of showing that the

deposits were not taxable income but were derived from a

nontaxable source.”   Welch v. Commissioner, 204 F.3d 1228, 1230

(9th Cir. 2000), affg. T.C. Memo. 1998-121.   “The bank deposits

method assumes that all money deposited in a taxpayer’s bank

account during a given period constitutes taxable income, but the

Government must take into account any nontaxable source or

deductible expense of which it has knowledge.”   Clayton v.

Commissioner, 102 T.C. 632, 645-646 (1994) (citing DiLeo v.

Commissioner, 96 T.C. 858, 868 (1991), affd. 959 F.2d 16 (2d Cir.

1992)).

     Agent Brown used summonses to gather information regarding

bank and brokerage accounts held by FAP, AFT, CSF, ACF, PST, and

     21
      (...continued)
comply with the substantiation requirements and have been
generally uncooperative in their dealings with respondent.
                               - 22 -

ACM.    His bank deposits analysis was based largely on that

information.    To avoid double-counting deposits attributable to

transfers made between accounts and to avoid counting deposits

derived from nontaxable sources, Agent Brown reduced the

entities’ taxable income for 2002 and 2003 to account for such

deposits.    Documents detailing Agent Brown’s bank deposits

analysis have been admitted into evidence in this case.

       Petitioners have provided no credible evidence demonstrating

error in respondent’s bank deposits analysis, choosing instead to

focus on other errors purportedly committed by respondent.

Respondent has introduced ample evidence reflecting that the

trusts had unreported income in 2002 and 2003.    We now turn in

more detail to whether petitioners should be charged with that

unreported income--an issue whose outcome turns on the nature of

their relationship with those entities.

       C. The Trusts as Disregarded Entities

       “The legal right of a taxpayer to decrease the amount of

what otherwise would be his taxes, or altogether avoid them, by

means which the law permits, cannot be doubted.”    Gregory v.

Helvering, 293 U.S. 465, 469 (1935).    “However, this right does

not bestow upon the taxpayer the right to structure a paper

entity to avoid tax when that entity does not stand on the solid

foundation of economic reality.”    Zmuda v. Commissioner, 79 T.C.
714, 719 (1982), affd. 731 F.2d 1417 (9th Cir. 1984).    Because we
                                - 23 -

look to substance over form, a paper entity that lacks economic

substance and is in reality a sham may be disregarded entirely

for Federal income tax purposes.    See id. at 720.

     We have looked to four factors in determining whether a

trust has economic substance:    (1) Whether the taxpayer’s

relationship to the transferred property differed materially

before and after the trust’s creation; (2) whether the trust had

an independent trustee; (3) whether an economic interest passed

to other trust beneficiaries; and (4) whether the taxpayer

respected restrictions imposed on the trust’s operation as set

forth in the trust documents.    See, e.g., Markosian v.

Commissioner, 73 T.C. 1235, 1243-1244 (1980); Lundgren v.

Commissioner, T.C. Memo. 2006-177.

     Although our analysis of the four factors is made difficult

by petitioners’ lack of cooperation with Agent Brown and with the

Court’s stipulation process under Rule 91(a), the evidence before

us compels the conclusion that petitioners treated the trusts as

their personal pocketbooks, depositing and withdrawing funds at

their convenience.

     1.   Petitioners’ Relationship to Trust Property

     Because the trust agreements underlying FAP, AFT, CSF, ACF,

and PST are not of record, it is not clear who formed the trusts

or what, if any, property was transferred into them at their

inception.   The evidence does reflect that petitioners dominated
                                   - 24 -

the trusts and that the transfer of property into the trusts did

not alter any cognizable economic relationship between

petitioners and the transferred property.         See Markosian v.

Commissioner, supra at 1241.       Money was frequently deposited into

the trusts’ accounts, and petitioners’ actions indicate that they

were free to do as they pleased with that money.         Consequently,

this factor points to a lack of economic substance.

       2.     Independence of Trustees

       Petitioners have not demonstrated that any of the trustees

were independent of the trusts.          The trustees of CSF and ACF were

certainly not independent:       Mr. Ioane was listed as successor

trustee of CSF, and petitioners were both listed as trustees of

ACF.    Checks from FAP and AFT were signed using the signature

stamps of purported trustees and successor trustees, none of whom

testified at trial.22       We can infer that their testimony would

have been unfavorable to petitioners.         See Wichita Terminal

Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162
F.2d 513 (10th Cir. 1947).       Who was trustee of PST is even less

clear, but Mr. Ioane referred to himself as “general trustee” in

a Tax Court petition.       Ultimately, petitioners have not shown

that any of the trusts had an independent trustee.         Consequently,

this factor points to a lack of economic substance.

