In re Wyly

Related to ECF Nos. 4, 75, 516, 923, & 938

MEMORANDUM OPINION

BARBARA J. HOUSER, United States Bankruptcy Judge

I. JURISDICTION, AUTHORITY, AND VENUE... 355

II. PRELIMINARY MATTERS... 356

A. Factual and Computation Stipulations of the Parties... 356

B. Facts Found Due to this Court’s Application of Collateral Estoppel... 356

C. United States’ Motion to Exclude the Expert Report, Opinions, and Testimony of Joshua S. Rubenstein... 358

D. Dee’s Motion for Partial Summary Judgment... 366

III. FACTUAL AND PROCEDURAL HISTORY... 366

IV. LEGAL ANALYSIS... 374

A. Burden of Proof... 374

1. Bankruptcy Law Burden of Proof— In General... 374

a) Prima Facie Validity under Bankruptcy Rule 3001(f)... 375

b) Have the Debtors Raised Evidence of a Probative Force Equal to that of the Proofs of Claim?... 378

2. Tax Law Burden of Proof — -In General ... 380

a) Gift Tax Deficiencies and the Presumption of Correctness... 380

*353 (1) Is the IRS’ Determination “Arbitrary and Erroneous?”... 381

(2) Burden Shifting under 26 U.S.C. § 7491 ... 383

b) Fraud Penalties for Income Tax and Gift Tax Underpayments... 386

c) International Failure to File Penalties ... 387

3.The Debtors’ Defenses... 388

a) Reasonable Cause Defenses... 388

b) Dee’s Innocent Spouse Defense... 389

B.Was the Debtors’ Underpayment of Income Taxes Due to Fraudulent Intent?... 389

1.Relevant Statutes and Badges of Fraud... 392

a) The Complexity of the Offshore System... 394

b) The Wylys’ Willingness to Commit Securities Fraud to Preserve the Secret Offshore System and to Maintain its Tax Advantages... 408

c) The Failure to Take Action to Resolve the Conflicting Advice Sam and Charles Received Regarding the 1992 IOM Trusts... 413

d) The Creation of False Documents to Support the Settling of IOM Trusts in 1994 and 1995 to Attempt to Obtain Favorable Tax Benefits for the Wy-lys... 415

e) The Treatment of the Offshore System as the Wyly Family Piggy Bank.423

f) The Planned Insolvency of Various IOM Corporations that Owed Annuity Obligations... 431

g) Understatement of Income..'. 441

h) Concealment of Income or Assets ... 446

i) Offering False or Incredible Testimony. .. 447

j) Offering Implausible or Inconsistent Explanations of Behavior... 449

k) Filing False Documents... 452

l) Failure to Cooperate with Taxing Authorities... 460

C. Was Dee Willfully Blind?... 461

D. Is Dee Entitled to the Benefits of the Innocent Spouse Defense?... 464

E. Did Sam Establish his Reasonable Cause Defense to the Imposition of Fraud Penalties for His Income Tax Underpayments? ... 475

1. The Defense in General... 475

2. The 1992 Private Annuity Transactions ... 482

3. The Settlement of the Bessie IOM Trust and the La Fourche IOM Trust and their Proper Characterization... 494

4. The 1996 Private Annuity Transactions ... 498

5. Alleged Reliance on French... 503

F. Were Gifts Made to the Wylys’ Children?... 512

1. The Relevant Standards... 513

a) Defining a Gift... 513

b) Determining the Underlying Substance of the Transaction... 514

(1) The Economic Substance Doctrine. .. 514

(2) The Substance Over Form Doctrine. .. 515

(3) The Step Transaction Doctrine. .. 515

2. Understanding the Transactions Alleged to be Gifts by Sam to His .Children ... 516

a) Formation and Funding of the Cayman LLCs... 516

b) The Real Estate Holdings... 519

*354 c) Liquidation of the Cayman LLCs... 524

3. Analysis of Alleged Gifts Made by Sam... 524

a) Cash Used to Purchase, Improve, and Maintain the Cottonwood Ventures I and II Properties... 525

b) Cash and Other Assets that were Transferred Into the Cayman LLCs... 532

(1) The Interests in IOM Real Estate Companies... 532

(2) Cash and Other Financial Assets Transferred to the Cayman LLCs... 535

4. Understanding the Transactions Alleged to be Gifts by Dee to Her Children ... 536

c) Stargate Horse Farm... 537

d) Little Woody (LL Ranch)... 538

5. Analysis of the Alleged Gifts Made by Dee.,. 539

a) Cash Used for the Purchase, Maintenance, Improvement, and Upkeep of the Stargate Horse Farm and Little Woody (LL Ranch) Real Estate Properties ... 539

b) The Promissory Note Due to Dee from the Caroline D. Wyly Irrevocable Trust... 543

(1) Overview of the Transaction... 543

(2) Analysis of the Alleged Gift Made by Dee... 546

(3) Is Dee Liable for Fraud Penalties on her Gift?... 549

G.Are Penalties Owing for the Failure to File Forms 3520, 3520-A, and 5471?... 551

1. Introduction... 551

2. Statutory Overview... 551

a)§ 6038 and Failures to File Form 5471... 553

b) § 6048(b) and Failures to File Form 3520-A... 556

c) § 6048(c) and Failures to File Form 3520... 557

(1) In General... 557

(2) Annuity Payments. <. 558

(3) Real Estate Transactions... 569

(4) Security Capital Loans... 570

(5) Sales of Options to IOM Corporations ... 575

H. Did the Debtors Establish Their Reasonable Cause Defenses to the Imposition of International Penalties?... 576

I. Introduction... 576

a) Review of Provisions of § 6038... 576

b) Review of Provisions of §§ 6048(b) and 6677... 576

2. Reasonable Cause and Lack of Willful Neglect... 577

a) In General... 577

b) Reliance on the Advice of Professionals ... 579

c) Honest Difference of Opinion... 580

d) Application to Both Debtors... 583

(1) As to Sam... 585

(2) As to Dee... 593

I. Does the Imposition of the International Penalties Violate the Eighth Amendment? ... 602

1. Applicable Supreme Court Precedent. .. 602

a) The Supreme Court Decisions... 603

b) Lower Courts’ Interpretations of Supreme Court Precedent.. .608

2. Are the International Penalties “Fines”?... 609

3. Alternatively, Are the International Penalties.“Excessive?”.., 614

a) As to Sam... 616

*355 b) As to Dee... 621

J. Do the Equitable Doctrines of Lach-es or Estoppel Apply Here, or Does the Court have Discretion Regarding the Assessment of Taxes or Penalties Against the Debtors?... 624

1. Does Laches Apply Here?... 624

2. Does Estoppel Apply Here?... 627

3. Does the Court have Discretion to Alter the Penalty Amounts?... 634

K. Suspension of Interest Under 26 U.S.C. § 6404 (g)... 635

1. This Court has Jurisdiction to Determine the Amount of Interest Payable by the Debtors, Including Whether the Debtors Are Entitled to Mandatory Interest Suspension under 26 U.S.C. § 6404 (g)... 636

2. Mandatory Suspension of Interest Does Not Apply in Any Case Involving Fraud, Precluding Suspension for Sam in the Relevant Years... 638

3. Interest Suspension is Moot as to Dee Because She Did Not Commit Tax Fraud and She is Entitled to Innocent Spouse Relief from the Income Tax Underpayments to Which § 6404(g) Interest Suspension Would Apply... 639

V. CONCLUSION... 639

Before the Court are the Motion Pursuant to Bankruptcy Code § 505 to Determine Tax Liability, If Any [ECF No. 4] and the Amended Motion Under Bankruptcy Code Section 505 to Determine Tax Liability, If Any [ECF No. 516] (together, the “Motions”) filed by Samuel Evans Wyly (“Sam”) and Carolyn Dee Wyly (“Dee,” and together with Sam, the “Debtors”), respectively, in which the Debtors seek to have this Court determine the allowed claim of the Internal Revenue Service (“IRS”) against them. The Debtors have also objected to the proofs of claim 1 filed by the IRS against them (together, the “Claim Objections”). 2 By agreement of the parties, the Motions and the Claim Objections were heard concurrently, as each seeks to have the Court determine the IRS’ allowed claims against the Debtors’ respective estates. Pursuant to a Scheduling Order agreed to by the parties and entered by the Court [ECF No. 564], trial commenced on January 6, 2016 and concluded on January 21, 2016. Closing arguments were heard on January 27 and 28, 2016. At the Court’s direction, the Debtors and the IRS filed post-trial briefs on certain issues on February 5, 2016 and reply briefs to each other’s post-trial brief on February 10, 2016. The Motions and Claim Objections are now ripe for ruling.

