The opinion
T.C. Memo. 2009-203
UNITED STATES TAX COURT
FOXWORTHY, INC., ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 20725-03, 160-04, Filed September 9, 2009.
18969-04, 601-05,
14612-05, 21699-05,
24533-06.
William E. Frantz and Donald B. DeLoach, for petitioners Ron
H. Bell and Tricia S. Bell.
Robert H. Hishon, for petitioner Foxworthy, Inc.
Stephen R. Takeuchi, Brianna B. Taylor, Joel D. McMahan,
Laura Beth Salant, Travis T. Vance, and Robert W. Dillard, for
respondent.
1
Cases of the following petitioners have been consolidated
herewith for trial, briefing and opinion: Foxworthy, Inc.,
docket Nos. 18969-04 and 14612-05, Ron H. Bell and Tricia S.
Bell, docket Nos. 160-04, 601-05, 21699-05, and 24533-06. All
are hereinafter collectively referred to as the instant case.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined deficiencies and
penalties with respect to petitioners’ Federal income tax as
follows:
Foxworthy, Inc. (Docket No. 20725-03)
Penalty Under I.R.C.
Year Deficiency Sec. 6662(a)
1999 $2,508,226 $501,645.20
Foxworthy, Inc. (Docket No. 18969-04)
Penalty Under I.R.C.
Year Deficiency Sec. 6662(a)
2000 $3,086,277 $617,255.40
Foxworthy, Inc. (Docket No. 14612-05)
Penalty Under I.R.C.
Year Deficiency Sec. 6663(a)
2001 $653,801 $490,350.75
Ron H. Bell and Tricia S. Bell (Docket No. 160-04)
Penalties Under I.R.C.
Year Deficiency Sec. 6663(a) Sec. 6662(a)
1999 $4,520,032 $3,390,024 $904,006.40
Ron H. Bell and Tricia S. Bell (Docket No. 601-05)
Penalties Under I.R.C.
Year Deficiency Sec. 6663(a) Sec. 6662(a)
2000 $4,489,883 $3,367,412.25 $897,976.60
Ron H. Bell and Tricia S. Bell (Docket No. 21699-05)
Penalties Under I.R.C.
Year Deficiency Sec. 6663(a) Sec. 6662(a)
2001 $1,108,334 $831,250.50 $221,666.80
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Ron H. Bell and Tricia S. Bell (Docket No. 24533-06)
Addition to
Penalties Under I.R.C. Tax Under I.R.C.
Year Deficiency Sec. 6662(a) Sec. 6663(a) Sec. 6651(a)(1)
1996 $548,028 $109,605.60 $411,021 $130,756.50
1997 1,747,365 349,473.00 1,310,445 ---
1998 1,180,512 236,102.40 885,384 ---
After concessions by the parties and settlement of several
issues, the issues remaining for decision are: (1) Whether
petitioners Ron H. Bell and Tricia S. Bell2 are liable for the
section 66633 fraud penalty for the years in issue; (2) whether,
on account of fraud, the period of limitations remains open for
the years in issue; (3) whether certain “offshore employee
leasing transactions” (OEL transactions) that petitioner Ron H.
Bell entered into during the years in issue lacked economic
substance; (4) whether petitioner Ron H. Bell constructively
received the money transferred as part of the OEL transactions;
(5) whether petitioner Foxworthy, Inc. (Foxworthy), was Ron H.
Bell’s alter ego; (6) whether Foxworthy is entitled to deductions
claimed regarding certain real property on Northside Drive, in
Atlanta, Georgia; (7) whether petitioners Ron H. Bell and Tricia
2
Tricia S. Bell is also referred to herein as Patricia D.
Small (her maiden name).
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), and all Rule references are to
the Tax Court Rules of Practice and Procedure.
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S. Bell are entitled to certain deductions claimed for expenses
related to Bell Capital Management, Inc., an S corporation owned
by petitioner Ron H. Bell; (8) whether petitioners Ron H. Bell
and Tricia S. Bell are entitled to a certain nonbusiness bad debt
deduction; (9) whether petitioner Ron H. Bell must recognize gain
on interest and dividends on certain investment accounts; (10)
whether petitioner Ron H. Bell must recognize capital gains on
the liquidation of certain stock; (11) whether Bell Capital
Management, Inc., was entitled to an employee business expense
deduction for certain fines paid to the Securities and Exchange
Commission (SEC); (12) whether petitioners are liable for the
section 6662(a) negligence penalty for the years in issue; (13)
whether petitioners Ron H. Bell and Tricia S. Bell are liable for
the section 6651(a)(1) addition to tax for the years in issue;
and (14) whether petitioners have shown sufficient grounds to
supplement the record.
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated
by the parties. The parties’ stipulations are incorporated in
this opinion and are so found. The parties have stipulated that
the venue for appeal of the instant case is the U.S. Court of
Appeals for the Eleventh Circuit.
Petitioner Ron H. Bell (Mr. Bell) graduated from Vanderbilt
University in 1968 and received a degree in electrical
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engineering. During 1970 Mr. Bell graduated from Emory
University and received a master’s of business administration.
During the years in issue Mr. Bell was a chartered financial
analyst of the CFA Institute as well as a chartered investment
counselor of the Investment Counselor Association of America.
After graduating from Emory, Mr. Bell worked for Asset
Management in Atlanta, Georgia, for 1 year specializing in
investment research. Subsequently, Mr. Bell worked for National
Service Industries, Inc., for 12 years in various positions. At
National Service Industries, Mr. Bell developed a risk control
process of managing investments. The objective of the risk
control process was to protect investments from participating in
periods of significant decline while allowing them to produce
attractive returns.
During 1984 Mr. Bell incorporated Bell Capital Management,
Inc. (BCM). During May 1988 Mr. Bell elected to treat BCM as an
S corporation. From Mr. Bell’s incorporation of BCM in 1984 and
throughout the years in issue, Mr. Bell owned 100 percent of BCM
and was its sole director. At BCM Mr. Bell made the risk control
process he developed at National Service Industries available to
individual clients and their financial planners.
During 1991 through 2001 Mr. Bell’s duties as BCM’s employee
included the supervision and direction of business operations,
providing services to clients as a financial planner, investment
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counselor, and wealth manager, and in related capacities. From
1987 through 2001, investment decisions on behalf of BCM clients
were made by BCM’s investment committee. The investment
committee comprised Mr. Bell, Thomas C. Comsudes (Mr. Comsudes),
and Mark S. Palmer (Mr. Palmer). Mr. Comsudes and Mr. Palmer
began contributing as decision makers after each had worked at
BCM for several years.
During 1984 Mr. Comsudes graduated from Stetson University
and received a bachelor’s degree in business administration. Mr.
Comsudes worked for Fidelity Investments for approximately 6
months after graduating from Stetson University. During June
1985 Mr. Comsudes met Mr. Bell and began working at BCM. When
Mr. Comsudes started working for BCM, he handled administrative
functions and placed buy and sell orders. As the years went by,
Mr. Comsudes assumed more responsibility and handled some of the
investment research.
During 1984 Mr. Palmer graduated from the University of
Georgia and received a BBA degree in finance. During 1987 Mr.
Palmer received a master’s in business administration from
Georgia State University. Mr. Palmer is also a chartered
financial analyst and a CFA Institute member. Mr. Palmer, like
Mr. Comsudes, handled administrative duties when he joined BCM
and later worked his way up to investment research.
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During 1996 BCM moved to new offices in Atlanta to
accommodate the growth it experienced. At the time of the move,
BCM had five employees. Shortly after the move, BCM hired three
additional workers. By 2003 BCM had 20 employees.
By the end of 1995 BCM managed the portfolios of 1,100
clients with an aggregate market value of $280 million. By the
end of 1999 business had improved and BCM managed the portfolios
of 2,283 clients with an aggregate market value of $531,531,263.
BCM received quarterly fees as compensation for investment
services. Clients paid the fees either by writing checks each
quarter or by having the fees deducted from their accounts.
From 1991 through 1995 BCM paid Mr. Bell wages of $761,978,
$978,772, $691,006, $589,760, and $630,760, respectively. During
1996 through 2001, the taxable years in issue, Mr. Bell reported
on his Federal income tax returns wages of $75,000, $75,000,
$75,000, $75,000, $75,000, and $37,500, respectively. For 1996
through 2000 Mr. Bell reported on his Federal income tax returns
wages received from Nationwide Executive Staff Leasing (NESL),
and for 2001 Mr. Bell reported on his Federal income tax return
wages received from International Leasing Services (ILS).
Petitioner Tricia S. Bell (Mrs. Bell) received a degree from
Kings Business School. For over 10 years Mrs. Bell worked as a
paralegal for a law firm in North Carolina. During 1972 Mrs.
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Bell moved to Atlanta. Mrs. Bell worked as a paralegal for an
Atlanta law firm for over 10 years.
During either 1979 or 1980 Mrs. Bell became interested in
interior plant design as a hobby. During the early 1980s Mrs.
Bell stopped working as a paralegal and opened her own interior
plant design business under the name “Plantlease”. Plantlease
bought, sold, and maintained interior plants for offices and
office buildings.
After Plantlease’s business declined, Mrs. Bell, sometime
around 2000, sold Plantlease. Thereafter Mrs. Bell became a 50-
percent owner of Kaleidoscope, a lawn maintenance company.
Belinda Cochran owned the other 50 percent of Kaleidoscope and
was responsible for its day-to-day operations.
During the years in issue Mr. and Mrs. Bell (hereinafter,
sometimes, the Bells) were cash method taxpayers.
Deductions Claimed by BCM and by the Bells
During the taxable years in issue BCM claimed deductions
related to its business and reported the deductions on its Forms
1120S, U.S. Income Tax Return for an S Corporation. The net
income of BCM was then reported on the Bells’ Schedule E,
Supplemental Income and Loss, for the respective years.
For the following taxable years BCM deducted the following
amounts paid for the services of Mr. Bell: $800,000 for 1996,
$1,220,000 for 1997, $2,225,000 for 1998, $2,430,000 for 1999,
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$1,880,000 for 2000, and $425,000 for 2001. Respondent
disallowed all those amounts.4
In addition to the money BCM paid Mr. Bell, it claimed
several other expenses. Respondent determined that BCM
overstated its deductions by $1,228,088, $1,702,817, $2,678,033,
$3,195,463, $1,966,457, and $651,470 for 1996, 1997, 1998, 1999,
2000, and 2001, respectively. For 1999 and 2000 BCM claimed
$3,740 and $1,400, respectively, for contract labor performed by
Sharon Mamrose Womble, an artist. Mrs. Bell hired Ms. Womble to
paint the outside and inside of the wine cellar of the Bells’
residence at 4371 Northside Drive (Northside). Mr. Bell approved
the expense as a business expense for BCM.
From taxable years 1996 through 1999, BCM claimed deductions
of $400,000, $400,000, $250,000, and $250,000, respectively, on
its Forms 1120S as expenses paid to Mycroft, Ltd. (Mycroft), an
alleged Irish corporation owned by John Fitzgerald. The payments
to Mycroft were allegedly for advertising and marketing BCM to
potential European clients, business development, seminar
expenses, travel, professional fees, and printing.
In addition to the professional fees deducted as part of the
OEL transactions, see infra pp. 14-22, BCM claimed deductions of
$57,129.52, $441,992.36, $288,302.81, $254,856, $5,212, and
4
These amounts represented payments as part of the OEL
transactions described below.
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$46,881 for professional fees on its Federal income tax returns
for taxable years 1996 through 2001, respectively. Respondent
disallowed all of the deductions. On its returns, BCM claimed
deductions of $56,178, $12,346, and $20,500 for business
development for taxable years 1996 through 1998, respectively.