       22
            The AFT checks were also signed by Mrs. Olson-Ioane.
                                - 25 -

       3.   Economic Interests of Beneficiaries

       Agent Brown testified that he did not know who the trust

beneficiaries were.     Because the relevant trust arrangements are

not of record, that question remains unanswered.23    The evidence

reflects that petitioners treated the trusts’ accounts as their

own.    Petitioners have failed to demonstrate that economic

interests flowed from the trusts to anyone other than petitioners

themselves.     Consequently, this factor points to a lack of

economic substance.

       4.   Respect for Trust Restrictions

       Petitioners had unfettered access to trust property, which

indicates that they were not restrained by trust restrictions, if

there were any, or by trust law.     They paid their personal bills

and took cash from the trusts’ accounts.     In addition, it appears

that at some point PST, FAP, and AFT lent petitioners unknown

sums of money.24    Petitioners have not demonstrated that those

loans were bona fide.    There is no evidence of written loan

agreements, the terms of the loans, or any payments by

       23
      We do have a little information regarding PST and AFT.
Although Mr. Ioane’s testimony was far from credible, he
testified that PST “is actually a trust that was created probably
about 40 years ago * * * in the island of American Samoa” and
that he and his wife transferred their home to PST in 1995. He
also testified that his children “were a break-off beneficiary”
of PST and that PST was itself a beneficiary of AFT.
       24
      Petitioners deducted interest payments on those loans (and
other loans) on their 2002 return. Respondent has disallowed
those itemized deductions, among others.
                                - 26 -

petitioners.   Consequently, this factor points to a lack of

economic substance.

     Mrs. Olson-Ioane did not testify at trial.      Mr. Ioane did

testify, but his testimony was evasive, plagued by feigned memory

lapses, and generally unbelievable.      He denied controlling the

trusts and claimed to be no more than an independent contractor

working for the trusts.    He characterized payments of

petitioners’ personal expenses by the trusts as loans that were

repaid, reimbursements for expenditures that he had made on the

trusts’ behalf, or payments to him in lieu of money that was owed

to him for his work.25    The evidence supports none of his

assertions.

     We conclude that the trusts were mere alter egos of

petitioners that lack any semblance of economic substance.

Accordingly, we shall disregard them for Federal income tax

purposes.   See Sparkman v. Commissioner, 509 F.3d 1149, 1156 n.6

(9th Cir. 2007) (“An entity without economic substance, whether a

sham partnership or a sham trust, is a sham either way and hence

is not recognized for federal tax law purposes.”), affg. T.C.

Memo. 2005-136.   Petitioners are therefore liable for Federal

     25
      If the money was owed to him for his work, he asserts it
was treated as income on petitioners’ returns.
                                - 27 -

income tax on the trusts’ unexplained receipts and dividends, see

supra note 2, for 2002 and 2003.26

     D.    ACM

     Using a bank deposits analysis, respondent determined that

petitioners received $140,710.68 in distributions from ACM in

2003.     ACM’s bank records and canceled checks support

respondent’s determination, and petitioners have not demonstrated

otherwise.

     Petitioners assert that ACM was the alter ego of Gerald and

Ona Lindsey.     A second default judgment entered by the U.S.

Bankruptcy Court for the District of Idaho on July 30, 2004,

refers to ACM and a “Golden Opportunity Trust” as “nominees or

alter egos of Debtors Gerald and Ona Lindsey.”     Petitioners

contend that “This means all of [ACM’s] income belonged to the

Lindsey’s (sic), and no one else” and that, because respondent

failed to contest the issue in bankruptcy court, respondent

“cannot now argue otherwise”.