After carefully considering the arguments of the parties (as advanced orally and in writing both pre and post-trial), the evidence admitted at trial, and its own research of the legal issues raised, this Memorandum. Opinion contains the Court’s findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014. 3

1. JURISDICTION, AUTHORITY, AND VENUE

The district court of the Northern District of Texas has subject matter jurisdic *356 tion over the Debtors’ bankruptcy cases (the “Cases”) pursuant to 28 U.S.C. § 1384 , and this Court has authority to determine the amount or legality of tax and the allowance or disallowance of claims against the bankruptcy estates pursuant to 28 U.S.C. § 157 (a), (b)(1), (b)(2)(B), and (b)(2)(0), 11 U.S.C. § 505 (a), 4 and the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc adopted in the Northern District of Texas on August 3, 1984. As explained by the Fifth Circuit, § 505(a)(1) is a “broad grant of jurisdiction” authorizing the bankruptcy court to determine certain tax issues, subject to statutory exceptions that are not applicable to the Cases. 5 Venue is proper in this district pursuant to 28 U.S.C. § 1408 ;'

II. PRELIMINARY MATTERS

A. Factual and Computation Stipulations of the Parties

At the Court’s urging, the parties stipulated to a large number of undisputed facts, which are contained in the Joint Stipulations of Fact [ECF No. 1040] (the “Joint Stipulations”) filed December 30, 2015. While the Court will not repeat those factual stipulations verbatim in this Memorandum Opinion, it adopts them as if they were set forth herein.

In addition, the parties were able to stipulate to the facts that will be necessary for them to compute the amount of tax, interest, and penalties that may result from this Court’s determination of the factual and legal issues in dispute among them, which are included in the parties’ Computation Stipulations [ECF No. 1106] (the “Computation Stipulations”) filed January 26, 2016. The Computation Stipulations, like everything else in the Cases, is complicated and detailed, so suffice it to say that the Court is not going to repeat those stipulations here, but it adopts them as if they were set forth herein. 6

B. Facts Found Due to this Court’s Application of Collateral Estop-pel

On May 29, 2015 the IRS filed its Motion for Partial Summary Judgment on the Application of Collateral Estoppel to Facts and Conclusions Established in the Securities and Exchange Commission v. Sam Wyly et al. Litigation [ECF No. 611] (the “Motion for Partial Summary Judgment”), seeking this Court’s determination that certain findings of fact and conclusions of law made in connection with a civil action pending in federal district court in the Southern District of New York (the “SDNY Court”) were binding on the Debtors in connection with this Court’s resolu *357 tion of the Motions and the Claim Objections. In summary, the Securities and Exchange Commission (the “SEC”) sued Sam and his brother, Charles Wyly (“Charles”), 7 among others, for securities fraud in connection with certain securities transactions undertaken by various offshore trusts and other offshore corporations that Sam and Charles were associated with in a case styled SEC v. Wyly et al., Case No. 10-5760-SAS (S.D.N.Y.) (the “SEC Action”). Following a jury trial on the liability phase and a bench trial on the remedies phase of the SEC Action, the SDNY Court entered judgment against Sam and the probate estate of Charles, who died in 2011, for $123,836,958.75 and $63,881,743.97, respectively, plus prejudgment interest. 8 The SDNY Court’s decision contained numerous findings of fact that either the jury or it had made, along with its conclusions of law, which the IRS sought to have this Court give collateral estoppel effect to here, as these same offshore trusts and other offshore corporations and the transactions that they engaged in for a number of years are at the heart of the IRS’ tax claims against the Debtors here.

For the reasons stated in its Memorandum Opinion and Order [ECF No. 789] entered on August 24, 2015, this Court granted the IRS’ Motion for Partial Summary Judgment, thereby giving collateral estoppel effect to sixty-four (64) specific facts and/or legal conclusions established in the SEC Action. 9 While the Court will not repeat them here, it adopts them and will quote them and/or discuss them when relevant to this Court’s specific determinations here. 10

As will be explained more fully below, of particular significance here is the SDNY Court’s determination that certain of the offshore trusts at issue in the SEC Action and here are foreign grantor trusts of Sam and Charles. Because of this determination by the SDNY Court, and because this Court has given collateral estoppel effect to the SDNY Court’s determination, the Debtors and the IRS agree that there were substantial underpayments of income *358 taxes by the Debtors, 11 including (i) for Sam tax years 1992 through 2003, 2005 through 2006, and 2010, and (ii) for Dee tax years 1992, 1994 through 2003, 2006, 2008, 2011, and 2013. 12

The reference above is the first time that the Court has used the phrase “foreign grantor trust” in this opinion and it will use it and other related terms throughout this opinion. Of course, it is important to understand what the Court is referring to when using these terms. A foreign trust is defined in 26 U.S.C. § 7701 as “any trust other than a trust described in subparagraph (E) of paragraph (30).” 13 Subparagraph (E) of paragraph (30) in turn defines when a trust can be considered a “United States person,” which is if “(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more United States persons have the authority to control all substantial decisions of the trust.” 14 In other words, if the trust is not subject to primary supervision by a court within the U.S. and control over the trust is exercised by a non-U.S. person, it is a foreign trust. The difference between grantor and non-grantor trusts is explained as follows:

Although trusts are usually separate taxable entities, the grantor trust rules may require that a portion or all of a trust be ignored for income tax purposes. When this occurs, the grantor (or in some cases a beneficiary or trust powerholder) is deemed to own the trust assets. When the assets of a trust are deemed owned by its grantor under Sections 671 through 677 or Section 679 of the Internal Revenue Code (the Code), the trust is called a “grantor trust.” 15

The “grantor trust rules” referred to above are contained in 26 U.S.C. §§ 671 through 679. 16 By implication, a trust that is not a “grantor trust” is a “non-grantor trust,” and is treated as its own taxable entity under the Internal Revenue Code.

C. United States’ Motion to'Exclude the Expert Report, Opinions, and Testimony of Joshua S. Ruben-stein

The IRS filed a Motion to Exclude the Expert Opinions of Joshua S. Rubenstein [ECF No. 923] (the “Rubenstein Motion”) prior to trial. Because the Ruben-stein Motion was heard the day before trial was scheduled to commence, and because the Court did not have sufficient time to rule on the Rubenstein Motion before the Debtors called Mr. Rubenstein (“Rubenstein”) to testify at trial, the Court allowed Rubenstein to testify, sub *359 ject to his testimony being stricken if the Court decided to grant the Rubenstein Motion. For the reasons explained below, the Rubenstein Motion is granted in part and denied in part. Those portions of Rubenstein’s testimony that are excluded are stricken from the record.