Respondent disallowed the entire amount of each deduction. BCM
also claimed deductions of $33,458, $69,205, $140,709, $33,639,
and $107,774 for travel and lodging for taxable years 1996, 1998,
1999, 2000, and 2001, respectively. Respondent disallowed all of
those deductions. BCM claimed a deduction of $49,258 for
advertising expenses paid to Mycroft for taxable year 1996. BCM
claimed deductions of $5,000, $26,042, $11,203, $4,388, $3,297,
and $13,921 for legal fees paid to Reiserer & Agee, LLP, for
taxable years 1996 through 2001, respectively. BCM claimed
deductions of $87,624, $55,200, $82,046, and $17,650 for
marketing for taxable years 1996, 1998, 1999, and 2000,
respectively. BCM claimed a deduction of $30,505, $9,632,
$33,626, and $2,685 for office supplies for taxable years 1996,
1999, 2000, and 2001, respectively. BCM claimed a deduction of
$105,762 paid to Mycroft for taxable year 1996 and a deduction of
$7,318 for taxable year 1998 paid to various organizations for
seminars. BCM claimed deductions of $3,174, $2,437, $1,305,
$1,000, and $1,881 for utilities for taxable years 1996, 1997,
1998, 2000, and 2001, respectively. BCM claimed deductions of
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$83,249.91 and $16,745.42 for employee business expenses for
taxable years 1999 and 2000, respectively. BCM claimed
deductions of $24,640, $49,280, and $36,960 for rent paid to
Foxworthy for taxable years 1999 through 2001, respectively. BCM
claimed deductions of $12,401.10, $1,802.18, and $3,046.04 for
meals and entertainment for taxable years 1999 through 2001,
respectively. BCM claimed a deduction of $153,541 for contract
labor for taxable year 1999. BCM claimed deductions of $1,692,
and $1,997 for taxes and licenses paid to Cherokee County and
Dekalb County for taxable years 2000 and 2001, respectively. BCM
claimed deductions of $1,200 and $4,500 paid to Georgia State
University for continuing education of Kelli Bell5 for taxable
years 2000 and 2001, respectively. BCM claimed deductions of
$2,317 and $2,078.20 for insurance for taxable years 2000 and
2001, respectively. BCM claimed a deduction of $15,540 for a new
telephone system6 for taxable year 2001. BCM claimed a deduction
of $1,774.70 for dues and subscriptions for taxable year 2001.
BCM claimed a deduction of $3,785.52 for repairs and maintenance
for taxable year 2001. Respondent disallowed all of BCM’s
claimed deductions listed above.
5
Kelli Bell is the daughter of petitioners Ron H. Bell and
Tricia S. Bell.
6
Respondent determined that the deduction for the new
telephone system should have been capitalized, not deducted.
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On September 30, 1998, the SEC fined BCM, Mr. Bell, Mr.
Comsudes, and Mr. Palmer because they were in violation of
section 203(e), (f), and (k) of the Investment Advisers Act of
1940. BCM was fined $15,000, and the three individuals were each
fined $10,000. BCM paid the entire $45,000 in 1999 because it
considered itself the beneficiary of the work of Mr. Bell, Mr.
Comsudes, and Mr. Palmer. BCM deducted the entire $45,000 as an
employee business expense for taxable year 1999. Respondent
disallowed the entire $45,000 deduction.
Mr. and Mrs. Bell claimed charitable contribution deductions
of $161,604, $192,377, $87,572, $139,653, and $69,386,
respectively, for taxable years 1996, 1997, 1998, 1999, and 2000.
Respondent disallowed those deductions in the following amounts:
$155,001 for 1996, $171,103 for 1997, $77,253 for 1998, $139,653
for 1999, and $62,915 for 2000. The disallowed deductions are
contributions to the Bell Family Foundation for Hope, Inc.
(foundation), an entity organized under section 501(c)(3).
During 1996 the Bells contributed to the foundation 27,000 shares
of Northeast Investors Trust, a mutual fund, owned by the Bells
through their partnership R&P Partnership. At the time of the
contribution the shares were worth $11.12 each, a total of
$300,240. During 1996 the Bells also contributed $2,250 to Youth
Cultural, $115 to Braves Foundation, and $1,000 to the Gorham-
McBane Library. In addition, the Bells claimed a charitable
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contribution deduction of $3,238 as 50 percent of the
contributions from Mr. Bell’s Schedule K-1, Shareholder’s Share
of Income, Credits, Deductions, etc. During 1997 the Bells
contributed to the foundation another 18,000 shares of Northeast
Investors Trust, again owned by the Bells through the R&P
Partnership. At the time of the contribution, the shares were
worth $11.24 each, a total of $202,320. During 1997 the Bells
also contributed $334 to Georgia State University, $15 to Georgia
Tech, $251 to Auburn University, $8,700 to the Unity North
Church, and $470 to Goodwill. In addition, the Bells claimed a
charitable contribution deduction of $12,444 as 50 percent of the
contributions from Mr. Bell’s Schedule K-1. Of the $87,572
claimed by the Bells as a charitable contribution deduction for
1998, $77,253 was a carryover from the previous year. Of the
$139,653 claimed by the Bells as a charitable contribution
deduction for 1999, $119,934 was a carryover. Of the $69,386 the
Bells claimed as a charitable contribution deduction for 2000,
$62,915 was a carryover.7 Respondent disallowed the charitable
contribution deductions to the foundation because Mr. Bell
controls the foundation and because respondent disputes that the
shares were transferred.
7
In addition to the carryover amounts claimed in 1998, 1999,
and 2000, the Bells claimed charitable contributions of $10,319
in 1998, $19,719 in 1999, and $6,471 in 2000.
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Offshore Employee Leasing Transaction
During 1996 Mr. Bell’s client Larry Calhoon (Mr. Calhoon)
asked Mr. Bell whether he was interested in learning about an
employee leasing deferred compensation plan. Mr. Bell indicated
that he was. Mr. Calhoon sent Mr. Bell employee leasing
information written on Kenneth Reiserer’s (Mr. Reiserer)
letterhead. Mr. Calhoon received a fee from Mr. Reiserer for
referring Mr. Bell to him.
Mr. Bell contacted Mr. Reiserer about employee leasing on
several occasions. Additionally, beginning in 1997 Mr. Bell
attended seminars that featured Mr. Reiserer as a speaker. Mr.
Reiserer sent Mr. Bell a 14-page document explaining “The Foreign
Deferred Compensation Program”. After discussion with Mr.
Reiserer, Mr. Bell decided to participate in the OEL transactions
set up by Mr. Reiserer. The OEL transactions were to start on
December 1, 1996, and were to be carried out in accordance with
an undated “Contract For Personnel Services” (contract), signed
by Mr. Reiserer as president of NESL and Mr. Comsudes as vice
president of BCM. On November 5, 1997, Mr. Reiserer forwarded
the contract to Mr. Bell to be finalized. The contract was
returned to Mr. Bell on December 4, 1997.
As part of the OEL transactions, on December 19, 1996, BCM
wired $800,000 to NESL, a domestic leasing company owned and
operated by Mr. Reiserer. During 2001 Mr. Reiserer changed the
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name of NESL to ILS.8 On its Form 1120S for its 1996 taxable
year, BCM listed the $800,000 wired to NESL as a deduction for
professional fees. Mr. Bell did not report any wages from BCM
for taxable year 1996. Mr. Bell alleges that during December
1996 he was an employee of NESL and received wages of $75,000.
On December 23, 1996, after deducting from the $800,000 a
management fee of $24,000 and a consulting fee to Mr. Calhoon of
$8,000, NESL wired $767,950 to Montrain Services, Ltd.
(Montrain). Montrain is an Irish corporation that allegedly was
Mr. Bell’s employer and leased Mr. Bell’s services to NESL, which
in turn leased Mr. Bell’s services to BCM. In the “Foreign
Deferred Compensation Program”9 document given to Mr. Bell, Mr.
Reiserer wrote that “to avoid United States taxation, the Irish
corporation [Montrain] cannot be deemed to be engaged in business
in the United States.” That same day, Montrain wired back to
NESL $77,480 to cover expenses of paying an alleged salary of
$75,000 to Mr. Bell along with other related expenses.
Additionally, Montrain returned to NESL $3,300, and $645,905.67
was deposited in an account under the name “Ruritania”. On March
8
Mr. Bell was not able to produce a copy of a personnel
services contract between BCM and ILS.
9
The “Foreign Deferred Compensation Program” document was
written by Mr. Reiserer to Mr. Bell. The document explains the
foreign deferred compensation planning program, and contains Mr.
Reiserer’s legal analysis of the program and how the program of
OEL transactions would work for Mr. Bell.
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7, 1997, the balance of $652,000 in the Ruritania account was
invested with Davis, Weaver & Mendel.10 Thomas Weaver11 managed
the $652,000 in an account with Rydex Investments.
During December 1997 BCM made three wire transfers to NESL
totaling $1,220,000, one on December 2 for $1 million and two on
December 16 for $35,000 and $185,000, respectively. On its Form
1120S for its 1997 taxable year BCM listed the transfers as
professional fees. As of December 8, 1997, $899,980,000 of the
$1 million transferred to NESL was deposited in a Charles Schwab
(Schwab) account for RHB Corp.12 By December 24, 1997, another
$122,980 was deposited into the RHB Corp. Schwab account. The
balance of the money transferred was paid to NESL and Montrain
for fees.
In a letter dated July 17, 1997, Mr. Bell expressed his
displeasure over the cost of doing business with Montrain. Mr.
Bell believed that he could replicate the services of Montrain at
a lower cost.
Mr. Bell was unhappy with the 7-day delay in having money
transferred to the RHB Corp. Schwab account. Mr. Bell indicated
10
Davis, Weaver & Mendel was an investment management firm
based in Atlanta.
11
Thomas Weaver, a friend of Mr. Bell, was the majority
owner and president of Davis, Weaver & Mendel.
12
RHB Corp. is a Nevis-based corporation Mr. Bell
incorporated. RHB Corp.’s original name was Rossendale
Investments. Nevis is an island in the Caribbean Sea.
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that he was losing money because interest was not accruing to his
benefit during the delay. Mr. Bell expressed his unhappiness to
James Jantos (Mr. Jantos), an associate at Mr. Reiserer’s law
firm. Consequently, Mr. Jantos contacted Judy Lovell13 (Ms.
Lovell) and requested an accounting of the money transferred to
the RHB Corp. account.
On October 7, 1997, Mr. Comsudes opened a corporate stock
brokerage account in Foxworthy’s name at Schwab. Mr. Bell
brought Mr. Comsudes the documents to sign in order to open the
Foxworthy Schwab account. On October 9, 1997, Mr. Comsudes
opened a bank account at SunTrust Bank in Foxworthy’s name.
During either May or June 1999, Mr. Comsudes opened a second
corporate stock brokerage account with Schwab in Foxworthy’s
name. Mr. Bell brought Mr. Comsudes the documents to sign to
open the second Foxworthy Schwab account.
Mr. Bell had three Nevis companies incorporated: Ballyclare
Holding, Inc. (Ballyclare), Helston Services, Inc. (Helston), and
Rossendale Investments (Rossendale). Mr. Bell later requested
that Rossendale change its name to RHB Corp.. The Elfin Trust
(Elfin), chosen by Mr. Bell, administered Ballyclare. Mr. Bell’s
contacts at Elfin were Ms. Lovell, Robert Kerriege, and John
13
Judy Lovell was one of Mr. Bell’s contacts at the Elfin
Trust, which was chosen by Mr. Bell to administer Ballyclare
Holding, Inc., a Nevis corporation used by Mr. Bell as part of
the OEL transactions.
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Robbiliard. One of the reasons Ballyclare needed a third-party
administrator is that Ballyclare had no employees.
During May 1998 Mr. Bell’s contacts at Elfin were concerned
that there was an unwanted link between Mr. Bell and RHB Corp.