     26
      Petitioners argue on brief that they cannot be held liable
for tax on the unreported income because tax on that income has
already been assessed against the trusts. They are incorrect.
Where there are two potential taxpayers, an assessment of tax on
the same income against both--a whipsaw assessment--is
permissible to protect the Commissioner’s ability to ensure
collecting the tax. See, e.g., Fayeghi v. Commissioner, 211 F.3d
504, 508 (9th Cir. 2000), affg. T.C. Memo. 1998-297; Centel
Communications Co. v. Commissioner, 920 F.2d 1335, 1339 (7th Cir.
1990), affg. 92 T.C. 612 (1989). To prohibit the tax from now
being assessed against petitioners would be to allow them to
avoid tax by hiding behind the very sham entities that were
created for tax avoidance.
                                  - 28 -

       Petitioners are wrong in all relevant respects.    Whether or

not ACM is an alter ego of Gerald and Ona Lindsey has nothing to

do with whether petitioners (and petitioners’ personal expenses)

were paid out of ACM’s account in 2003.      Because petitioners and

their personal expenses were paid out of ACM’s Wells Fargo

account in 2003, they are liable for tax on that unreported

income.27

III.    Self-Employment Tax

       Respondent determined that petitioners are liable for self-

employment tax for both years at issue.      Section 1401 imposes a

tax on the self-employment income of every individual.      Section

1402(b) defines “self-employment income” as an individual’s “net

earnings from self-employment”.

       On brief, respondent asserts that “Petitioners earned the

income as sole proprietors, and therefore, their income is

subject to the self-employment tax.”       Petitioners have provided

no evidence demonstrating that their unreported income was not

self-employment income.       They are therefore liable for the self-

employment tax determined by respondent for 2002 and 2003.

IV.    Schedule C Deductions

       Petitioners claimed $14,562 in Schedule C deductions on

their 2002 return and $14,823 in Schedule C deductions on their

       27
      Petitioners have not argued (and there is no evidence
suggesting) that payments from ACM to petitioners or on
petitioners’ behalf were for some reason nontaxable.
                                - 29 -

2003 return.   Respondent disallowed those deductions in their

entirety.

     Deductions are a matter of legislative grace, and the

taxpayer must maintain adequate records to substantiate the

amounts of any deductions or credits claimed.   Sec. 6001;

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec.

1.6001-1(a), Income Tax Regs.    The taxpayer bears the burden of

proving entitlement to any claimed exemptions or deductions; the

taxpayer’s burden includes the burden of substantiation.

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. 540
F.2d 821 (5th Cir. 1976).

     Section 162(a) authorizes a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”.    A trade or business

expense is ordinary for purposes of section 162 if it is normal

or customary within a particular trade, business, or industry and

is necessary if it is appropriate and helpful for the development

of the business.   Commissioner v. Heininger, 320 U.S. 467, 471

(1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940).

     Petitioners have not submitted into evidence any records in

support of their claimed business expense deductions.   In support

of those deductions, petitioners have presented Mr. Ioane’s self-

serving testimony that the records were provided to respondent’s
                              - 30 -

auditor “at that time” and “I believe this is accurate”.28      Mr.

Ioane also testified that the Schedule C expenses were

“accurate”.   This is woefully insufficient to demonstrate

entitlement to deductions for any business expenses.

Accordingly, we conclude that petitioners are not entitled to any

Schedule C deductions for business expenses.

V.   NOL and NOL Carryover Deductions

     Petitioners claimed deductions for a $99,172,118 NOL in 2002

and a $99,134,330 NOL carryover in 2003.   Respondent disallowed

those deductions in their entirety.

     Section 172(a) allows NOL deductions.     Section 172(c)

defines an NOL as “the excess of the deductions allowed by this

chapter over the gross income”, as modified by section 172(d).

“[Section] 172 provides specific rules allowing NOLs to be

carried back to preceding taxable years and carried forward to

future years to reduce a taxpayer’s taxable income.”     Med James,

Inc. v. Commissioner, 121 T.C. 147, 153 n.9 (2003).     A taxpayer

claiming an NOL deduction for a taxable year must file with the

     28
      Petitioners also argue belatedly that they cannot
substantiate their deductions because relevant records were
seized when a search warrant was executed at their house in June
2006. We do not believe that they are unable to substantiate
their deductions because respondent has the necessary evidence
and has refused to return it to them. They have no proof that
such evidence is in respondent’s possession or that respondent
has refused their request to return such evidence. There is no
evidence that they attempted to obtain any relevant records from
respondent’s Criminal Investigation Division.
                                - 31 -

tax return for that year a concise statement setting forth the

amount of the NOL deduction claimed and all material and

pertinent facts, including a detailed schedule showing the

computation of the NOL deduction.     Sec. 1.172-1(c), Income Tax

Regs.