Rubenstein is a lawyer and partner at the firm of Katten Muchin Rosenman, LLP. The Debtors offered Rubenstein as an expert in “trust arid estate law and taxation of trusts, with specific experience and knowledge regarding these areas during the 1990s, and also as an expert regarding practices concerning the establishment and administration of foreign trusts during the 1990s.” 17 Rubenstein was to provide “an opinion as to how practitioners advised clients with respect to the application of the grantor trust rules to foreign trusts during the 1990’s (the ‘relevant time period’) and how foreign trusts, as opposed to domestic trusts were drafted and administered at the time.” 18 The purported purpose of Rubenstein’s opinion is to assist the Court in the evaluation of the Debtors’ reasonable cause defense to their failure to file Forms 3520, 3520-A, and 5471, as well as to assist the Court in its evaluation of the Debtors’ alleged fraudulent intent for purposes of the IRS’ recovery of fraud penalties under 26 U.S.C. § 6663 . 19

In the Rubenstein Motion, the IRS objected to Rubenstein’s proposed testimony on multiple grounds. First, the IRS contended that Rubenstein’s opinions would consist of statements of the law and legal analysis that would usurp this Court’s role as both fact finder arid the “one spokesman of the law.” 20 Second, the IRS argued that Rubenstein’s failure to apply his expert knowledge to the specific facts of these Cases made his opinions both irrelevant and unreliable' under Daubert and Federal Rule of Evidence 702. 21 Finally, the IRS argued that Rubenstein’s lack of experience with private annuity transactions in a foreign trust context rendered him unqualified under Federal Rule of Evidence 702 to give any opinion related to the private annuity transactions at issue here. 22

We turn first to the IRS’ argument that Rubenstein’s opinion consisted of impermissible recitations of the law and legal conclusions. It is all but axiomatic that the judge should be the sole source of the applicable legal standard in any case, and that expert testimony that attempts to tell the fact finder what law to apply is improper. 23 Likewise, expert testimony that states a legal opinion that tells the fact finder what result to reach is improper. 24

Much of Rubenstein’s expert opinion consisted of explanations of what Internal Revenue Code provisions and IRS regulations did or do not allow during the rele *360 vant time period or today. For example, at one point Rubenstein testified that, until 2010, it was permissible under the law for a beneficiary of a foreign non-grantor trust to engage in uncompensated use of trust property without paying tax on the fair rental value of that use. 25 Testimony such as this — which explained black letter law as it stands today or as it stood in years past — consisted of legal conclusions and was therefore inadmissible. This Court is capable of determining the law applicable to the Cases on its own, without Ruben-stein’s assistance. All of Rubenstein’s testimony that simply told the Court what the law was or is will be stricken.

However, not all of Rubenstein’s testimony consisted of statements that were simply impermissible legal analysis, opinions, and conclusions. In addition to giving general statements of both past and present law, Rubenstein also made statements that the law that governed offshore trusts and the tax treatment of such trusts during the relevant time period was, in the eyes of many practitioners, including him, uncertain. 26 The purported purpose of this testimony was, again, to assist the Court in assessing the Debtors’ reasonable cause defense and the presence or absence of fraudulent intent 27 — i.e., according to the Debtors,, given the fact of uncertainty among experienced tax professionals, how could the Debtors possibly have acted with fraudulent intent here? More specifically, the Debtors argue that if lawyers practicing in the area of cross-border trust and estate taxation felt that the law governing the taxation of offshore trusts like the ones at issue here was uncertain, then this in turn would tend to corroborate that the Debtors were uncertain about the state of the law, and any missteps that the Debtors made in following that law would be more reasonable and less likely to be fraudulent.

The admissibility of this testimony regarding the fact of alleged uncertainty among members of the cross border trust and estate and tax bars as to how to interpret and apply the law during the relevant time period was a close call. As the Fifth Circuit has noted, “the task of separating impermissible questions which call for overbroad or legal responses from permissible questions is not a facile one.” 28 In general, a fact finder is “qualified to determine intelligently and to the best degree possible both the reasonableness of a client relying upon the advice of an attorney ... retained to render such advice and whether the client did so in good faith after making full disclosure” on its own, and that “expert testimony as to the legal basis underlying the advice” does not assist the fact finder. 29 However, in U.S. v. Burton, 30 the Fifth Circuit also stated that:

Evidence of legal uncertainty, except as it relates to defendant’s effort to show *361 the source of his state of mind, need not be received, at least where,- as here, the claimed uncertainty does not approach vagueness and is neither widely recognized nor related to a novel or unusual application of the law.

The Debtors have not introduced any evidence that the purported uncertainty in the law at issue here approached vagueness, a phrase that harkens back to the Fifth Circuit’s decision in U.S. v. Garber, 31 which in turn seems to have been limited to its “unique, indeed near bizarre, facts.” 32 However, even if they did, the Court concludes that Rubenstein’s testimony regarding the fact of uncertainty as to the law among the relevant bars during the relevant time period need only be ad'mitted if the Debtors kneio of this legal uncertainty, as this is the only way this legal uncertainty could have affected.their states of mind.

As explained below, knowledge that there was uncertainty regarding the proper legal characterization of the various offshore trusts at issue here can be imputed to Sam and Charles back to 1993. 33 Moreover, the evidence shows that by 2003 at the latest, Sam and Charles had actual knowledge of this uncertainty. 34 Thus knowledge of this legal uncertainty may have had some influence on Sam’s and Charles’ states of mind. On this basis, Rubenstein’s testimony regarding the fact that there was uncertainty as to the law among the bar is relevant and admissible, and is not an impermissible legal conclusion. However, for the reasons more fully explained below, the Court gives this testimony little weight.

■ As the IRS pointed out in its cross-examination of Rubenstein, Rubenstein offered no opinion as to (and was unaware of) whether Sam, Charles, or any Wyly advisor felt that there was any uncertainty in the applicable law during the relevant time period. 35 Rubenstein’s failure to connect his testimony to the specific facts of the Cases makes his testimony of less use in evaluating Sam’s and Charles’ actions or intent, 36 and thus the Court gives this testimony little weight.

In closing out the analysis of the IRS’ first argument — that Rubenstein’s testimony consisted of impermissible legal conclusions — the Court will identify other testimony that Rubenstein gave that did not consist of impermissible legal conclusions. Although Rubenstein is a lawyer, this does not automatically mean that all of his testimony must therefore consist of statements of the law or legal conclusions. Ruben-stein is permitted to “testify as to legal matters when those matters involve questions of fact.” 37 Here, Rubenstein offered *362 testimony as to whether certain practices — such as the settlement of trusts with nominal amounts of money, the use of protectors 38 with expansive powers, or the use of “accommodation grantors” 39 — were viewed as normal or proper by the cross-border trust and estate and tax bars during the relevant time period. The question of what members of the bar thought, as opposed to what the actual state of the law was, is a factual one. Although counsel for the Debtors or the IRS can explain what the true state of the law during the relevant time period was or is today via briefing or oral argument, proving what the cross-border trust and estate and tax bars thought the law was or how they mewed the law is a factual inquiry that requires resort to expert testimony as opposed to argument. Rubenstein’s testimony regarding the views of the bar during the relevant time period — like his testimony regarding the fact of uncertainty in the law during the relevant time period — is admissible. However, the Court must still analyze the relevance and reliability of such testimony under Daubert.

Thus, we turn to the IRS’ second argument, that Rubenstein’s testimony is inadmissible because it is irrelevant and unreliable under Daubert and Federal Rule of Evidence 702. Two Supreme Court cases guide our analysis of the admissibility of expert opinion evidence on the basis of whether it is both relevant and reliable: Daubert v. Merrell Dow Pharm., Inc. 40 and Kumho Tire Co., Ltd. v. Carmichael. 41 At the outset, we note that this is a bench trial and that “[m]ost of the safeguards provided for in Daubert are not as essential in a case ... where ... a ... judge sits as the trier of fact in place of a jury.” 42 This makes perfect sense, as this Court’s “chief role when determining the admissibility of expert testimony under Daubert is that of a ‘gate-keeper,’ ” 43 and there is little need for the Court to serve as a gate-keeper for itself.