Consequently, Mr. Bell asked that Mr. Weaver manage the funds in
the RHB Corp. Schwab account through Tahosa Valley Investments.
Mr. Bell recommended that Ballyclare, Helston, and
Rossendale each set up accounts with Charles Schwab. A fourth
account in Mr. Reiserer’s name was also set up with Schwab. The
four accounts were opened at the Cobb County, Georgia, Schwab
branch, the office closest to BCM’s headquarters. Mr. Bell
provided limited power of attorney forms for the Schwab accounts.
The forms were signed using a signature stamp of William
Zarrett14 (Mr. Zarrett). Mr. Bell did not have permission to use
Mr. Zarrett’s signature stamp on the limited power of attorney
forms, and Mr. Zarrett never conducted business on behalf of
Ballyclare, Helston, or Rossendale or its later name RHB Corp.
Mr. Reiserer directed Ms. Lovell to have Elfin acquire 100
percent of the voting common stock of the three Nevis
corporations. Furthermore, Mr. Reiserer indicated to Ms. Lovell
that each Nevis corporation needed minutes created and that
14
Mr. Zarrett is Mr. Bell’s personal friend. The two met in
1968 at Emory University. Mr. Zarrett was the trustee of the
Mycroft Trust, set up for Kelli Bell. Mr. Zarrett also had
limited power of attorney over Ballyclare and Helston. At the
time of trial, Mr. Zarrett was a retired banker.
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statements from the Schwab accounts were to be confidentially
provided to Mr. Bell.
The investment income on the Helston, Ballyclare, and
Rossendale/RHB Corp. Schwab accounts is as follows:
Account 1997 1998 1999 2000 2001
Helston $8,445.10 --- --- --- ---
Ballyclare 7,469.19 --- --- --- ---
Rossendale/RHB 37,031.00 $168,287.61 $126,963.85 $96,235.40 $141,916.42
Of the $126,963.85 of income in the Rossendale/RHB Corp. Schwab
account during 1999, $18,166.50 consisted of dividend income; the
rest of the income from all the accounts is interest income. Mr.
Bell did not report any of the income from the Helston,
Ballyclare, and Rossendale/RHB Corp. Schwab accounts on his tax
returns for the respective taxable years.
On June 3, 1998, BCM wired $250,000 to NESL. On July 20,
1998, BCM wired $500,000 to NESL. Additionally, on that day, Mr.
Bell sent a note to Mr. Reiserer requesting that the $500,000 BCM
wired to NESL be transferred quickly to RHB Corp.’s Schwab
account because of the potential for lost interest in the event
of a delay in the transfer. On October 26, 1998, BCM wired an
additional $500,000 to NESL. BCM wired $800,000 to NESL on
December 17, 1998, and $175,000 on December 24, 1998. As in
previous years, BCM claimed a deduction for the transfers on its
Form 1120S for taxable year 1998 as “professional fees”. By
January 6, 1999, the money BCM transferred to NESL was deposited
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in RHB Corp.’s Schwab account, less fees to Montrain. During
1998 $550,000 was transferred from the RHB Corp. Schwab account
as a loan to Mr. Bell’s church, the Unity Church. Mr. Bell
requested that Ms. Lovell provide Internet access to the account
and give him the password to the account in order to keep track
of the RHB Corp. Schwab account.
On September 20, 1999, BCM wired $1,200,000 to NESL. On
December 20, 1999, BCM wired $1,230,000 to NESL. As in previous
years, BCM claimed a deduction for the transfers on its Form
1120S for taxable year 1999 as “professional fees”. By January
5, 2000, the transferred money, less the fees of NESL and
Montrain, was wired from the Royal Bank of Scotland to
Foxworthy’s SunTrust Bank account. Mr. Bell was unsatisfied with
the fees charged to implement the OEL transactions. Mr. Reiserer
wrote a note to Mr. Bell highlighting the significant tax savings
of the OEL transactions and told Mr. Bell he was trying too hard
for “perfection”.
On August 29, 2000, BCM wired $800,000 to NESL. On December
21, 2000, BCM wired $1,080,000 to NESL. As in previous years,
BCM claimed a deduction for the wire transfers on its Form 1120S
for taxable year 2000 as “professional fees”. On August 31,
2000, the $800,000, less fees, a net of $767,900, was wired
offshore. On December 21, 2000, the $1,080,000 less fees, for a
net of $955,700, was wired offshore.
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On March 22, 2001, BCM wired $375,000 to NESL. On December
18, 2001, BCM wired $50,000 to ISL.15 BCM claimed a deduction on
its Form 1120S for taxable year 2001 for the wire transfers as
“professional fees”. On March 23, 2001, NESL wired $319,300
offshore to Fitzwilliam International Resource Services Limited
(Fitzwilliam).16 On June 22, 2001, Fitzwilliam transferred
$260,000 of the $319,300 to an account in the name of Mr. Bell’s
trust. Fitzwilliam set up the trust for Mr. Bell with Elfin as
the trustee. Mr. Bell wanted to know why only $260,000 had been
transferred to the trust. Mr. Reiserer informed Mr. Bell that
Mr. Bell had not accounted for the $37,500 wages to Mr. Bell. On
December 28, 2001, ISL wired $47,800 offshore. On December 31,
2001, $44,000 of the $47,800 was transferred to Mr. Bell’s trust
account.
During the years in issue Mr. Bell’s duties at BCM did not
change. Also during the years in issue, BCM provided Mr. and
Mrs. Bell with health insurance. Additionally, BCM, not NESL,
ISL, Montrain, Pixley, or Fitzwilliam paid Mr. Bell’s employee
expenses. Furthermore, during the years in issue BCM filed with
the SEC forms listing Mr. Bell as president and as its contact
15
Sometime before this transfer, NESL changed its name to
ISL.
16
In 1999 Pixley Services (Pixley) took the place of
Montrain as Mr. Bell’s alleged offshore employer. In 2001
Fitzwilliam took the place of Pixley as Mr. Bell’s alleged
offshore employer.
- 22 -
person. During the years in issue, Mr. Bell did not receive
guidance from NESL, ISL, Montrain, Pixley, or Fitzwilliam but
performed his duties as he himself determined.
Foxworthy
Mr. Reiserer incorporated Foxworthy on August 12, 1996, in
Nevada. Foxworthy’s initial officers were Mr. Reiserer as
president and Sonia M. Agee (Ms. Agee) as secretary and
treasurer. Mr. Reiserer was an attorney in Bellevue,
Washington.17 Ms. Agee was an associate at Mr. Reiserer’s law
firm. As of August 13, 1997, Foxworthy had no assets. Mr. Bell
suggested that Foxworthy use a Reno, Nevada, address he
previously had obtained as a result of identity theft he had
experienced. The Reno address is a mail forwarding service, with
mail forwarded to BCM in Atlanta, Georgia. Petitioners allege
that Foxworthy is owned by Ruritania, Ltd. (Ruritania).
Petitioners further allege that Ruritania is a corporation formed
under the laws of Jersey, Channel Islands. On March 18, 1998,
Foxworthy issued Ruritania a stock certificate for 2,500 shares.
Mr. Bell requested that Mr. Comsudes, as president of Foxworthy,
sign the certificate.
Northside
During 1997 Mrs. Bell inquired about a house at 4371
Northside Drive, Atlanta, Georgia (Northside). Mrs. Bell toured
17
Mr. Reiserer died during July 2004.
- 23 -
Northside on multiple occasions during 1997 when Sam Foreman
owned Northside. Mr. Bell spoke to Jill Elliott regarding the
purchase of Northside. On or about October 15, 1997, Northside
was purchased from Mr. Foreman in the name of Foxworthy. Mr. and
Mrs. Bell, not Foxworthy, selected Northside. After purchasing
Northside, Mr. and Mrs. Bell asked Larry Graham (Mr. Graham) to
work at Northside to manage and care for the property. Mrs. Bell
worked with an interior designer to select furnishings for
Northside. During 1997, shortly after it was purchased, Mr. and
Mrs. Bell moved into Northside. Although an alleged lease
agreement between Foxworthy and Mr. and Mrs. Bell was not signed
until November 1, 2001, the Bells used Northside as their primary
residence during the workweek from the time they moved into the
residence during 1997.
Before Foxworthy closed on Northside, Mr. Reiserer suggested
that someone in Atlanta should be the president of Foxworthy.
Mr. Bell asked Mr. Comsudes to be the president, and, on
September 30, 1997, Mr. Comsudes became president of Foxworthy.
Mr. Comsudes never met Mr. Reiserer and did not know who
Foxworthy’s shareholders were. Furthermore, Mr. Comsudes had no
day-to-day activities as president of Foxworthy. Mr. Comsudes,
in his words, “looked to” Mr. Bell and Mr. Reiserer in his
dealings with Foxworthy.
- 24 -
Foxworthy purchased Northside using a $2,110,000 wire
transfer that took place on October 14, 1997. The money was
transferred from Schwab accounts in the name of Helston and
Ballyclare. Helston and Ballyclare obtained the funds from a
Schwab account in the name of Mr. Reiserer. The Reiserer Schwab
account obtained the funds from an August 19, 1997, liquidation
of stock.18 The Reiserer account received the stock on August
15, 1997 from a transfer from four Schwab accounts in the names
of (1) R&P Partnership, Ron H. Bell TTEE, (2) Hoyt Bell Revocable
Trust, Ron H. Bell TTEE, (3) Roberta L. Bell Revocable Trust, and
(4) Kelli Bell. R&P Partnership is owned by Mr. and Mrs. Bell.
The proceeds from the liquidation of stock transferred from R&P
Partnership Schwab account were transferred to Rossendale’s
(later known as RHB Corp.) Schwab account. The proceeds of the
liquidation of stock transferred to the Rossendale Schwab account
totaled $2,225,181.96. The gain on the liquidation of stock in
the Reiserer account during 1997 was $329,363.38. Mr. Bell
authorized all the transfers of stock. The $2,225,181.96
transferred to the Rossendale Schwab account was part of an asset
18
Mr. Reiserer expected that the Reiserer Schwab account
would have income from the liquidation of stock. Mr. Reiserer
contacted Mr. Bell about two ways to report the income. Mr. Bell
instructed Mr. Reiserer that he preferred Mr. Reiserer to report
the income and to pay the tax from the residual amount in the
Reiserer Schwab account.
- 25 -
exchange to RHB Corp. in return for an alleged private annuity
for the benefit of Mr. Bell.
The transfers through which Foxworthy acquired funds for its
purchase of Northside were structured as loans from Ballyclare
and Helston to Foxworthy. Mr. Bell later suggested changing the
structure of the purported loans. Mr. Bell’s plan was to have
Ballyclare lend money to Helston, which then lent money to
Foxworthy. Mr. Bell and Mr. Reiserer collaborated on the
preparation of the mortgages and notes used to buy Northside.
Mr. and Mrs. Bell procured homeowners insurance on Northside
in Mrs. Bell’s maiden name, Patricia D. Small. The homeowners
policy listed Foxworthy as an additional insured. The Bells
explained to the insurance company that Foxworthy was added as an
additional insured because Foxworthy was their company for tax
purposes and it owned the house. Had Foxworthy been the only
insured on the Northside policy, the policy would have been more
expensive. Additionally, Northside was insured for personal use,
not business use.
On September 8, 1998, Foxworthy filed a Form 1120, U.S.
Corporation Income Tax Return, for its 1997 taxable year. Mr.
Comsudes signed the Form 1120 at Mr. Bell’s request. Before
filing the tax return, on March 13, 1998, Foxworthy filed a Form
7004, Application for Automatic Extension of Time To File
Corporation Income Tax Return. Larry Graham’s name appears to be
- 26 -
signed on the signature line on the Form 7004. However, Mr.
Graham did not in fact sign the Form 7004.