      Petitioners claimed staggering NOLs but presented no

documentary evidence in support of those losses and appear to

have forgotten their genesis.     At trial Mr. Ioane testified that

the claimed NOL resulted from a theft loss in 2001.       When asked

“Can you tell us what object was stolen or was lost in a

casualty?”, he responded:     “You know, I don’t recollect how that

was calculated.”     When asked if he knew the object that was lost

or destroyed, Mr. Ioane responded:       “No, I don’t recall any of

that information.”     After the Court commented that it is hard to

believe that someone would incur such immense losses and have no

idea how, Mr Ioane asserted:     “I know it related to some losses

in real estate, and promissory notes, and medical losses, and

related to medical loss.”     Mr. Ioane’s testimony was evasive and

unbelievable.     Petitioners have not demonstrated that they are

entitled to any NOL deductions or deductions for any other type

of loss.

VI.   Itemized Deduction for Medical and Dental Expenses in 2002

        Petitioners claimed an $8,840 deduction for medical and

dental expenses in 2002.     Respondent disallowed that deduction.
                               - 32 -

     Section 213(a) allows for the deduction of personal medical

and dental expenses to the extent that they exceed 7.5 percent of

adjusted gross income (AGI).   Although respondent concedes that

petitioners have substantiated $3,182.82 in medical expenses for

2002, that is less than the applicable $7,850 standard deduction

for 2002.   Also, in light of our earlier conclusions,

petitioners’ 2002 AGI is significantly higher than the enormous

loss that they reported on their 2002 return.    This warrants an

upward adjustment of the 7.5-percent floor for deductions for

medical and dental expenses, which would in any event preclude

petitioners from deducting such expenses.   Petitioners have

failed to demonstrate entitlement to an itemized deduction for

medical and dental expenses for 2002.

VII. Exemptions and Credits

     Petitioners claimed a deduction of $15,000 for personal

exemptions in 2002 and a deduction of $15,250 for personal

exemptions in 2003.   They claimed an earned income credit of

$2,194 in 2003.   And they claimed additional child tax credits of

$1,800 and $1,377 in 2002 and 2003, respectively.   Respondent

disallowed the claimed exemptions and credits.

     The relevant exemptions and credits are all reduced or

phased out if a taxpayer’s AGI exceeds certain amounts.   See

secs. 24(b), 32(a)(2), 151(d)(3).   In light of our opinion

sustaining the deficiencies determined by respondent,
                                  - 33 -

petitioners’ 2002 and 2003 AGI is increased to the extent that

they are ineligible for any of the claimed personal exemption

deductions or credits.

VIII.     Addition to Tax and Penalties

        A. Burden of Production

        Under section 7491(c) the Commissioner bears the burden of

production with respect to a taxpayer’s liability for penalties

or additions to tax.      This means that the Commissioner “must come

forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty.”      Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).      In instances where an

exception to the penalty or addition to tax is afforded, for

example, upon a showing of reasonable cause or substantial

authority, the taxpayer bears the burden of “[coming] forward

with evidence sufficient to persuade a Court that the

Commissioner’s determination is incorrect.” Id. at 447.

        B.   Section 6651(a)(1) Addition to Tax

        Respondent determined that petitioners are liable for an

addition to tax under section 6651(a)(1) for 2002.      We agree with

respondent.

        Section 6651(a)(1) imposes an addition to tax of 5 percent

per month or a fraction of a month up to a maximum of 25 percent

for failure to file a timely return unless it is shown that such

failure is due to reasonable cause and not to willful neglect.
                                - 34 -

       Petitioners argue that respondent has not met the burden of

production because respondent has not shown that they failed to

file any return.    Petitioners are incorrect.   In order to satisfy

the burden of production, respondent does not have to show that

petitioners failed to file any return, only that their 2002

return was filed late.    Respondent has done so.   The return

itself reflects that respondent received it on June 23, 2003.

That is the date on which the return is deemed to have been

filed.29    Petitioners have not introduced any evidence reflecting

that their failure to file a timely return was supported by

reasonable cause.    Accordingly, we conclude that petitioners are

liable for the section 6651(a)(1) addition to tax for 2002.