Nevertheless, the basic holding of Daubert, as expanded upon by Kumho Tire Co., Ltd., is very simple — in order to be admissible, expert testimony must be both (i) relevant, and (ii) reliable. 44 Dau-bert defined the standards for admissibility of expert opinion evidence under Federal Rule of Evidence 702, and was decided within the specific context of a scientific expert. 45 In Kumho Tire Co., Ltd. 46 the *363 Supreme Court explained how to apply Daubert’s holding and its specific indicia of reliability to non-scientific testimony:

We conclude that Daubert’s general holding — setting forth the trial judge’s general “gatekeeping” obligation — applies not only to testimony based on “scientific” knowledge, but also to testimony based on “technical” and “other specialized” knowledge. See Fed. Rule Evid. 702. We also conclude that a trial court may consider one or more of the more specific factors that Daubert mentioned when doing so will help determine that testimony’s reliability. But, as the Court stated in Daubert, the test of reliability is “flexible,” and Daubert’s list of specific factors neither necessarily nor exclusively applies to all experts or in every case. Rather, the law grants a district court the same broad latitude when it decides how to determine reliability as it enjoys in respect to its ultimate reliability determination. See General Electric Co. v. Joiner, 522 U.S. 136, 143 , 118 S.Ct 512 , 139 L.Ed.2d 508 (1997) (courts of appeals are to apply “abuse of discretion” standard when reviewing district court’s reliability determination).

As indicated by the Supreme Court in Kumko Tire Co., Ltd., 47 the relevance and reliability inquiry under Dau-bert is necessarily very fact specific. 48 Furthermore, a trial court’s decision whether to admit expert testimony, and how to determine the reliability of such testimony, is subject to an abuse of discretion review. 49 According to the Fifth Circuit, “[district courts enjoy wide latitude in determining the admissibility of expert testimony, and the discretion of the trial judge and his or her decision will not be disturbed on appeal unless manifestly erroneous.” 50

The IRS’ main argument as to why Ru-benstein’s testimony does not pass muster under Daubert is that Rubenstein did not opine on anything the Wylys did or any facts specific" to the Cases. Instead, Ru-benstein gave a general assessment of what the bar thought was normal or proper practice regarding offshore trusts during the relevant time period and opined as to areas where the bar thought that the law was uncertain. At the outset, the Court notes that the language of Federal Rule of Evidence 702(d) requiring an expert to apply their principles and methods “to the facts of the case” does not per se exclude expert testimony that does not refer to the facts of the particular case before the fact finder. 51 However, despite the permissibility of “general principles” expert testimony, such expert testimony is not automatically relevant.

*364 As the IRS pointed out during its cross-examination of Rubenstein, Rubenstein does not apply his concept of normal or proper practice to the facts of the Cases or to anything that the Wylys did. 52 Nor does he know whether the Wylys or their advisors viewed the law governing their offshore transactions as uncertain. 53 Thus, this Court has no way of knowing whether the scope of normal or proper practice that Rubenstein describes encompasses anything that the Wylys did. Nor is this Court able to say for certain whether the legal uncertainties that Rubenstein described influenced the Wylys or their advisors. The lack of connection between Rubenstein’s testimony and the Wylys’ actions raises relevance concerns.

Despite these concerns, Rubenstein’s testimony that, during the relevant time periods: (i) the use of protectors in the context of foreign trusts was permissible and even common, (ii) de facto control of trustees by grantors was not out of the ordinary, and (iii) the use of “accommodation grantors” was thought to be legitimate is admittedly of some relevance here. It is helpful for the Court to understand that these practices — in and of themselves— were not considered to be inappropriate by the cross-border trust and estate and tax bars during the relevant time period. 54 However, without any opinion as to whether the manner in which the Wylys themselves implemented their offshore system falls within the scope of the “usual” practices that Rubenstein describes, the Court can draw few useful conclusions from Ru-benstein’s testimony. While the Court can conclude that, in at least some situations, the use of protectors, accommodation grantors, and other devices that Ruben-stein described was seen by the trust and estate and tax bars during the relevant time period as appropriate, the Court has no way of knowing how these same bars would have viewed the Wylys’ particular uses of these same devices. Though there is admittedly some relevance to Ruben-stein’s testimony, it is limited.

Despite its limited relevance, Ruben-stein’s opinions are reliable for what they are as shown by his curriculum vitae (CV), testimony at the Daubert hearing, and testimony at trial — his recollections based on his experience as an admittedly prominent and accomplished cross-border trust and estate and tax lawyer who practiced during the relevant time period, coupled with some confirmatory research. 55 Ruben-stein’s opinions were testable both by exploring the research that was cited in his expert report and by probing the accuracy of his own recollections. Indeed, the IRS did this at trial by pointing out that Ru-benstein did not speak to any practitioners specifically to confirm his recollection of the cross-border trust and estate and tax bars’ views during the relevant time period. Nevertheless, Rubenstein did engage in substantial research and pointed out *365 that he spoke to practitioners “every day of every week” in the course of his work. 56

As the Supreme Court counseled in Daubert, 57 “[vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.” Despite the various issues with Rubenstein’s testimony, this Court finds that Rubenstein’s opinions that are not impermissible legal conclusions are somewhat relevant and reliable, and therefore admissible under the principles of Dau-bert 58 As this is a bench trial, the Court need not be concerned with any possible undue prejudice outweighing the probative value of Rubenstein’s testimony under Federal Rule of Evidence 403. 59 The Court is capable of giving Rubenstein’s testimony its proper weight, which it views as limited in light of the concerns outlined above.

Finally, we address the IRS’ third argument — that Rubenstein was not qualified to give an opinion on the private annuity transactions at issue here. The IRS argued that Rubenstein’s lack of experience with private annuity transactions in a foreign trust context rendered him unqualified under Federal Rule of Evidence 702 to give any opinion related to the private annuity transactions at issue here. 60 According to the Fifth Circuit, qualification of experts should not become a battle of labels, where the expert’s expertise is labeled broadly and the needed expertise is labeled narrowly in an attempt to disqualify experts. 61 Furthermore, the Fifth Circuit has stated that “it is well established that an expert’s qualifications depend upon his knowledge, skill, experience, training, or education, and the trial court is afforded the widest possible discretion in deciding whether a witness qualifies as an expert” 62 and that those challenging a trial court’s determination that an expert is qualified or not face a “heavy burden.” 63

Rubenstein is an experienced cross-border trust and estate and tax lawyer, as his CV amply demonstrates. 64 Furthermore, Rubenstein’s uncontradicted testimony was that utilizing a foreign trust, as opposed to a domestic trust, does not change the character of the private annuity transaction itself. 65 Thus, Rubenstein’s experience advising taxpayers as to annuities issued by domestic trusts makes him qualified to testify here. For these reasons, the Court rejects the IRS’ argument and will permit Rubenstein’s testimony to the extent set forth above.

*366 D. Dee’s Motion for Partial Summary Judgment

Dee filed a Motion for Partial Summary Judgment [ECF No. 879] on November 16, 2015, seeking to have this Court determine that there was no evidence in the record to support the IRS’ claim for fraud penalties under 26 U.S.C. § 6663 . The IRS opposed Dee’s motion, which motion was heard on December 21, 2015, shortly before trial was scheduled to commence. Given (i) other more pressing matters in preparing for trial, and (ii) the timing of when the parties filed briefs on Dee’s innocent spouse defense, which the Court wanted to read and understand before ruling on her motion for partial summary judgment, the Court simply ran out of time to rule on her motion before trial. The motion is now moot, as the issues were fully tried by the parties.

III. FACTUAL AND PROCEDURAL HISTORY

While the parties stipulated to many facts as noted previously, the Court will briefly summarize certain facts in order to put its legal analysis into context. This summary is, by definition, incomplete, and more facts will be found and analyzed throughout this Memorandum Opinion.