On October 27, 1997, Foxworthy purported to enter into a
lease with BCM for the third floor of Northside. Mr. Bell
purported to negotiate the terms of the lease on behalf of BCM,
and Mr. Reiserer purported to negotiate the terms on behalf of
Foxworthy. Mr. Graham’s name appears on the signature line as
Foxworthy’s representative; however, he did not sign the lease
and was never an officer or authorized to sign on behalf of
Foxworthy.
On April 1, 1998, Mr. Bell, on behalf of BCM, and Mr.
Graham, on behalf of the Whitehall Inn, purportedly entered an
agreement between BCM and the Whitehall Inn whereby the Whitehall
Inn would provide accommodations at Northside to individuals
doing business with BCM. As in the case of other documents
bearing his name, Mr. Graham did not sign this agreement and was
not aware of it. Mr. Comsudes was not familiar with the
Whitehall Inn and was not familiar with an agreement between the
Whitehall Inn and BCM. The Whitehall Inn is an assumed name for
Foxworthy.
From 1997 through 2001 BCM paid Foxworthy for allegedly
renting Northside. Additionally, the Whitehall Inn prepared
invoices to BCM for guests who allegedly stayed at Northside.
However, no guests actually stayed at Northside. Linda Sagaert
- 27 -
(Ms. Sagaert) prepared the invoices at the request of Mr. Bell.
Mr. Bell also gave Ms. Sagaert the information needed to prepare
the invoices.
From 1997 through 2001 Northside was legally zoned as a
single-family residential property and therefore not permitted to
be used as a hotel. When BCM entertained guests from out of
town, the guests usually stayed at the Waverly Inn. No guests
stayed at Northside.
Mr. and Mrs. Bell lived at Northside, allegedly as tenants
of Foxworthy. At the beginning of 1997 Foxworthy had no assets.
At the end of the year Foxworthy had $177,983 in cash, $3,036 in
trade notes and receivables, $1,511,064 in buildings and other
“depreciable” assets, and $600,000 in land. The buildings and
other “depreciable” assets and land related to Northside.
During taxable year 1997 Foxworthy reported a net operating
loss of $19,004. The net operating loss is the result of an
excess of deductions for repair and maintenance, taxes and
licenses, depreciation, and other items, over the income reported
for rent, dividends, and interest. The income Foxworthy earned
and the deductions it claimed for taxable year 1997 were related
to Northside.
During taxable year 1998 Foxworthy reported a net operating
loss of $82,304. The loss is the result of a $19,904 carryover
- 28 -
loss from 1997, increased by the excess of deductions for repair
and maintenance, taxes and licenses, depreciation, and
other items, over the income reported for rent, dividends, and
interest.
For taxable year 1997 through taxable year 2001 Foxworthy
claimed deductions for depreciation, insurance expenses, utility
expenses, and lawn maintenance, all related to Northside.
Additionally, for taxable year 1999 through taxable year 2001
Foxworthy claimed deductions for maid services performed at
Northside. For taxable year 2000 through taxable year 2001
Foxworthy claimed deductions for janitorial and cleaning expenses
relating to Northside. Foxworthy also claimed deductions for
payments to Mr. Graham. Mr. Graham worked at Northside for the
previous owners, and Mrs. Bell hired him to stay after the Bells
moved into Northside. Foxworthy claimed the deductions for the
payments to Mr. Graham as business expenses.
Northside suffered water damage. Consequently, during June
1999 the Bells submitted an insurance claim. On June 22, 1999,
Chubb insurance issued a check from Great Northern Insurance Co.
(Great Northern) to Patricia D. Small of $1,059.02 for the water
damage. On July 16, 1999, Chubb issued a second check from Great
Northern to Patricia D. Small of $18,061 to compensate for water
damage to the floors and phone system at Northside. Mrs. Bell
deposited the check for $18,061 into her personal bank account.
- 29 -
During January 2001 Mr. Bell became interested in purchasing
a 1958 Rolls Royce. Mr. Bell visited the owner in Augusta,
Georgia, and drove the car back to Atlanta. On January 21, 2001,
Mr. Bell placed the title of the Rolls Royce in Foxworthy’s name.
The insurance application for the Rolls Royce lists Mr. Bell as
the insured and Foxworthy as an additional insured. Mr. Bell and
Mrs. Bell are listed as the two drivers.
Tax Deed Business
During the summer of 1998 Mr. Bell began reading about tax
deeds. After consulting with Lynn Featherly and D.J. Adams, who
both had experience in the tax deed business, Mr. Bell decided to
invest in the tax deed business. Mr. Bell contracted with Ms.
Featherly and Mr. Adams to perform research and develop a
business plan to be used by BCM. Mr. Bell recommended that
Foxworthy invest in the tax deed business because he felt it was
lucrative.
Foxworthy needed capital in order to become engaged in the
tax deed business. Mr. Bell arranged a series of loans to
Foxworthy to fund the tax deed business. The loans came from
Shirley Hearle, who was Mr. Bell’s first cousin, Investment
Partnership 00, which was a partnership in which Mr. Bell was the
general partner, and four customers of Mr. Bell. Additionally,
Foxworthy received loans from the foundation, Ms. Sageart, and
Mr. Palmer. Furthermore, loans are alleged to have come from the
- 30 -
three Nevis corporations, RHB Corp., Ballyclare, and Helston.
Mr. Bell orchestrated all of the loans to Foxworthy. Most of the
money for the tax deed business came from Mr. Bell’s OEL
transactions, chiefly in the name of RHB Corp. By December 31,
1999, Foxworthy had borrowed $4,729,990 from RHB Corp. By
December 31, 2001, the amount of the loan had increased to
$8,839,965.
During 2000 Mr. Bell asked Charles L. Wilson III (Mr.
Wilson) to become president of Foxworthy, replacing Mr. Comsudes.
One of the reasons Mr. Bell replaced Mr. Comsudes was that he
wanted no connections between Foxworthy and the RHB Trust in
order that the loans from the RHB Corp. to Foxworthy would be
viewed as arm’s-length transactions. During 1999 Mr. Wilson
became an employee of BCM and continued to receive a salary from
BCM during 2000 and 2001. Mr. Wilson does not have a college
degree, and before he worked for BCM, his work experience was as
a store designer and events coordinator. At BCM Mr. Wilson
initially oversaw the computer system and was a special projects
manager earning an annual salary of approximately $30,000.
After becoming Foxworthy’s president during 2000, Mr. Wilson
oversaw the tax deed business. Mr. Wilson looked to Mr. Bell and
Mr. Reiserer in dealings on behalf of Foxworthy; and when he
started working for BCM, he reported to Mr. Bell.
- 31 -
During May 1999 Foxworthy opened a brokerage account at
SunTrust Equitable Securities (SunTrust Equitable). Mr. Bell,
Mr. Comsudes, and Mr. Reiserer were the three signatories on the
account. Mr. Bell was listed as a consultant. Mark Kallis, an
account representative at SunTrust Equitable who handled the
Foxworthy account, took instructions only from Mr. Bell and never
from Mr. Comsudes or Mr. Reiserer.
During December 1999 Mr. Bell thought that it might be wise
to restructure the tax deed business using RHB Corp. as the
primary entity as opposed to Foxworthy. In a note to Mr.
Reiserer, Mr. Bell wrote that because Foxworthy was a domestic
entity and subject to taxes, RHB Corp. might be better suited for
the tax deed business because it was a foreign entity.
During the months that followed, Mr. Bell continued to seek
avenues to limit Foxworthy’s taxable income for taxable year
2000. During January 2000 Mr. Bell proposed to Mr. Reiserer to
increase the interest Foxworthy paid on the loan from RHB Corp.
Mr. Bell followed up during February. During February 2000 Mr.
Bell wrote to Mr. Reiserer that Foxworthy could pay its debt in
October 2000 but that it would want to re-borrow at a higher
interest rate in order to shift more profits out of Foxworthy.
Mr. Bell noted that doing so would be costly and that he wanted
to keep the options open.
- 32 -
On March 15, 2000, Mr. Bell sought more funding for the tax
deed business. In a note to Mr. Reiserer, Mr. Bell indicated
that a bank was willing to extend a line of credit of $10 million
to purchase tax deeds. The bank intended to fund 75 percent of
the purchase of each deed. In the note to Mr. Reiserer, Mr. Bell
wrote that he would have to fund the remaining 25 percent.
Bad Debt Deduction
Mr. Bell claimed as a flowthrough item from R&P Partnership
a nonbusiness bad debt deduction of $91,350 for taxable year 2000
and $11,936 in legal fees associated with collecting a debt for
taxable year 2000. On June 1, 1997, R&P Partnership allegedly
lent $31,350 to Steinberg & Associates, Inc. (Steinberg), with an
interest rate of 18 percent and a maturity date of 1 year. R&P
Partnership was one of nine alleged creditors on the loan, which
totaled $449,350. On September 12, 1997, R&P Partnership
allegedly lent Steinberg $60,000 with an interest rate of 18
percent and a maturity date of 1 year. R&P Partnership extended
the maturity date of the second note by 1 year to September 12,
1999. Both promissory notes are undated and have only the
signature of the alleged debtor, not that of any notary or
witness. R&P Partnership alleges that it never received a
payment from Steinberg on either loan and that Steinberg
defaulted on both. During 2000 Steinberg filed for bankruptcy
- 33 -
and listed R&P Partnership as a secured and unsecured creditor in
relation to the two notes.
Investigation
The Internal Revenue Service (IRS) began investigating Mr.
Reiserer and NESL in regard to promoting abusive transactions,
pursuant to sections 6700 and 6701. As a result of the
investigation, the IRS identified Mr. Bell as a client of Mr.
Reiserer. The IRS initiated the investigation of Mr. Bell from
its office in Daytona Beach, Florida, because Mr. Bell used a
Daytona Beach address as his home address on his income tax
returns. Mr. Bell declined the offer of the revenue agent to
move the investigation to Atlanta. The Daytona Beach address on
the income tax returns for taxable years 1999 and 2000 was that
of a mail forwarding company. By using property records, the
revenue agent discovered Mr. Bell owned a condominium in Daytona
Beach. When the revenue agent went to the condominium, the
person who answered the door did not know anyone by the name of
Ron H. Bell.
OPINION
I. Fraud Penalty
We begin with our consideration of the issue of fraud
because, absent fraud, the period of limitations may no longer be
open for respondent’s assessment of deficiencies in the income
tax of the Bells for taxable years 1996, 1997, and 1998. See
- 34 -
sec. 6501(c)(1); see, e.g., Langworthy v. Commissioner, T.C.
Memo. 1998-218.
In the case of the filing of a false or fraudulent return
with intent to evade tax, the tax may be assessed at any time.
Sec. 6501(c)(1). If the return is fraudulent in any respect, it
deprives the taxpayer of the bar of the statute of limitations
for that year. Lowy v. Commissioner, 288 F.2d 517, 520 (2d Cir.
1961), affg. T.C. Memo. 1960-32. “Thus where fraud is alleged
and proven, respondent is free to determine a deficiency with
respect to all items for the particular taxable year without
regard to the period of limitations.” Colestock v. Commissioner,
102 T.C. 380, 385 (1994). Moreover, if a joint return was filed,
proof of the fraudulent intent as to one spouse lifts the bar of
the statute of limitations as to both spouses. Vannaman v.
Commissioner, 54 T.C. 1011, 1018 (1970). However, the
Commissioner must show fraud clearly and convincingly as to both
taxpayers on a joint return for each of them to be liable for the
fraud penalty. Balot v. Commissioner, T.C. Memo. 2001-73.
The fraud penalty is a civil sanction provided primarily as
a safeguard for the protection of the revenue and to reimburse
the Government for the heavy expense of investigation and the
loss resulting from a taxpayer’s fraud. See Helvering v.