       C. Section 6662(a) Accuracy-Related Penalties

       Section 6662(a) imposes an accuracy-related penalty on an

underpayment of tax that is equal to 20 percent of any

underpayment that is attributable to one of the causes listed in

subsection (b).    Among those causes is negligence or disregard of

rules or regulations and a substantial understatement of income

tax.    Sec. 6662(b)(1) and (2).   Respondent contends that

petitioners are liable for the section 6662 penalty because (1)

their underpayment of income tax in 2002 and 2003 resulted from

       29
      Because there is no evidence that petitioners mailed that
return on or before its due date, the timely-mailed-is-timely-
filed rule in sec. 7502(a) is inapplicable. See sec. 7502(a)(2).
                                - 35 -

negligence and (2) they substantially understated their income

tax for both years.

     Section 6662(c) defines negligence as “any failure to make a

reasonable attempt to comply with the provisions of this title”.

“[D]isregard” is defined to include “any careless, reckless, or

intentional disregard.” Id.   Under caselaw, “‘Negligence is a

lack of due care or the failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.’”

Freytag v. Commissioner, 89 T.C. 849, 887 (1987) (quoting

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967),

affg. on this issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

     There is a “substantial understatement” of an individual’s

income tax for any taxable year where the amount of the

understatement exceeds the greater of (1) 10 percent of the tax

required to be shown on the return for the taxable year or (2)

$5,000.   Sec. 6662(d)(1)(A).   However, the amount of the

understatement is reduced to the extent attributable to an item

(1) for which there is or was substantial authority for the

taxpayer’s treatment thereof, or (2) with respect to which the

relevant facts were adequately disclosed on the taxpayer’s return

or an attached statement and there is a reasonable basis for the

taxpayer’s treatment of the item.    See sec. 6662(d)(2)(B).
                                - 36 -

     There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate (1) reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment.    Sec. 6664(c)(1).   Regulations

promulgated under section 6664(c) further provide that the

determination of reasonable cause and good faith “is made on a

case-by-case basis, taking into account all pertinent facts and

circumstances.”    Sec. 1.6664-4(b)(1), Income Tax Regs.

     Petitioners were negligent and substantially understated

their 2002 and 2003 Federal income tax liabilities.     They used a

number of entities in order to obscure their true income, and

they claimed a nearly $100 million NOL and cannot remember why.

They have not demonstrated that any of the exceptions applies.

They are therefore liable for the section 6662 penalties

determined by respondent.

     D.   Section 6673(a)(1) Penalty

     Section 6673(a)(1) authorizes the Tax Court to impose a

penalty not in excess of $25,000 on a taxpayer for proceedings

instituted primarily for delay or in which the taxpayer’s

position is frivolous or groundless.     “A position maintained by

the taxpayer is ‘frivolous’ where it is ‘contrary to established

law and unsupported by a reasoned, colorable argument for change

in the law.’”     Williams v. Commissioner, 114 T.C. 136, 144 (2000)

(quoting Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir.
                              - 37 -

1986)).   Although respondent does not ask us to impose a penalty

upon petitioners under section 6673(a)(1), we may impose such a

penalty sua sponte.   See Pierson v. Commissioner, 115 T.C. 576,

581 (2000).

     Months before trial, when he was not cooperating in the

stipulation process, we warned Mr. Ioane of the possible

imposition of a section 6673 penalty.30   Undeterred, he continued

to be uncooperative in the stipulation process.   His behavior

throughout these proceedings has been marked by a lack of candor.

His arguments have been nothing but frivolous and groundless.    As

a consequence, we shall impose upon petitioners a $10,000 penalty

pursuant to section 6673(a)(1).

     The Court has considered all of petitioners’ contentions,

arguments, requests, and statements.   To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,

                                          Decision will be entered

                                    under Rule 155.