As noted previously, Sam and Charles are brothers who grew up in modest circumstances in northeast Louisiana. Charles was about a year older than Sam and they were close friends and business associates throughout their adult lives. As relevant here, Sam founded his first company, University Computing Company in 1963. 66 At this point he brought in Charles — who had been working in Houston for IBM — and grew University Computing Company to a successful public company. 67 Then, Sam and Charles bought' the Bonanza Steakhouses company when it was insolvent and grew it from 15 or 20 stores to about 600 stores; 68 bought Gulf Insurance whose business included annuities; 69 founded Earth Resources; 70 bought Computer Technology company; 71 and founded Datran, an innovative firm that attempted a digital data transmission business in competition with AT & T. 72 Sam then co-founded Sterling Software, Inc. (“Sterling Software”) with Charles and served as its Chairman of the Board from 1981 through its acquisition by Computer Associates in 2000. 73 The common stock of Sterling Software was publicly traded on the New York Stock Exchange. 74

Sam was the Chairman of the Executive Committee and a Director of Sterling Commerce, Inc. (“Sterling Commerce”) from December 1995 through its acquisition by SBC Communications in 2000. 75 The common stock of Sterling Commerce was publicly traded on the New York Stock Exchange. 76 Sterling Commerce was a wholly owned subsidiary of Sterling Software until March 1996 when Sterling Commerce completed an initial public offering in which it sold approximately 18.4% *367 of its outstanding common stock. 77 In September 1996, Sterling Software declared a special dividend and distributed all the Sterling Commerce shares it owned to all the Sterling Software shareholders. 78

Sam was the Chairman of the Board of Michaels Stores, Inc. (“Michaels Stores”) from 1984 through July 2001 and Vice-Chairman of the Board from July 2001 through its acquisition by a consortium of private equity firms in 2006. 79 The common stock of Michaels Stores was publicly traded on the New York Stock Exchange. 80

Charles was a co-founder of Sterling Software and served as its Vice-Chairman of the Board from 1984 through its acquisition by Computer Associates in 2000. 81 Charles was a member of the Executive Committee and a Director of Sterling Commerce from December 1996 through its acquisition by SBC Communications in 2000. 82 Charles was the Vice-Chairman of the Board of Michaels Stores from 1984 through July 2001 and the Chairman of the Board from July 2001 through its acquisition by a consortium of private equity firms in 2006. 83 Charles was killed in an automobile accident in Colorado on August 7, 2011. 84

Given the wide variety of business ventures Sam and Charles were involved in, they needed administrative help. Sharyl Robertson (“Robertson”) started working for the Wylys as a bookkeeper in the late 1970s and eventually became chief financial officer of Highland Stargate, Ltd., a Texas Limited Partnership, which is the Wyly family office located in Dallas (“Highland Stargate” or “Wyly family office”). 85 In late 1998, she left that position and became employed full time by Maverick Capital, Ltd. (“Maverick”), an investment management company that was established and initially run by Sam and his eldest son, Evan. 86

Keeley Hennington (“Hennington”) began working for Highland Stargate in January 1999 as tax director. 87 She became chief financial officer of Highland Stargate in June 2000 and still remains there in that position today. 88

Given the wide variety of business ventures the Wylys were involved in, they also needed legal help. Michael French (“French”) is an attorney licensed to practice law in Texas. 89 He was an equity partner in the law firm of Jackson Walker from 1976 through 1992 and a non-equity partner in that firm from 1992 through 1995. 90 Jackson Walker was the Wylys’ law firm and French was their primary lawyer, controlling the Wyly business within the firm.

French testified that he left Jackson Walker to become a consultant to two Wyly-related entities — Sterling Software and Michaels Stores. 91 French also testi- *368 fled that after leaving Jackson Walker he worked with the Wylys to help set up Maverick, which was an investment management business. 92 When asked why he left Jackson Walker, French had a one-word explanation — “money.” 93 He then elaborated, “I made more money as a consultant to Sterling Software and Michaels Stores and the other activities, Maverick activities.” 94

When Jeannette Meier, the general counsel of Sterling Software, expressed a preference for Jones Day as an outside law firm, French also became a “consultant” to Jones Day from 1995 through 2000, after which Jones Day started doing work for Sterling Software and Michaels Stores. 95 French was paid a consulting fee by Jones Day for bringing Wyly business to the firm. 96

Starting in 1995, French officed with the Wylys at the Wyly family office. From 1993 to 2000, the Wylys decided the amount of French’s total compensation paid by entities controlled by or affiliated with them. 97 In 1996, Sam and Evan promised French that his income would be at least $1.5 million per year or the Wylys would personally pay him the difference between what he made from the Wyly related entities and $1.5 million. 98 French also served as a director of Michaels Stores from July 1992 through March 2000, and as a director of Sterling Software from September 1992 through August 2000. 99

Dee is Charles’ widow, having met and married him during college at Louisiana Tech. 100 Dee did not finish college after Charles and she were married. 101 Charles and she had five children and she was their primary caregiver. 102 During her 50 plus year marriage to Charles, Dee was a homemaker. 103 She was not involved in Charles’ business ventures and did hot talk business with him. 104 Charles provided for the family financially and Dee took care of their home. 105

By 1990, Sam and Charles had accumulated enormous wealth. , As the SDNY Court found, and was independently established here, “in early to mid-1991, .Sam Wyly asked Robertson to attend a seminar held by lawyer and trust promoter David Tedder [“Tedder”] on the use of foreign trusts as a method of asset protection and tax deferral.” 106 Robertson circulated a *369 memo about Tedder’s proposed system of “Asset Protection and Tax Deferral” (the “Tedder Seminar Memo”) to Sam, Charles, Evan, French, and an in-house CPA, Ethel Ketter. 107 In the Tedder Seminar Memo, Robertson identified six goals, four of which implicated the IRS: 108

1. Never pay probate unless there is a tax advantage in your state (not in Texas).

2. Whenever possible eliminate inheritance tax — Tedder says everyone can reduce it to zero.

3. Wherever possible reduce income tax — both domestically and foreign.

4. Never let a creditor get your asset, no matter how bad your mistake. (In 18 years of practice, Tedder’s firm has never had a creditor successfully pierce the asset protection setup).[ 109 ]

5. Be able to change your asset protection/tax savings system.

6. Feel comfortable with the setup you’ve got. If your [sic] not comfortable with a foreign setup don’t do it.

The Tedder Seminar Memo further identified “[t]he three major sources of creditor problems — unknown creditor, IRS-inheritance, IRS-income tax.” 110

The Tedder Seminar Memo also warned to “-[ajlways show your chart to the creditor, rely on law not secrecy.” 111 The Ted-der Seminar Memo also laid out an aggressive tax transaction in which assets are exchanged to a foreign system for an annuity, warning that due to the aggressive nature of the transaction that the taxpayer should “file every tax form available and any support schedule that seems pertinent.” 112 Tedder later provided the Wy-lys with written information about his firm’s view of asset protection, including a document entitled “An Overview of Asset Protection Estate and Income Tax Reduction Using Domestic and International Structures.” 113 The goal, as stated- in the overview, “is to ensure that a creditor will never be able to touch or get control of your assets, and allow you to maintain complete control of all your assets.” 114

Sam was interested in the programs outlined in the Tedder Seminar Memo and related documents. Thus, as found by the SDNY Court, and independently established here, “[s]hortly thereafter, the Wy-lys, Robertson, and French attended another Tedder seminar in New Orleans.” 115 There, Tedder gave a presentation about *370 the tax advantages of foreign trusts. 116 The SDNY Court also found, as do we, “Tedder, French, and the Wylys then had a private meeting at Sam Wyly’s house in Malibu, California. At that meeting, Ted-der ‘talked about establishing trusts that would provide tax deferral, and how the Wylys could transfer assets to those trusts and get tax deferral on the growth of those assets.’ ” 117