Mitchell, 303 U.S. 391, 401 (1938). Fraud is intentional
wrongdoing on the part of the taxpayer with the specific purpose
- 35 -
to evade a tax believed to be owing. See McGee v. Commissioner,
61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975).
The Commissioner has the burden of proving fraud by clear
and convincing evidence. Sec. 7454(a); Rule 142(b). The
Commissioner’s burden of proof under section 6501(c)(1) is the
same as that imposed by section 6663. See Pennybaker v.
Commissioner, T.C. Memo. 1994-303. To satisfy the burden of
proof, the Commissioner must show: (1) An underpayment exists;
and (2) the taxpayer intended to evade taxes known to be owing by
conduct intended to conceal, mislead, or otherwise prevent the
collection of taxes. See Parks v. Commissioner, 94 T.C. 654,
660-661 (1990). The Commissioner must meet this burden through
affirmative evidence because fraud is never presumed. Petzoldt
v. Commissioner, 92 T.C. 661, 699 (1989); see also Beaver v.
Commissioner, 55 T.C. 85, 92 (1970). Once the Commissioner has
established by clear and convincing evidence that any portion of
an underpayment is attributable to fraud, the entire underpayment
shall be treated as attributable to fraud, except with respect to
any portion of the underpayment which the taxpayer establishes
(by a preponderance of the evidence) is not attributable to
fraud. Sec. 6663(b).
A. Underpayment
An “underpayment” is generally defined (insofar as relevant
to the instant case) as the amount by which the tax imposed by
- 36 -
the Code exceeds the amount shown as the tax by the taxpayer on
his return. See sec. 6664(a). Respondent contends that the
evidence clearly and convincingly shows that the OEL transactions
lacked economic substance and that the money transferred by BCM
to NESL, and later ILS, as part of those transactions was income
to Mr. Bell, in the form of wages from BCM, which he failed to
report on his returns. Respondent contends that the wages were
compensation for Mr. Bell’s personal services. Respondent also
relies on the doctrine of constructive receipt of the funds
because Mr. Bell had unfettered control over the funds.
Furthermore, respondent argues that Foxworthy should be
disregarded as Mr. Bell’s alter ego because it did not have a
legitimate business purpose and was used as a way for Mr. Bell to
claim deductions for his personal expenses and later to operate
the tax deed business. Additionally, respondent argues that the
Bells fraudulently understated their income by overstating
deductions.
1. Economic Substance of the OEL Transactions
Mr. Bell argues that the OEL transactions in which he
engaged beginning in 1996 were pursuant to a valid nonqualified
“deferred compensation plan” and not done solely to avoid income
tax. Respondent argues that the OEL transactions lack economic
substance and therefore should be disregarded and that the
payments from BCM to NESL, and later to ILS, for Mr. Bell’s
- 37 -
services constituted wages to Mr. Bell at the time BCM made the
payments. We agree with respondent.
Income is taxed to the person who earns it and enjoys the
benefit of it when paid. See Helvering v. Horst, 311 U.S. 112,
119 (1940); Corliss v. Bowers, 281 U.S. 376, 378 (1930); cf.
Commissioner v. P.G. Lake, Inc., 356 U.S. 260, 267 (1958); Old
Colony Trust Co. v. Commissioner, 279 U.S. 716, 729 (1929).
Moreover, the taxpayer who earns income may not avoid taxation
through anticipatory arrangements no matter how clever or subtle.
Lucas v. Earl, 281 U.S. 111, 115 (1930).
The economic substance of a transaction, rather than its
form, controls for Federal income tax purposes. Gregory v.
Helvering, 293 U.S. 465 (1935). We conclude that the OEL
transactions lacked economic substance and, despite petitioners’
contentions, were not made pursuant to a valid nonqualified
deferred compensation plan.
Mr. Bell argues that throughout the course of the OEL
transactions from 1996 through 2001 he properly deferred over $7
million of income. Moreover, Mr. Bell argues that the benefits
were subject to a substantial risk of forfeiture. Mr. Bell
argues that the money was sent offshore, ultimately to RHB Corp.,
where he did not have control over the money; instead he only
recommended investments to Elfin. Furthermore, Mr. Bell argues
that the OEL transactions have economic substance because the
- 38 -
payees of the money, NESL and ISL, were legitimate businesses
that leased Mr. Bell’s services to BCM. According to Mr. Bell,
the OEL transactions offered him greater retirement savings over
his previous Salary Reduction Simplified Employee Pension Plan
(SARSEP) and to disallow the OEL plan respondent would be
condemning retirement planning.
The December 1996 BCM transfer of $800,000 to NESL, was
BCM’s first transfer to NESL and the only such transfer made in
1996. Mr. Bell reported only $75,000 of income for that year,
even though the alleged arrangement among Montrain, NESL, and BCM
did not purport to take effect until December 1, 1996. From 1996
through 2000 Mr. Bell continued to report only $75,000 of wages
annually. For 2001 Mr. Bell reported $37,500 in wages; the OEL
transactions were terminated that year. Mr. Bell alleges that he
became an employee of Montrain, an Irish corporation, that
Montrain leased his services to NESL, and that NESL, in turn,
leased his services to BCM. During the years in issue Mr. Bell
continued to perform the same services for BCM as he had in the
past. Mr. Bell did not take instructions or orders from anyone
at Montrain or NESL. The documents that purport to establish Mr.
Bell’s employment with Montrain were not completed until November
1997, nearly a year after the purported deferred compensation
plan was alleged to have taken effect and BCM’s transfer of the
$800,000.
- 39 -
Aside from a few days’ delay in processing the transactions
from entity to entity, Mr. Bell at all times effectively had
control of and access to the funds transferred and used the funds
at his discretion. The initial $800,000 transfer, less fees, was
managed by Mr. Weaver in an account with Rydex Investments. The
money in the Rydex Investments account was later transferred to
the Rossendale/RHB Corp. Schwab account, which Mr. Bell
controlled. We conclude that respondent has shown by clear and
convincing evidence that, from the beginning, the money BCM
transferred as part of the OEL transactions was set aside for Mr.
Bell’s use and was not part of any valid deferred compensation
plan. Indeed, at one point, Mr. Bell complained to Mr. Reiserer
of the interest he was losing as a result of the delay, and Mr.
Reiserer reminded him of the immense tax savings. Mr. Reiserer’s
response did not satisfy Mr. Bell, and he continued to complain.
Mr. Bell argues that the OEL transactions offered him a
deferred compensation plan that was payable to him at age 75.
Furthermore, Mr. Bell argues that the Montrain, and later Pixley
and Fitzwilliam, plans were discretionary and subject to the
exclusive discretion of those entities as his employer. Mr.
Bell’s argument is not persuasive. Mr. Bell, by using the Rydex
Investments account and later the Schwab accounts of the Nevis
corporations, effectively had access to the funds a few days
after BCM transferred the money.
- 40 -
The money transferred in the OEL transactions was ultimately
used in various ways. The Bells’ Northside residence, selected
by the Bells, was purchased in the name of Foxworthy using funds
from Helston’s and Ballyclare’s Schwab accounts. Mr. Bell, in
collaboration with Mr. Reiserer, set up three Nevis corporations
along with corresponding brokerage accounts at Schwab. The three
Schwab accounts were set up at the Cobb County, Georgia, branch,
the closest bank branch to BCM’s office. Additionally, Mr. Bell
used the signature stamp of Mr. Zarrett without his permission in
order to obtain power of attorney over the funds. During the
course of the OEL transactions, Mr. Bell primarily used RHB Corp.
as the repository for the money transferred from BCM.
Mr. Bell, in collaboration with Mr. Reiserer, set up the
purchase of Northside using the appearance of loans from
Ballyclare and Helston to Foxworthy of $1,080,000 and $1,222,060,
respectively. Foxworthy purchased Northside from Sam Foreman in
October 1997, using a $2,110,000 wire transfer from a Schwab
account in Foxworthy’s name. The money in the Schwab account,
however, came from Ballyclare and Helston. The money from
Ballyclare and Helston came from the Schwab account in Mr.
Reiserer’s name. The source of the funds in the Reiserer account
came from liquidating stock received pursuant to journal entry
transfers from four other Schwab accounts in the names of R&P
- 41 -
Partnership, Ron H. Bell TTEE; Hoyt Bell Revocable Trust, Ron H.
Bell TTEE; Roberta L. Bell Revocable Trust; and Kelli Bell.
Before purchasing Northside, Foxworthy had no assets.
Foxworthy’s address in Reno was a mail forwarding service that
forwarded mail to BCM in Atlanta. Mr. and Mrs. Bell discovered
Northside and visited the property before Mr. Bell instructed
Foxworthy to purchase it. Although Foxworthy was the entity
that, in name, purchased Northside, the homeowners insurance
policy listed Mrs. Bell’s maiden name, Patricia Small, for the
insured. Foxworthy was listed only as an additional insured.
After Northside was purchased, Mr. and Mrs. Bell moved in.
From the time Mr. Bell established the RHB Corp. Schwab
account, he used the account as the main repository of the money
transferred as part of the OEL transactions. Mr. Bell authorized
Mr. Weaver to act under a power of attorney in order to cover up
a direct link between the RHB Corp. Schwab account and himself.
However, Mr. Bell maintained access to the account. Mr. Bell
used the RHB Corp. account several times to fund the tax deed
business that he began in 1999. After a few days offshore, the
money transferred as part of the OEL transactions reverted to Mr.
Bell’s control.
Additionally, Mr. Bell’s control and use of the funds
transferred offshore is shown by his $550,000 loan to the church
- 42 -
he attended, the Unity Church. The funds came from the RHB Corp.
Schwab account.
2. Constructive Receipt of Funds Used in OEL
Transactions
Mr. Bell argues that the OEL transactions were part of a
deferred compensation plan. Mr. Bell’s argument fails because,
in addition to the reasons already cited, the alleged plan
violates the doctrine of constructive receipt. Section 1.451-2,
Income Tax Regs., provides in pertinent part:
(a) General rule.--Income although not actually
reduced to a taxpayer’s possession is constructively
received by him in the taxable year during which it is
credited to his account, set apart for him, or
otherwise made available so that he may draw upon it at
any time, or so that he could have drawn upon it during
the taxable year if notice of intention to withdraw had
been given. However, income is not constructively
received if the taxpayer’s control of its receipt is
subject to substantial limitations or restrictions.
* * *
The 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, T.C. Memo. 2000-
228. Under the constructive receipt doctrine, a taxpayer may not
deliberately turn his back on income otherwise available. See
Martin v. Commissioner, 96 T.C. 814, 823 (1991).
A few days after BCM transferred money to NESL, and later to
ISL, the money was wired offshore. After a brief delay in
- 43 -
processing the transactions, Mr. Bell requested that the money be
placed in the various Schwab accounts. All of the Schwab
accounts were controlled by Mr. Bell directly, or through Mr.
Weaver, who held a power of attorney on the RHB Corp. Schwab
account. Additionally, Mr. Bell had access to the money in the
accounts as demonstrated by loans to his church and to Foxworthy
for the tax deed business. The agreement that Mr. Bell claims to
have entered into with Montrain, and later Pixley and
Fitzwilliam, to defer his compensation until age 75 is
ineffective to prevent constructive receipt of the money because
Mr. Bell had access to and control over the money shortly after
BCM transferred it. Consequently, we conclude that the record
clearly shows that all of the money BCM transferred as part of
the OEL transactions was constructively received by Mr. Bell in
the years it was transferred, and it is therefore includable in
Mr. Bell’s income for those years.
3. Disregard of Foxworthy as Mr. Bell’s Alter Ego
Respondent argues that the Court should disregard Foxworthy
and treat it as Mr. Bell’s alter ego. In Moline Props., Inc. v.