     30
      Mrs. Olson-Ioane has not participated in person in these
proceedings in any meaningful way.
                                         - 38 -

                                        APPENDIX

Table: Examples of Checks Reflecting (on a Preponderance of Available Evidence) Payments
 to Petitioners, by Petitioners, or on Behalf of Petitioners from the Entities’ Accounts

Account   Institution    Check   Date         Payee         Amount      Memo Section
Holder                   No.
FAP       Saratoga/San   4808    02/01/2002   Capital One   $1,198.69   An account number
          Jose                                                          followed by
          National                                                      “Michael S.
          Bank                                                          Ioane”

FAP       Saratoga/San   4864    02/26/2002   Merced        $1,301.50   “IOANE/Balance of
          Jose                                Christian                 tuition due +
          National                            School                    $1.50 Nov. ECS”
          Bank
FAP       Saratoga/San   5032    06/14/2002   Mike Ioane    $4,000      “car purchase”
          Jose
          National
          Bank
FAP       California     6006    05/13/2002   Target -      $543.26     An account number
          Federal Bank                        Retailers                 followed by “For:
                                              National                  Shelly J. Olson”
                                              Bank
                                    - 39 -

FAP   California     6013   05/13/2002   Capital One    $466.66   “Michael S.
      Federal Bank                                                Ioane”
                                                                  followed by an
                                                                  account number
FAP   California     6014   05/13/2002   Capital One    $470.11    “Shelly J.
      Federal Bank                                                Ioane” followed
                                                                  by an account
                                                                  number
FAP   California     6068   06/16/2002   Capital One    $704.28   “Mike Ioane”
      Federal Bank                                                followed by an
                                                                  account number
FAP   California     6084   06/14/2002   Shelly         $4,100    Signed using
      Federal Bank                       Olson-Ioane              signature stamp
                                                                  of Laurel Fierro.
FAP   California     6104   06/28/2002   Merced         $255      The memo section
      Federal Bank                       Christian                contained the
                                         School                   name of one of
                                                                  petitioners’
                                                                  children.
FAP   California     6214   08/21/2002   Tracy Kupfer   $137.74   “For: Shelly
      Federal Bank                                                Ioane + $10
                                                                  postage”
                                    - 40 -

FAP   California     6219   08/23/2002   Merced         $20    The memo section
      Federal Bank                       Christian             contained the
                                         School                name of one of
                                                               petitioners’
                                                               children followed
                                                               by “hot lunches-
                                                               Sept 2002”
FAP   California     6263   09/06/2002   Golden Ram     $850   “Mike Ioane -
      Federal Bank                       Sportsman’s           ‘Family Pack’”
                                         Club, Inc.
FAP   California     6268   09/12/2002   The Scottish   $60    Renewal for a
      Federal Bank                       Rite                  member number
                                                               followed by
                                                               “Michael Ioane”
FAP   California     6329   10/08/2002   Blue Cross     $550   A “certificate”
      Federal Bank                       of                    number followed
                                         California            by “Michael S.
                                                               Ioane”
FAP   California     6481   12/13/2002   Blue Cross     $550   The same
      Federal Bank                       of                    certificate
                                         California            number that was
                                                               on check no. 6329
                                        - 41 -

AFT   Saratoga       229        04/02/2002   The           $834,000     Blank. Signed by
      National                               Charitable                 Mike Ioane and
      Bank                                   Scholarship                using the
                                             Foundation                 signature stamp
                                                                        of Jeffrey P.
                                                                        Rosenberg.
CSF   A.G. Edwards   2019       12/15/2003   Stone Ridge   $2,356.50    Blank. Signed
                                             Christian                  using signature
                                             High School                stamp of Laurel
                                                                        Fierro.
ACF   California     1017       11/21/2003   Morgan Hill   $1,071       “Dues life”
      Federal Bank                           Lodge                      signed by Mike
                                                                        Ioane
ACF   California     1027       12/08/2003   Cash          $1,295       “$1,285- cashiers
      Federal Bank                                                      check” signed by
                                                                        Shelly J. Olson
ACF   A.G. Edwards   2002       12/20/2002   Stone Ridge   $600         Illegible.
                                             Christian                  Petitioners both
                                             High School                signed the check
ACF   Morgan         10516060   11/14/2002   MICHAEL       $30,300.40   N/A
      Stanley                                SCOTT IOANE
                                             AND SHELLY
                                             JEAN IOANE
                                             TTEES F/T
                                             [ACF] TRUST
                                             DTD 1-1-93
                                   - 42 -

ACM   Wells Fargo   7962   10/21/2003   Mike Ioane   $1,967      Blank. Signed
                                                                 using signature
                                                                 stamp of Laurel
                                                                 Fierro.
ACM   Wells Fargo   8037   11/19/2003   Mike Ioane   $1,993.50   Blank. Signed
                                                                 using signature
                                                                 stamp of Laurel
                                                                 Fierro.