Specifically, in Malibu, Tedder told the Wylys that they could establish offshore trusts in the Isle of Man (“IOM”) and transfer their stock options in Michaels Stores and Sterling Software to those trusts in exchange for annuities. 118 Ted-der further stated that capital gains earned on securities held in the Isle of Man Trusts would not be taxed by U.S. tax authorities. As the SDNY Court found, as do we, “Tedder recommended transferring the Wylys’ stock options in Sterling Software and Michaels Stores to a foreign trust in exchange for a private annuity ‘in a tax-free kind of transaction.’ Under Tedder’s plan, it was ‘expressly intended that [the Wylys] ... irrevocably surrender the enjoyment, control, ownership, and all economic benefits attributable to the ownership of the [options] which are sold in exchange for the private annuity.’ ” 119

In part because of the complexity of the record keeping required to support the Wyly offshore system, and in part because of their desire for secrecy and to make access to the records of the offshore system more difficult for their creditors, including the IRS, to obtain if there was ever a challenge to the offshore system, Sam and Charles implemented an offshore version of their Dallas family office in the mid-1990s called Irish Trust Company (“Irish Trust”), an entity domiciled in the Cayman Islands and indirectly owned by two of the Wyly IOM trusts. 120

Michelle Boucher (“Boucher”) became a trusted Wyly advisor in approximately 1995 and then became a protector of the Wyly IOM trusts in 2001. 121 Boucher is a *371 Canadian citizen who resides in the Cayman Islands. 122 The Wylys first met Boucher when she was working for Mees-Pierson in the Cayman Islands, where one of her clients was Maverick. 123 Acting on behalf of Sam and Charles, Robertson approached Boucher around 1995 and offered her a position as chief financial officer of Irish Trust. 124 Boucher accepted and continued in this position until 2010, when- her role changed to consultant to Irish Trust. 125 Boucher remains at Irish Trust today. ' At Irish Trust, Boucher reported to Robertson, French, and later Donnie Miller (Dee’s son-in-law and executor of Charles’ probate estate), and Evan (Sam’s eldest son). 126

Prior to becoming a trust protector herself, Boucher served as a conduit, the person who communicated the Wylys’ recommendations between the protectors (Robertson and French) and the various IOM trustees. 127 Francis Webb, an employee of IFG, one of the trust management companies who served as trustee for certain of the Wyly IOM trusts, 128 summarized a meeting with French and Robertson concerning the hiring of Boucher and the movement of all records concerning the Wyly IOM trusts to the Cayman Islands in a memorandum dated September 29, 1995. 129 Webb’s memorandum states that French and Robertson were concerned about the trail of communications to the trustees and records maintained in the United States: 130

We were already aware of the roles played by Michael French and Sharyl Robertson, representing Maverick Capital and the Wyly Family, and firstly the role of Michelle Boucher was explained .... We will therefore have ;prime contact with Michelle in most situations as she is to act as the focus of communications and maintain records etc. which should not be seen in the USA_Michael and Sharyl are anxious that any trail of communications between themselves, Michelle and Mees-Pierson does not give rise to any potential claim that control is being exercised-in the USA Consequently we may anticipate that there will be telephone communications only from Dallas; suggestions possibly put forward via Michelle Boucher but it was agreed that there should be formal recommendations made by the Trustees to the Protectors Committee wherever appropriate to maintain a required direction of control.

After a chance meeting in the Cayman Islands in mid-2003 between Charles Lu-bar (“Lubar”), a prominent international tax attorney, and Boucher, Boucher learned that Lubar (i) had previously concluded that there was a “significant risk” that the 1992 IOM trusts settled by Sam and Charles would be treated as grantor trusts to them under the Internal Revenue Code, and (ii) had informed French of his firm’s conclusions a decade earlier. 131 *372 Boucher informed Hennington, which led to a flurry of activity. 132

First, Hennington and Boucher met with Lubar at his London office where Lubar’s concerns with the offshore system dating back to 1993 were discussed in detail. Hennington and Boucher informed Sam and Charles, among others, of Lubar’s legal conclusions. 133 Of note, while numerous witnesses at trial expressed surprise over this news because it was contrary to other advice that had been allegedly received, 134 Sam was not one of the witnesses expressing surprise. 135

Second, acting as agents for Sam and Charles, Hennington and Boucher hired Lubar to reanalyze all of the issues surrounding the Wyly offshore system, which he did and which confirmed his original conclusions. Lubar ultimately recommended an anonymous meeting with the IRS on the Wylys’ behalf to see if a global resolution of the tax issues surrounding the Wyly offshore system could be achieved, which recommendation the Wy- *373 lys accepted and authorized. 136 Thus, in August 2003, Lubar and other Wyly attorneys had a meeting with the IRS, on an anonymous basis, to discuss the Wyly IOM offshore system and activities undertaken offshore in an attempt to secure a global resolution of the Wyly’s looming tax issues. 137 Although the parties have different perspectives on this meeting, it is sufficient for our purposes to simply state that nothing ultimately came from this meeting.

Third, because the extended due date of Sam’s 2002 tax return was quickly approaching (October 15, 20Ó3), and given that Meadows Owens had been advising the Wylys for years and had apparently given advice to them previously about the offshore system, 138 the Wylys, acting through Hennington, requested additional advice from Meadows Owens. 139 By this time, the primary lawyer at Meadows Owens that the Wylys used, Rodney Owens (“Owens”), had passed away. 140 However, other Meadows Owens attorneys that had worked with Owens on Wyly matters— primarily Charles Pulman (“Pulman”) and Trey Cousins (“Cousins”) — met with Hen-nington and quickly made recommendations on available alternatives, one of which was that the Wylys make formal disclosures of the tax positions identified by Lubar on their tax returns. Specifically, Meadows - Owens recommended that Sam file a Form 8275 disclosure with his about-to-be filed 2002 tax return, which is a from that can be filed with the IRS when the position being taken on a tax return has only a reasonable basis of being sustained, in order to attempt to avoid accuracy related penalties from being imposed by the IRS. 141 Because Dee and Charles had already filed their 2002 joint tax return, Meadows Owens recommended that Dee and Charles file a Form 8275 disclosure with their 2003 joint tax return (filed in October 2004), which they did. 142

Early in 2004, the IRS commenced an audit of the Wylys’ returns for the 2000 tax year. From the beginning of the audit it was clear that the IRS was examining the offshore trusts and the annuity transaction undertaken offshore. 143

The Permanent Subcommittee on Investigations of the United States Senate'undertook an investigation of tax haven abuses. The Wylys offshore system was one of the offshore systems investigated. That investigation became public knowledge *374 sometime in 2005. 144 Hennington testified that attorneys hired by the Wylys reviewed all of the files maintained in the Wyly family office and over 700 boxes of documents in off-site storage in response to document requests made in relation to the investigation. 145

By April of 2005, Bickel & Brewer and Donald Lan 146 of Kroney Mincey PC were hired as counsel for the Wylys to handle the government’s on-going tax and securities investigations. Prior to the filing of the Wylys’ 2005 federal income tax returns in October 2006, Bickel & Brewer learned that certain IOM trusts settled in 1994 and 1995 had not been funded with the amount of funds required by the trust deeds of settlement, 147 which raises additional concerns about the validity of the IOM offshore system as will be discussed infra at pp. 415-23.

On July 30, 2010, the SEC sued Sam, Charles, and French, among others, in the SEC Action, asserting ten counts of securities fraud. French settled with the SEC. 148 As noted previously, following a jury trial on the liability phase and a bench trial on the remedies phase of the SEC Action, the SDNY Court entered judgment against Sam and the probate estate of Charles, for $123,836,958.75 and $63,881,743.97, respectively, plus prejudgment interest, 149 finding that Sam and Charles had committed securities fraud. This decision is currently on appeal to the Second Circuit Court of Appeals.