Commissioner, 319 U.S. 436, 438-439 (1943), the Supreme Court
stated:
The doctrine of corporate entity fills a useful
purpose in business life. Whether the purpose be to
gain an advantage under the law of the state of
incorporation or to avoid or to comply with the demands
of creditors or to serve the creator’s personal or
- 44 -
undisclosed convenience, so long as that purpose is the
equivalent of business activity or is followed by the
carrying on of business * * *, the corporation remains
a separate taxable entity. * * * [Fn. refs. omitted.]
Despite the general rule, however, the corporate form will be
disregarded when it is determined that the corporation is a sham.
Id. at 439.
Mr. Reiserer formed Foxworthy as a Nevada corporation on
August 12, 1996, but until it purchased Northside during 1997 it
had no assets, no liabilities, and no employees and had not
issued any stock. When the Bells decided to purchase Northside,
Mr. Reiserer suggested to Mr. Bell that he use Foxworthy to hold
title to Northside. The mailing address used for Foxworthy was a
mail forwarding service in Reno that Mr. Bell contends he
previously had set up because of identity theft issues.
At the time of Foxworthy’s formation, Mr. Reiserer was its
president, and Ms. Agee, Mr. Reiserer’s law firm associate, was
its secretary and treasurer. Because Foxworthy’s main asset as
of the end of 1997, Northside, was in Atlanta, it needed, for
convenience, a local individual to sign documents. Mr. Bell
suggested Mr. Comsudes, his employee at BCM. Mr. Comsudes never
met Mr. Reiserer and was unaware of the identity of Foxworthy’s
shareholders. Mr. Bell simply instructed Mr. Comsudes to sign
the documents. While he was president of Foxworthy, Mr. Comsudes
had no day-to-day duties and followed Mr. Bell’s instructions.
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Although it was not originally formed for Mr. Bell, once Mr.
Bell decided to use Foxworthy to purchase Northside, the record
clearly shows that Foxworthy’s separateness as a corporation
became a sham that was executed by Mr. Bell as eyewash for his
scheme to fraudulently underpay his taxes. By interjecting
Foxworthy between himself and Northside, Mr. Bell implemented a
scheme to deduct his personal living expenses.
When the corporate form did not suit Mr. Bell, he simply
ignored it, as illustrated by the holding of the homeowners
insurance covering Northside in his wife’s maiden name because
the rate was less than if it had been in Foxworthy’s name.
Additionally, Mr. Bell purported to negotiate a fictitious lease
between BCM and Foxworthy that was allegedly to be used for
office space. We conclude that the lease transaction with
Northside, however, was just a device for BCM to claim additional
deductions, in this instance related to the Bells’ personal
residence. Indeed, Mr. Graham, whose name appears on the
signature line of the lease on behalf of Foxworthy, testified
that he did not sign it. Mr. Graham was not authorized to sign
for Foxworthy. Northside had always been zoned as residential
property; and since the Bells moved in shortly after purchasing
it, they have lived in Northside.
Mr. Bell devised another alleged lease between BCM and “The
Whitehall Inn”, which Mr. Bell testified was an assumed name for
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Foxworthy. We conclude that the lease agreement for the
Whitehall Inn, like the one purportedly signed by Mr. Graham, was
also a sham. Mr. Comsudes was unaware of the lease agreement and
the existence of the Whitehall Inn. The Whitehall Inn lease
agreement is purportedly signed by Mr. Graham, whose name appears
on the signature line of the lease, but he did not sign it. The
leases were additional instances of Mr. Bell’s use of Foxworthy,
and its apparent assumed name, the Whitehall Inn, to suit his
needs. Ms. Sagaert prepared invoices for rent payments that
purported to reflect guests staying at Northside, but no guests
ever stayed at Northside. To the contrary, Mr. Bell told out-of-
town guests doing business with BCM to stay at the Waverly Inn
and had Ms. Sagaert prepare false invoices to cover up these
facts.
During 1998 Mr. Bell became interested in the tax deed
business. Mr. Bell felt that the tax deed business was lucrative
and decided to use Foxworthy to invest in the business during
1999. Mr. Bell, despite not being a board member, officer, or
employee of Foxworthy, made all of the significant decisions
regarding the tax deed business. In order to fund the tax deed
business, Mr. Bell arranged a series of alleged loans with
various parties, including the three Nevis corporations. By the
end of 2001, Mr. Bell had invested nearly $9 million from the OEL
transactions in the tax deed business.
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Mr. Bell is a skilled businessman, and he turned the tax
deed business into a profitable venture. Mr. Bell proposed to
alter the terms of a loan by having Foxworthy repay the loan from
RHB Corp. by October 2000, only to re-borrow the money at a
higher interest rate so that Foxworthy could reduce its income.
The October 2000 refinancing transaction further demonstrates the
control that Mr. Bell exerted over Foxworthy, despite having no
formal role with the corporation. On May 27, 1999, Mr. Bell
opened a brokerage account at SunTrust Equitable under
Foxworthy’s name. In addition to Mr. Bell, Mr. Reiserer and Mr.
Comsudes had signature authority over the account. Mr. Kallis,
the account representative at SunTrust Equitable, took direction
only from Mr. Bell, who identified himself to Mr. Kallis as a
consultant.
During 2000 Mr. Bell replaced Mr. Comsudes as president of
Foxworthy with Mr. Wilson. Before working for BCM, Mr. Wilson’s
experience was in special events planning. At BCM Mr. Wilson
earned a salary of $30,000 overseeing computer systems and
special projects. As president of Foxworthy, Mr. Wilson deferred
to Mr. Bell and Mr. Reiserer, although he did consult with Mr.
Bell. Mr. Wilson never had contact with Foxworthy’s alleged
owner, Ruritania.
During March 2000 Mr. Bell indicated to Mr. Reiserer that a
bank was willing to extend a $10 million line of credit for
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Foxworthy to purchase tax deeds. Mr. Bell told Mr. Reiserer that
although the bank would finance 75 percent of the money, Mr. Bell
himself would have to finance the remaining 25 percent.
Foxworthy’s tax deed business, despite its success, was Mr.
Bell’s alter ego, as he made all the crucial decisions, appointed
and replaced its officers, funded the business primarily through
his OEL transactions money, and acted as its representative with
banks.
The record clearly and convincingly demonstrates, and we so
conclude, that Foxworthy was Mr. Bell’s alter ego in all
respects, used to avoid taxation and not for any legitimate
business reasons, and is further evidence of Mr. Bell’s
fraudulent understatement of income. We therefore conclude that
Foxworthy, as Mr. Bell’s alter ego, should be disregarded. As a
result of the disregard of Foxworthy, its gross income of
$7,400,759.91, $9,627,935, and $2,421,527 for 1999 through 2001,
respectively, is gross income to Mr. Bell. Additionally,
Foxworthy’s claimed deductions19 in relation to Northside and the
tax deed business, if not otherwise disallowed, are allowable as
deductions to Mr. and Mrs. Bell.20
19
We decide below that, as Mr. Bell’s alter ego, Foxworthy
is not liable for any amounts determined by respondent in the
notices of deficiency in issue.
20
The Bells are not entitled to deductions for their living
expenses including the costs of maintaining Northside, their
(continued...)
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4. Overstatement of Deductions
It is well settled that a fraudulent understatement of
income can result from an overstatement of deductions. Drobny v.
Commissioner, 86 T.C. 1326, 1349 (1986).
BCM claimed deductions for a significant number of expenses
that Mr. Bell contends are ordinary and necessary business
expenses, including rent to Foxworthy. Mr. Bell, as the sole
owner of BCM, reported BCM’s gross income on his income tax
returns as part of Schedule E. The record clearly establishes
that the deductions for the payments to Foxworthy for rent are
overstated and evidence of fraudulent underpayment of taxes
because the payments in fact disguised personal expenses of the
Bells. The rent was allegedly for Northside, Mr. and Mrs. Bell’s
personal residence. Petitioners contend that BCM needed more
office space because it had outgrown its then-current office.
However, during 1996 BCM moved to new office space. The record
clearly shows that BCM did not need to rent office space from
Foxworthy and that the rent payments to Foxworthy were merely a
device to disguise personal expenses.
20
(...continued)
personal residence, except for real estate taxes, allowable
pursuant to sec. 164(a)(1). We discuss such income and
deductions below. See infra p. 57.
- 50 -
The record also clearly shows that other claimed deductions
of BCM were overstated. Accordingly, we conclude that, in
addition to the rent expenses claimed as deductions, the other
claimed deductions for expenses of BCM were improper and were
disguised personal expenses for the purpose of overstating
deductions and fraudulently underpaying taxes.
During the years in issue, Mr. Bell should have reported but
did not report as income any of the money transferred as part of
the OEL transactions. Moreover, Mr. Bell overstated his
deductions. Consequently, we hold that the record clearly and
convincingly establishes that Mr. Bell underpaid his income tax
for each of the years in issue.
B. Fraudulent Intent
The Commissioner must prove that a portion of the
underpayment for each taxable year at issue was due to fraud.
Sec. 7454(a); see also Profl. Servs. v. Commissioner, 79 T.C.
888, 930 (1982). The existence of fraud is a question of fact to
be resolved from the entire record. See Gajewski v.
Commissioner, 67 T.C. 181, 199 (1976), affd. without published
opinion 578 F.2d 1383 (8th Cir. 1978). Because direct proof of a
taxpayer’s intent is rarely available, fraud may be proven by
circumstantial evidence, and reasonable inferences may be drawn
from the relevant facts. See Spies v. United States, 317 U.S.
492, 499 (1943); Stephenson v. Commissioner, 79 T.C. 995, 1006
- 51 -
(1982), affd. 748 F.2d 331 (6th Cir. 1984). A taxpayer’s entire
course of conduct can be indicative of fraud. See Stone v.
Commissioner, 56 T.C. 213, 223-224 (1971); Otsuki v.
Commissioner, 53 T.C. 96, 105-106 (1969). The following badges
of fraud have been used to prove fraud: (1) Understating income,
(2) maintaining inadequate records, (3) implausible or
inconsistent explanations of behavior, (4) concealment of income
or assets, (5) failing to cooperate with tax authorities, (6)
engaging in illegal activities, (7) an intent to mislead which
may be inferred from a pattern of conduct, (8) lack of
credibility of the taxpayer’s testimony, (9) filing false
documents, (10) failing to file tax returns, and (11) dealing in
cash. Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir.
1986), affg. T.C. Memo. 1984-601. No single factor is
necessarily sufficient to establish fraud. A combination of
factors may constitute persuasive evidence of fraud.
1. Understating Income
As we have found above, Mr. Bell clearly understated his
taxable income in each of the taxable years in issue. Mr. Bell
should have reported but did not report as wages the money BCM
transferred as part of the OEL transactions for 6 consecutive
years. Additionally, both Mr. Bell’s alter ego Foxworthy and BCM
claimed improper deductions for Mr. Bell’s disguised living
expenses, including maintenance of his personal residence. The
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disallowed deductions and omitted gross income establish an
understatement of Mr. Bell’s taxable income for 6 consecutive
years, a badge of fraud. See Hicks Co. v. Commissioner, 56 T.C.
982, 1019 (1971), affd. 470 F.2d 87 (1st Cir. 1972).
2. Implausible or Inconsistent Explanations of
Behavior
Mr. Bell was very successful in business and had developed
BCM into a firm managing 1,100 portfolios worth $280 million in
aggregate market value by the end of 1995. From 1991 through
1995 Mr. Bell earned an average of $730,455 in annual wages from
BCM. Pursuant to the OEL transactions, Mr. Bell claimed that he
earned only $75,000 each year, excluding 2001. According to Mr.
Bell, the money BCM transferred as part of the transactions, a
sum in excess of $7 million, was nonqualified deferred
compensation, subject to the control of Mr. Bell’s alleged new
employer, Montrain, and to a substantial risk of forfeiture until
he reached the age of 75. Mr. Bell’s argument is flatly
contradicted by the record–-as we found above, he exerted control
over the money at every turn.
