Sometimes I have to be careful about jumping to conclusions. When I first looked at Charlton v. Commissioner I expected the taxpayer to lose. It wasn’t hard to jump to that conclusion when I read,
Throughout his career, Jeffrey pursued a myriad of income producing opportunities. His desire to earn large amounts of income with minimal effort led him to become involved with Amway, Herbalife, and numerous other multilevel marketing businesses (MLM). These endeavors were unsuccessful.
Next, I read that the petitioner learned about Trusts that magically made income tax disappear. In a footnote, Judge Foley notes,
Representatives of ProTec routinely told potential clients that the Internal Revenue Service had verified that the ProTec plan complied with tax laws. In 2004, certain representatives of ProTec pleaded guilty to a charge of conspiracy to defraud the United States in connection with their activities related to the promotion and marketing of fraudulent trust schemes.
But the petitioner missed out on that entity (whew) as it went out of business before he could invest. Unfortunately, he discovered Aegis. I’ve reported on Aegis in the past; suffice to say many of the principals ended up at ClubFed. With their CPA they attended an Aegis presentation and, “…[they] left the Aegis seminar convinced that the Aegis system was a legitimate tax minimization and asset protection plan.”
From 2002 – 2003 the IRS attempted to obtain records, but the petitioner fought the IRS, even suing employees. Eventually, a District Court ordered the petitioner to comply with an IRS summons (which he did). Finally, in 2007, the IRS issued deficiency notices for tax years 1999 and 2000. The IRS alleged that the petitioner, his partnerships, and his trusts engaged in fraud, so the normal 3-year statute of limitations wouldn’t apply. (In cases of fraud, the tax can be assessed at any time.)
Unlike in most Tax Court cases, the burden of proof is on the IRS in a fraud case. “Respondent must establish by clear and convincing evidence that Jeffrey and Mary filed false or fraudulent returns with the intent to evade tax.”
Simply put, respondent has failed to meet his burden…To the contrary, Jeffrey did not intend to evade tax but wrongfully believed that the ProTec plan and the Aegis system were legitimate tax avoidance techniques. Indeed, Jeffrey, Timothy, and Mr. Moore [the CPA] all believed that the Aegis system was legitimate and that the returns were accurate.
Mr. Moore, respondent’s primary witness, provided convincing testimony regarding the perceived legitimacy of the techniques and accuracy of the returns. His testimony relating to his advice to Jeffrey and Timothy, however, was inconsistent, incoherent, and at times incomprehensible. Nevertheless, Jeffrey, through his credible testimony, established that Mr. Moore did not express any doubt regarding the legitimacy of the tax planning arrangements. In fact, Mr. Moore was so comfortable with the tax planning arrangements that, after preparing the domestic trusts’ returns relating to the years in issue, he became a trustee of Jeffrey’s domestic trust.
Luckily for the petitioner, there are cases where “reliance upon an accountant to prepare accurate returns may negate fraudulent intent if the accountant was supplied with all the information necessary to prepare the returns.” Mr. Moore may have been “imprudent,” but the petitioner supplied him with all of his records. They may have “believed in and acquiesced to an elaborate scheme designed by con artists,” but the petitioner didn’t intend to commit fraud. Thus, the IRS is time-barred from redress.
Still, this case is a reminder that if it sounds too good to be true, it probably is. There is no magical trust that makes the income tax disappear.
Case: Charlton v. Commissioner, T.C. Memo 2011-51