On October 19, 2014, shortly before judgment was entered against him in the SEC Action, Sam filed his Case here. Shortly thereafter, Dee filed her Case here. The Cases are being jointly administered. On the day each Case was filed, the Debtor’s respective Motion was filed. The ÍRS timely filed the Proofs of Claim against each of the Debtors and the Debtors filed the Claim Objections, which brings us to the present dispute before the Court.

IV. LEGAL ANALYSIS

A. Burden of Proof

Like most aspects of the Cases, the burden of proof analysis is complicated. The fact that the IRS is asserting federal tax liability in the context of the Proofs of Claim implicates not only the burden-shifting analysis applicable to proofs of claim in bankruptcy generally, but also multiple additional burden shifting doctrines and statutory allocations of burdens of proof that apply specifically to tax matters. None of these burden of proof analyses are exactly alike, so the Court will proceed in the only way it can — by analyzing each burden of proof framework before coming to its ultimate conclusions.

1. Bankruptcy Law Burden of Proof — In General

In bankruptcy, a proof of claim filed in accordance with Bankruptcy Rule *375 3001 150 is “prima facie evidence of the validity and amount of the claim.” 151 However, this prima facie validity may be rebutted 152 by the objecting party producing evidence “of a probative force equal to that of the creditor’s proof of claim.” 153 In 2000, the Supreme Court held, in a bankruptcy case involving a proof of claim asserting tax liability, “bankruptcy does not alter the burden imposed by the substantive law.” 154 Thus, once an objecting party produces evidence rebutting a proof of claim, the burden then lies with whichever party it would normally according to the relevant substantive law. 155 Here, that relevant substantive law is federal tax law, which often, but not always, puts the initial burden of proof on the taxpayer.

The Debtors’ arguments here regarding burden of proof implicate every step of the bankruptcy burden of proof analysis, to which we now turn.

a) Prima Facie Validity under Bankruptcy Rule 3001(f)

The Debtors initially argue that the burden of proof lies with the IRS because the Proofs of Claim were not filed in accordance with Bankruptcy Rule 3001, and thus do not constitute prima facie evidence of the validity or amount of the IRS’ claims. 156 In particular, the Debtors argue that the Proofs of Claim fail to comply with Bankruptcy Rule 3001 for three reasons: (i) they do not contain an itemized statement of the interest, fees, expenses, or charges required in individual bankruptcies under Bankruptcy Rule 3001(c)(2)(A), 157 (ii) they were not executed in accordance with Official Form 10 as required by Bankruptcy Rule 3001(b) because the IRS bankruptcy specialist who signed the Proofs of Claim “signed and filed the IRS Claims without any factual basis whatsoever, instead relying on IRS staff professionals to investigate and prepare the forms for his signature,” 158 and (iii) they lack sufficient information for the Debtors to evaluate the bases of them. 159 The Debtors also argue that the IRS’ supposed missteps in failing to comply with Bankruptcy Rule 3001 are exacerbated by the fact that the Proofs of Claim contained numerous errors. 160

Although much of the “fuss” surrounding the burden of proof issues revolved around the now-stipulated income tax liability amounts reflected in the Computation Stipulations, the Court undertakes the *376 burden of proof analysis because of its .potential relevance to other areas of dispute in the Cases. 161 For the reasons explained below, the Court rejects the Debtors’ arguments and will accord prima facie validity to the Proofs of Claim.

Regarding the failure of the IRS to attach an itemized statement of the interest, fees, expenses, or charges to the Proofs of Claim,- it must first be noted that such failure was not complete. In the Proofs of Claim filed by the IRS in these Cases, the IRS did break out the amount of income tax due and interest on income tax due on a year-by-year basis, as well as the amount of gift tax due and interest on gift tax due on a year-by-year basis. 162 However, the IRS did not similarly break out the amounts of penalties due on a year-by-year basis. 163 For the reasons explained below, the Court concludes that this failure was harmless under the highly unique facts of these. Cases.

Bankruptcy Rule 3001(c)(2)(D) provides the appropriate remedies that a court may invoke for a creditor’s failure to attach the itemized statement required by Bankruptcy Rule 3001(c)(2)(A). These remedies include precluding the IRS from presenting the omitted information (unless the Court determines that the IRS’ failure to include this information “was substantially justified or is' harmless” 164 ) or awarding other appropriate relief.

In light of the highly, unique facts of these Cases, the Court does not choose to exercise either of these (or any other) remedies. These Cases involved a great deal of back-and-forth between the parties, as is to be expected when billions-of dollars of potential tax liability hang in the balance. 165 The IRS met with the Debtors shortly after filing the Proofs of Claim, at which meeting it made a presentation explaining how it had calculated its claims *377 against them. 166 This presentation — along with the open lines of communication that existed between the parties’ respective counsel throughout the pre-trial and trial phases of the Motions and Claim Objections — eventually allowed .the parties to come to the Computation Stipulations resolving the vast majority of the calculations relevant to the Debtors’ ultimate tax-liability, once the Court determines certain factual and legal issues that remain in. dispute between them. The presentation and these open lines of communication caused the essential purpose of the itemized statement required by Bankruptcy Rule 3001(c)(2) to be satisfied.

The Advisory Committee Notes that accompany Bankruptcy Rule 3001 state that subsection (c)(2) was added:

to require additional information to accompany proofs of claim filed in cases in which the debtor is an individual. When the holder of a claim seeks to recover-in addition to the principal amount of a debt-interest, fees, expenses, or other charges, the proof of claim must be accompanied by a .statement itemizing these additional amounts with sufficient specificity to make clear the basis for the claimed amount. 167

Even though the IRS did not attach a completely itemized statement as required by Bankruptcy Rule 3001(c)(2)(A), it did “make clear the basis for the claimed amount” to the Debtors through the itemized statement that was attached to its Proofs of Claim, its presentation to the Debtors, and through regular communication with Debtors’ counsel. The IRS did not act as a recalcitrant creditor who refused to provide information to the Debtors. On the contrary, the evidence shows that the IRS was very forthcoming with information about how it calculated its claims, and because of this, at least in part, the parties were able to come to the Computation Stipulations.

In light of the fact that the Debtors were supplied with a great deal of information regarding the amounts of interest and penalties asserted in the Proofs of Claim, the IRS’ failure to supply a fully itemized statement of interest, fees, expenses, or other charges as required by Bankruptcy Rule 3001(c)(2)(A) was harmless, and did not affect the Proofs of Claim’s prima facie validity.

The Debtors also argue that the Proofs of Claim are not prima facie valid because the IRS insolvency specialist who signed them relied on other IRS staff to prepare them and simply accepted their calculations as true and accurate without checking them. 168 The Court is less troubled by this than the Debtors, as “IRS employees possess the properly delegated authority to file a proof of claim and participate in bankruptcy proceedings on behalf of the United States.” 169 The IRS insolvency specialist who signed the Proofs of Claim testified that this authority was delegated to him pursuant to IRS Delegation Order 25-3. 170 Moreover, “Rule 3001 *378 is not inflexible.” 171 The Debtors failed to cite a single case where a court denied an IRS proof of claim prima facie validity because the signatory did not personally perform the claim calculations. This Court was likewise unable to locate such a case. That is likely because the fact that the signing insolvency specialist did not personally prepare the underlying calculations does not affect the claims’ prima facie validity. As a practical matter here, given the variety of different components of the IRS’ claims against the Debtors and the complexities of the claim calculations, it is unlikely that a single person could have actually calculated the amounts and then signed the claim. So, unless multiple people then have to sign a single claim on behalf of the IRS, the Debtors’ argument is untenable. For all of these reasons, the Court rejects the Debtors’ argument.