3. Concealment of Income or Assets
From the moment Mr. Bell entered into the OEL transactions,
we conclude that his goal was to find a way to conceal the money
being transferred. The web of organizations and third parties
Mr. Bell and Mr. Reiserer conspired to devise clearly was an
elaborate scheme designed solely for the purpose of avoiding
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taxation. In addition to forming corporations allegedly located
in Nevis, Mr. Bell used his alter ego Foxworthy to repatriate the
money allegedly transferred to those entities. Foxworthy,
allegedly owned by Ruritania, a foreign entity, was used to
purchase Northside, the property in which Mr. and Mrs. Bell lived
in Atlanta, a scheme clearly designed to give Foxworthy an avenue
to deduct personal living expenses of the Bells. When Foxworthy
purchased Northside, the Bells used Mrs. Bell’s maiden name on
the homeowners insurance in order to obtain a lower rate and to
conceal their true ownership of Northside. Additionally, Mr.
Bell insured his Rolls Royce under his name but claimed it was a
Foxworthy asset. Once Mr. Bell became involved in the tax deed
business and it became successful, he renegotiated alleged loans
between organizations he controlled in order to lessen
Foxworthy’s tax burden.
Mr. Bell was aware that his involvement in many of the
transactions in issue would appear “troublesome”, so he
frequently used third parties both with and without their
permission in his attempt to conceal a link between himself and
the funds and assets. Mr. Comsudes, Mr. Bell’s employee at BCM,
became the president of Foxworthy because Mr. Bell needed an
individual in Atlanta to use as a figurehead on paper while Mr.
Bell maintained control. Mr. Comsudes signed whatever documents
Mr. Bell put in front of him. Later, Mr. Bell replaced Mr.
- 54 -
Comsudes with Mr. Wilson. Mr. Wilson admittedly had more
involvement with the activities of Foxworthy than did Mr.
Comsudes, but Mr. Bell still maintained control. Mr. Bell asked
Mr. Graham to stay on at Northside and help maintain the home
after Foxworthy purchased it. Mr. Bell used Mr. Graham’s name
without his knowledge as a signatory on lease documents. Mr.
Graham did not sign any lease and was not authorized to do so,
yet his name appears as Foxworthy’s representative on two alleged
leases. Additionally, Mr. Graham’s name appears without his
permission on Foxworthy’s request for an extension to file its
1997 income tax return. Furthermore, Mr. Bell used Mr. Zarrett’s
signature stamp without his permission. The record clearly
establishes that by the use of third party names Mr. Bell
attempted to conceal the true nature of the Northside purchase
and subsequent lease agreements.
4. An Intent To Mislead
Mr. Bell’s behavior, described above, in relation to the
concealment of income and assets, also indicates an intent to
mislead. Additionally, when the IRS began investigating Mr.
Bell, he insisted on having the investigation take place in
Daytona Beach, Florida, rather than Atlanta. The Bells used a
Florida address on their income tax return. When the IRS agent
attempted to reach Mr. Bell in Florida, she discovered that the
address used on the return was a mailbox address. Additionally,
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Mr. Bell owns residential property in Florida. When the IRS
agent visited the property, the person who answered the door did
not know anyone by the name of Ron H. Bell. Despite his presence
in Atlanta, Mr. Bell insisted that the investigation be located
in Florida. We conclude that by means of such actions Mr. Bell
attempted to mislead the IRS.
5. Filing False Documents
As previously mentioned, on March 13, 1998, Foxworthy filed
a Form 7004 for taxable year 1997. The Form 7004 contains Mr.
Graham’s signature on the signature line; however, Mr. Graham did
not sign it.
In sum, we conclude that, on the basis of the extensive
record, respondent has proved by clear and convincing evidence
that Mr. Bell fraudulently underpaid his Federal income taxes for
the years in issue. As to Foxworthy, respondent concedes the
determinations made with respect to Foxworthy in the event that
we decide that Foxworthy was Mr. Bell’s alter ego. As we have
decided above that Foxworthy was Mr. Bell’s alter ego, we need
not consider the determinations made in the notice of deficiency
sent to Foxworthy. On the basis of respondent’s concession, we
hold that Foxworthy is not liable for those determinations.
As to the fraud penalty determined against Mrs. Bell, we
conclude that respondent has failed to clearly and convincingly
establish any fraudulent intent by Mrs. Bell. See Katz v.
- 56 -
Commissioner, 90 T.C. 1130, 1144 (1988) (a finding of fraud based
upon circumstance that creates only suspicion will not be
sustained). Consequently, we hold that Mrs. Bell is not liable
for the fraud penalty.21
II. Period of Limitations
The Bells argue that respondent cannot assess the tax
deficiencies respondent determined against them for taxable years
1996 through 1998 because the statutory periods of limitations
have expired.
In the case of a false or fraudulent return with the intent
to evade tax, the tax may be assessed at any time. See sec.
6501(c)(1). A fraudulent return deprives the taxpayer, and the
taxpayers’ spouse in the case of a joint return, of the
protection of the bar of the statutory period of limitations for
that year. See Badaracco v. Commissioner, 464 U.S. 386, 396
(1984); Lowy v. Commissioner, 288 F.2d at 520; Vannaman v.
Commissioner, 54 T.C. at 1018; see also Colestock v.
Commissioner, 102 T.C. at 385.
We have decided above that Mr. Bell filed fraudulent income
tax returns for all of the taxable years in issue. Consequently,
the period of limitations on assessment for each taxable year in
issue remains open as to the Bells.
21
We note that Mrs. Bell has not raised any defenses
pursuant to sec. 6015(b), (c), or (f).
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III. The Deficiencies Determined Against the Bells
Deductions are a matter of legislative grace, and taxpayers
generally bear the burden of showing that they are entitled to
any deductions claimed on their returns. Rule 142(a); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
A taxpayer is required to maintain records that are
sufficient to enable the Commissioner to determine the correct
tax liability. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
In addition, the taxpayer bears the burden of substantiating the
amount and purpose of the item for the claimed deduction. See
Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam
540 F.2d 821 (5th Cir. 1976).
A. Burden of Proof
The Bells argue that respondent bears the burden of proof
under section 7491(a)(1) with respect to the deficiencies in
issue. In pertinent part, Rule 142(a)(1) provides, as a general
rule: “The burden of proof shall be upon the petitioner”. In
certain circumstances, however, if the taxpayer introduces
credible evidence with respect to any factual issue relevant to
ascertaining the proper tax liability, section 7491 places the
burden of proof on the Commissioner. See sec. 7491(a)(1); Rule
142(a)(2). Credible evidence is evidence that, after critical
analysis, a court would find constituted a sufficient basis for a
- 58 -
decision on the issue in favor of the taxpayer if no contrary
evidence were submitted. Baker v. Commissioner, 122 T.C. 143,
168 (2004); Bernardo v. Commissioner, T.C. Memo. 2004-199, n.6.
The Bells’ contention that respondent has the burden of
proof lacks merit because, for the reasons discussed throughout
the instant opinion, aside from certain of the claimed charitable
contribution deductions discussed below,22 the Bells have not
introduced credible evidence with respect to the deficiencies in
issue. Consequently, the burden of proof remains on the Bells, a
burden that, because of the absence of credible evidence, they
cannot sustain. See Bernardo v. Commissioner, supra n.7; see
also Rendall v. Commissioner, 535 F.3d 1221, 1225 (10th Cir.
2008) (citing Bernardo v. Commissioner, supra), affg. T.C. Memo.
2006-174.
Additionally, section 7491(a) requires that the taxpayer
cooperate with reasonable requests by the Commissioner for
“witnesses, information, documents, meetings, and interviews”.
Sec. 7491(a)(2)(B). Aside from the disallowed charitable
contribution deductions, the Bells failed to comply with the
substantiation and record-keeping requirements necessary to shift
the burden of proof to respondent. Consequently, for the
22
As to the disallowed charitable contribution deductions,
we decide below, on the evidence in the record, that the Bells
are entitled to some of the claimed deductions. Therefore, as to
those deductions that we sustain on the basis of the record, we
need not determine where the burden of proof lies.
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foregoing additional reasons, we hold that the Bells bear the
burden of proof as to the deficiencies in issue.
B. OEL Transactions, Foxworthy Deductions, and BCM
Deductions
As discussed above with respect to respondent’s fraud
determinations, respondent determined a series of adjustments to
the Bells’ income taxes. Most of the Bells’ contentions
regarding respondent’s deficiency determinations are addressed
above in our discussion of the fraud penalties and do not bear
repeating here, except that we conclude on the record that the
Bells have failed, except for the charitable contribution
deductions discussed below, to prove that respondent’s deficiency
determinations are incorrect. Accordingly, we uphold
respondent’s determinations with respect to the unreported income
from the OEL transactions, Foxworthy’s overstated deductions with
respect to Northside, the Bells’ unreported income with respect
to Foxworthy’s gross income, and the disallowed BCM flowthrough
deductions.
We found above that Foxworthy is Mr. Bell’s alter ego. Most
of Foxworthy’s deductions, except the real estate ad valorem
taxes paid with respect to Northside, are otherwise personal to
the Bells and therefore are not deductible by the Bells. As to
those real estate ad valorem taxes, we hold that they are
properly allowable deductions by the Bells pursuant to section
164(a)(1). As to the interest deductions Foxworthy claimed for
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payments on the alleged loans by Helston and Ballyclare, however,
those deductions are not proper because we conclude, on the basis
of the record, that the loans are a sham. The remaining disputed
deductions are addressed below.
C. BCM’s Bad Debt Deductions Flowing Through to the Bells
Respondent determined that the Bells are not entitled to
their claimed deductions with respect to two alleged Steinberg
loans. The Bells claimed a capital loss of $103,286 for taxable
year 2000. The loss consists of $91,350 of unsecured notes and
$11,936 in legal fees associated with collecting the alleged
debts. Respondent contends that the Bells have failed to
establish that the debts existed, that the R&P Partnership had
bases in the alleged debts, that the alleged debts are of the
type that qualifies for a deduction, that the alleged debts were
paid, or that the alleged debts, if they were in fact debts, went
bad during a year in issue.
Section 166(d)(1)(B) provides that, where any nonbusiness
debt becomes worthless within the taxable year, the loss
resulting therefrom shall be considered a loss from the sale or
exchange, during the taxable year, of a capital asset held for
not more than 1 year. Whether a debt is worthless is a factual
question on which the taxpayer bears the burden of proof. Estate
of Mann v. United States, 731 F.2d 267, 275 (5th Cir. 1984).
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The Bells have failed to meet their burden of proof because
they have not demonstrated that the alleged Steinberg loans were
valid debts and that those alleged debts became worthless. The
promissory notes that the Bells submitted as evidence are not
dated and are signed only by the alleged debtor Steinberg, with
no witness or any notary seal. Furthermore, the Bells allege
that in addition to R&P Partnership there were eight creditors of
Steinberg. However, there is no evidence to verify this
allegation. We conclude that Mr. Bell’s testimony lacks
credibility and is insufficient to establish the debt and its
worthlessness without further corroboration. The Court need not
accept at face value a witness’s testimony that is self-
interested or otherwise questionable. See Archer v.
Commissioner, 227 F.2d 270, 273 (5th Cir. 1955), affg. a
Memorandum Opinion of this Court dated Feb. 18, 1954; Weiss v.
Commissioner, 221 F.2d 152, 156 (8th Cir. 1955), affg. T.C. Memo.
1954-51; Schroeder v. Commissioner, T.C. Memo. 1986-467. We
conclude that the Bells have failed to carry their burden to
prove the bad debts were bona fide debts and became worthless
during a year in issue. We therefore uphold respondent’s
determinations disallowing the $103,286 in capital losses with
respect to the alleged loans.
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D. Investment Account Income
The Schwab accounts of Helston, Ballyclare and
Rossendale/RHB Corp. earned investment income which the Bells
failed to report. The money in those accounts came from the OEL
transactions, which we have held to be income to Mr. Bell. Mr.
Bell formed the three corporations in Nevis and set up Schwab
accounts in Georgia, in the branch closest to BCM’s office. All
three entities lacked a legitimate business interest.
Rossendale/RHB Corp. was the primary recipient of the funds from
the OEL transactions. The funds were then used to finance the
tax deed business. Helston and Ballyclare were used to lend
money for Foxworthy to purchase Northside. Mr. Bell formed the
three foreign entities because they were not subject to taxation
in the United States, and Mr. Bell used them as a mechanism to
repatriate the OEL funds. Section 61 provides that gross income
means all income from whatever source derived, including interest
and dividends. All of the income in the three accounts, aside
from the principal amounts deposited, consists of interest or
dividends. Additionally, we note that Mr. Bell stressed to Mr.
Reiserer that the speed at which the offshore money was
repatriated was unacceptable because he was losing interest.
Accordingly, we hold that the Bells have failed to prove that
they are not liable for $8,445.10 in interest income from
Helston’s Schwab account in 1997, $7,469.19 in interest income
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from Ballyclare’s Schwab account in 1997, and $37,031,
$168,287.61, $126,963.85, $96,235.40, and $141,916.42 in 1997
through 2001, respectively, from Rossendale/RHB Corp.’s Schwab
account. As found above, for 1999, $18,166.50 of the income in
the Rossendale/RHB Corp. account was dividend income.
E. Capital Gains on Liquidation of Stock
Respondent argues that the Bells must recognize $329,363.38
as gain on the sale of stock because the shares in the R&P
Partnership were owned by Mr. Bell. Mr. Bell authorized the
shares in the R&P Partnership to be transferred to the Schwab
account in Mr. Reiserer’s name. Once in the Reiserer account,
the shares were liquidated for $2,225,181.96, with Mr. Bell
authorizing the proceeds to be transferred to Rossendale’s Schwab
account. The Bells argue that the liquidated shares from the
Reiserer account were not Mr. Bell’s and that he was merely a
trustee of his father’s and mother’s trust accounts. The Bells
further argue that respondent has not provided an explanation for
the calculation of the gain. Mr. Bell testified that R&P
Partnership was another name for himself and his wife. The
shares that came from the R&P Partnership and were transferred,
first to the Reiserer account and later as liquidation proceeds
to the Rossendale account, were owned by the Bells. The shares
in the Hoyt Bell account, Roberta Bell account, and Kelli Bell
account were eventually transferred to Helston and Ballyclare and
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used to purchase Northside. The shares in those accounts were
not transferred to Rossendale as part of an alleged private
annuity transaction. We conclude that the Bells have failed to
establish that such a private annuity transaction in fact
existed.
As to the Bells’ argument regarding respondent’s failure to
explain the calculation of the gain, it is the Bells who bear the
burden of proving that respondent’s deficiency determinations are
incorrect. On the issue of the capital gains on the liquidation
of stock, the Bells have not met their burden of proof.
Consequently, we conclude that the Bells are liable for the
capital gain on the liquidation of stock of $329,363.38 because
the shares were owned by Mr. Bell and sold for a gain.
F. SEC Fine
The Bells concede that the $15,000 fine against BCM was not
properly deducted in 1999 as an employee business expense. The
Bells argue that the remaining $30,000 was proper because,
although the fines were the personal obligation of Mr. Bell, Mr.
Comsudes, and Mr. Palmer, respectively, BCM was the beneficiary
of the work done by the three individuals. Pursuant to section
162(f), no deduction shall be allowed for any fine or similar
penalty paid to a government for the violation of any law. BCM
paid the $30,000 to satisfy the SEC fines levied for violation of
the Investment Advisers Act of 1940, a Federal law, arguing that
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it was the beneficiary of the work done by Mr. Bell, Mr.
Comsudes, and Mr. Palmer. The SEC order states that Mr. Bell,
Mr. Comsudes, and Mr. Palmer aided and abetted BCM in committing
violations. Therefore, we hold that BCM was not entitled to
deduct $30,000 paid in fines to the SEC on behalf of Mr. Bell,
Mr. Comsudes, and Mr. Palmer.23
G. Charitable Contribution Deductions
The Bells claimed on their returns charitable contribution
deductions of $161,604, $192,377, $87,572, $139,653, and $69,386,
respectively for taxable years 1996, 1997, 1998, 1999, and 2000.
Respondent disallowed the charitable contribution deductions in
the following amounts: $155,001 for 1996, $171,103 for 1997,
$77,253 for 1998, $139,653 for 1999, and $62,915 for 2000. The
contributions in 1996 and 1997 included the contribution to the
foundation of shares of Northeast Investments Trust valued at
$300,240 for 1996 and $202,320 for 1997. Respondent disallowed
the charitable contribution deductions because Mr. Bell controls
the foundation and has not demonstrated the transfer of shares
took place.
Section 170(a)(1) provides that a taxpayer may deduct “any
charitable contribution * * * payment of which is made within the
23
Mr. Bell does not argue that the payments of the fines
imposed on him, on Mr. Comsudes, and on Mr. Palmer were
deductible to BCM as wages. Accordingly, we need not reach that
issue.
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taxable year. A charitable contribution shall be allowable as a
deduction only if verified under regulations prescribed by the
Secretary.”
Petitioners have provided statements from R&P Partnership’s
Schwab account that substantiate the transfer of the shares of
Northeast Investments Trust to the foundation. The statements
show the shares leaving the R&P Partnership account and the
foundation’s statements show the shares in the account, along
with the value of the shares. IRS Revenue Agent Wilcoxon
testified that despite receiving substantiation from the Bells
regarding the contributions to the foundation, she disallowed the
deductions because Mr. Bell controlled the charity. However,
respondent has not cited any authority in support of his
contention that merely having control over the foundation
disqualifies the Bells from claiming the charitable contribution
deductions for the contribution of the shares of Northeast
Investors Trust to the foundation. Although the foundation is a
private foundation controlled by the Bells, control alone is not
sufficient to defeat the deduction to the Bells.24 Control in
the context of private foundations generally is an issue in
determining whether a private foundation is liable for excise
taxes because of self-dealing. See sec. 4941. Respondent,
24
The foundation files Forms 990-PF, Return of Private
Foundation, and the Bells do not dispute the foundation’s status
as a private foundation.
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however, does not contend that there was any self-dealing on the
part of the foundation or any other violation of the restrictions
or requirements of private foundations, and the record shows
none. See secs. 4940-4945. Furthermore, respondent does not
challenge the tax-exempt status of the foundation.
For the years 1999 and 2000, the Bells claimed total
charitable contribution deductions of $650,592. However, at
trial the Bells substantiated charitable contributions of only
$567,886, leaving $82,706 of unsubstantiated contributions.
Consequently, we hold that the Bells are entitled to a total
charitable contribution deduction of $567,886.
H. BCM Deductions
Mr. Bell, as the sole owner of BCM, reported its income on
his Schedule E for each of the years in issue. BCM claimed
deductions on its income tax returns for various expenses.
Respondent determined that BCM overstated its deductions by
$1,228,088, $1,702,817, $2,678,033, $3,195,463, $1,966,457, and
$651,470 for 1996, 1997, 1998, 1999, 2000, and 2001,
respectively. BCM claimed deductions of $800,000, $1,220,000,
$2,225,000, $2,430,000, $1,880,000, and $425,000 for the services
of Mr. Bell in 1996, 1997, 1998, 1999, 2000, and 2001,
respectively. The foregoing deductions are proper deductions by
BCM as wages paid to Mr. Bell pursuant to section 162(a)(1). As
we have previously determined above, however, that salary is
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taxable to Mr. Bell. Aside from the wages paid to Mr. Bell, the
Bells have failed to substantiate that the deductions BCM claimed
are legitimate deductions. Excepting Mr. Bell’s self-serving
testimony, which we do not find credible on the basis of the
record, the Bells have not called witnesses or submitted
documents that corroborate the claimed deductions. See Archer v.
Commissioner, 227 F.2d at 273; Weiss v. Commissioner, 221 F.2d at
156; Schroeder v. Commissioner, T.C. Memo. 1986-467.
Accordingly, we hold that, except for the wages paid to Mr. Bell,
BCM is not entitled to the disputed deductions disallowed in the
notices of deficiency. Consequently, we sustain respondent’s
determinations increasing the Bells’ income by those amounts.
IV. Negligence Penalty
As to the Bells, respondent concedes the accuracy-related
penalty pursuant to section 6662 in the event the Court upholds
the fraud penalty against Mr. Bell. As we have held above, Mr.
Bell is liable for the section 6663 penalty; consequently, on the
basis of respondent’s concession, we hold that neither of the
Bells is liable for the section 6662 penalty. Mrs. Bell is not
liable for the accuracy-related penalty imposed by section
6662(a) because the underpayments are due to fraud by Mr. Bell.
See sec. 6662(b); Zaban v. Commissioner, T.C. Memo. 1997-479;
Aflalo v. Commissioner, T.C. Memo. 1994-596; Minter v.
Commissioner, T.C. Memo. 1991-448.
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V. Section 6651(a)(1) Addition to Tax
Respondent determined that the Bells are liable for an
addition to tax under section 6651(a)(1) for 1996. Section
6651(a)(1) imposes an addition to tax for failure to file a
return by the date prescribed (determined with regard to any
extension of time for filing) unless the taxpayer can establish
that such failure is due to reasonable cause and not due to
willful neglect. Once the Commissioner carries his burden of
production, the taxpayer has the burden of proving that the
addition to tax is improper. Rule 142(a); United States v.
Boyle, 469 U.S. 241, 245 (1985). Section 7491(c) provides that
the Commissioner will bear the burden of production with respect
to the liability of any individual for additions to tax and
penalties. “The Commissioner’s burden of production under
section 7491(c) is to produce evidence that it is appropriate to
impose the relevant penalty, addition to tax, or additional
amount”. Swain v. Commissioner, 118 T.C. 358, 363 (2002); see
also Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Respondent has met his burden of production.
Respondent received the Bells’ joint income tax return for
1996 on August 27, 1997. Petitioners have not shown that they
requested an extension. Furthermore, the Bells’ return preparer
indicated that her records did not reflect that any request by
the Bells for an extension had been approved. The Bells have
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shown no reasonable cause as to the late filing. Consequently,
we conclude that the Bells are liable for the section 6651(a)(1)
addition to tax for 1996.
VI. Petitioners’ Motions To Supplement the Record
Petitioners filed motions in each docket to supplement the
record seeking leave to submit as evidence a letter dated July
22, 2008, from the IRS on the status of the investigation of Mr.
Reiserer. Reopening the record for the submission of additional
evidence lies within the discretion of the Court. Zenith Radio
Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331 (1971). We
will not grant a motion to reopen the record unless, among other
requirements, the evidence relied on is not merely cumulative or
impeaching, the evidence is material to the issues involved, and
the evidence probably would change some aspect of the outcome of
the case. Butler v. Commissioner, 114 T.C. 276, 287 (2000).
Petitioners argue that it is in the interest of justice to grant
their motions. However, petitioners do not articulate why it is
in the interest of justice or how the evidence would change any
aspect of the outcome of the instant case. We hold that
reopening the record is not warranted. Therefore, petitioners’
motions will be denied.
In reaching all of our holdings herein, we have considered
all of the arguments made by the parties, and, to the extent not
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mentioned above, we conclude they are without merit, irrelevant
or unnecessary to reach.
To reflect the foregoing,
An appropriate order will
be issued.
Decisions will be entered
for petitioner in docket Nos.
20725-03, 18969-04, and
14612-05.
Decisions will be entered
under Rule 155 in docket Nos.
160-04, 601-05, 21699-05, and
24533-06.