Finally, the Debtors argue that the Proofs of Claim are deficient because “[t]he IRS Claims lack any explanation as to the basic facts on which the IRS relies to determine the alleged liabilities; instead the IRS Claims contain only bare-bones legal conclusions without reference to any facts whatsoever.” 172 The Court rejects this argument as it overlooks the fact that the Proofs of Claim are based on a statute, not on a writing, and therefore it is not necessary for the IRS to attach any supporting documentation to the Proofs of Claim in order to comply with Bankruptcy Rule 3001. 173 Where, as here, the IRS chose to attach support to the Proofs of Claim when it was not required to do so and then made a specific presentation to the Debtors to explain the bases of its claims against them, 174 the Debtors’ contention that the Proofs of Claim did not provide sufficient notice cannot be taken seriously.

When all is said and done, the Proofs of Claim fulfilled their “essential purpose of providing objecting parties with sufficient information to evaluate the nature of the claims.” 175 The Proofs of Claim substantially comply with Bankruptcy Rule 3001, and are thus prima facie evidence of the validity and the amount of the IRS’ claims against the Debtors under Bankruptcy Rule 3001(f).

b) Have the Debtors Raised Evidence of a Probative Force Equal to that of the Proofs of Claim?

The Debtors next argue that even if the Proofs of Claim are afforded prima facie validity, they have raised evidence of a probative force equal to that of the Proofs of Claim. 176 If this is true, then the burden of proof lies with whichever party it normally would under federal tax law. 177

The Debtors imply that they could raise evidence of equal probative force to the Proofs of Claim merely by stating that the IRS’ claimed amounts are “too high.” 178 Their reliance on In re 801 Congress, *379 L.L.C., 179 however, is misplaced. In re 801 Congress, L.L.C. involved creditors asserting claims for contractual attorney fees who did not attach any supporting documentation to the proof of claim. 180 In that case, the bankruptcy court held that in a situation where no documents are provided to support a claim based on a writing — in clear contravention of Bankruptcy Rule 3001(c)(1) — a mere questioning of the claim’s reasonableness could be construed as evidence of equal probative force to the proof of claim itself. Here, however, the Proofs of Claim are based on a statute, and no documents were required to be attached to them in the first instance. Thus, In re 801 Congress, L.L.C. is clearly distinguishable.

Accordingly, we must further examine what sort of evidence could meet the standard of “equal in probative force” and whether the Debtors raised such evi-, dence here. As this Court recently held, once the prima facie validity of a proof of claim under Bankruptcy Rule 3001(f) is established:

The burden of going forward with the evidence then shifts to the objecting party to produce evidence at least equal in probative force to that offered by the proof of claim and which,' if believed, would refute at least one of the allegations that is essential to the claim’s legal sufficiency. This can be done by the objecting party producing specific and detailed allegations that place the claim into dispute, by the presentation of legal arguments based upon .the contents of the claim and its supporting documents, or by the presentation of pretrial pleadings, such as a motion for summary judgment, in which evidence is presented to bring the validity of the claim into question. 181

Here, the Proofs of Claim seek amounts from the Debtors that fall into four basic categories: (i) income taxes, (ii) gift taxes, (iii) fraud penalties, and (iv) failure to file penalties. 182 As noted previously, shortly before trial commenced, the parties reached agreement on the Computation Stipulations, which will enable the parties to calculate the amounts owed to the IRS depending on this Court’s analysis of certain legal and factual issues that remain in dispute among them, rendering' the pretrial dispute over the burden of proof on the amount of the Debtors’ income tax underpayments and gift tax underpayments moot.

However, a dispute remains regarding whether any gifts were actually made by the Debtors, for which the IRS is asserting gift taxes (and associated penalties). The Debtors have raised legal arguments that create doubts as to whether gifts were made. The Debtors also introduced evidence suggesting that the transactions that remain at issue were not gifts. 183 These arguments and evidence together *380 form evidence that is of a probative force equal to that raised by the Proofs of Claim regarding the alleged gift tax issues. Thus, the ultimate burden of proof will be where federal tax law places it, as discussed further below.

The parties likewise agree — as does this Court — that the IRS bears the burden of proving its claim for fraud penalties (for both income and gift tax underpayments) by clear and convincing evidence. 184 But, even without their agreement, the Debtors presented evidence of a probative force equal to the Proofs of Claim regarding the fraud penalties being sought by the IRS. 185 Thus, the ultimate burden of proof on the issue of fraud penalties lies where the substantive federal tax law places it, as discussed further below.

Regarding the IRS’ claims for international failure to file penalties, the Debtors also raised legal arguments that cast into doubt at least some of the IRS’ assertions that the Debtors failed to file certain required forms. 186 Thus, the burden of proof on the issue of whether the Debtors are liable for international failure to file penalties also lies where federal tax law places it, as discussed further below.

2. Tax Law Burden of Proof — In General

As noted previously, in 2000, the Supreme Court held that “bankruptcy does not alter the burden imposed by the substantive law.” 187 Because the Debtors have rebutted the Proofs of Claim as to the Debtors’ alleged liability for gift taxes, fraud penalties, and international failure to file penalties, we must now determine where federal tax law places the burden of proof on these issues.

a) Gift Tax Deficiencies and the Presumption of Correctness 188

The burden of proof analy-ses — there are two relevant here — regarding gift tax deficiencies are by far the most complicated of the tax law burden of proof analyses that this Court must address. However, before reaching those analyses we must discuss one of the general rules regarding burden of proof in tax matters— ie., the presumption of correctness. In tax court proceedings, after the IRS has made a determination that a certain amount of tax is due, the burden of proof is usually on the taxpayer to show that the IRS’ determination is incorrect. As the Supreme Court has stated, “[unquestionably the burden of proof is on the taxpayer to show that the Commissioner’s determination is invalid.” 189 Not surprisingly, the Fifth Circuit agrees: “it is well settled that the courts afford IRS determinations of deficiency a presumption of correctness.” 190 Of course, in order to be afforded a presumption of correctness, the IRS’ deficiency determination must be “supported by a minimal factual foundation.” 191 If for some reason the presumption of correctness does not apply to the IRS’ *381 determination of tax liability, then the IRS has the burden of proving that the taxpayer owes tax.

Fifth Circuit precedent supports the view that a proof of claim filed by the IRS should be afforded the presumption of correctness. In Portillo v. C.I.R., 192 the court noted that there is really no prescribed form for the statutory deficiency notice that normally contains the IRS’ determination which receives the presumption of correctness, and that this notice simply must, at a minimum: (i) advise the taxpayer that the IRS has determined that a deficiency exists for a particular year, and (ii) specify the amount of the deficiency or provide the information necessary to compute the deficiency. In Data Industries Corp. of Texas v. I.R.S., 193 the Fifth Circuit stated:

Data Industries makes two contentions in its effort to overturn the District Court’s order. First, Data contends that, notwithstanding the prima facie correctness of a claim filed in bankruptcy proceedings, the presumptive correctness arising from the underlying tax assessment cannot be invoked unless the Government produces additional evidence such as a copy of the assessment certificate. This contention simply has no merit, particularly since all pertinent information relating to the IRS assessment was contained in the proofs of claim filed by the Government in the bankruptcy proceedings.

Under this precedent, the Proofs of Claim are entitled to the presumption of correctness, 194 unless the Debtors’ two arguments as to why the presumption of correctness does not apply here have merit.

(1) Is the IRS’ Determination “Arbitrary and Erroneous?”

The Debtors first argue that the presumption of correctness should not apply because the IRS’ determinations of gift tax deficiencies are arbitrary and erroneous. 195 If the presumption of correctness does not apply, then the IRS has the burden of proving up its claim that gift tax is owed by one or both Debtors. In In re 01-shan, 196 the Ninth Circuit described how a taxpayer is able to shift the burden of proof to the IRS by arguing that the IRS’ deficiency determination was arbitrary and erroneous:

A bankruptcy court adjudicating a tax claim by the IRS must apply the burden-of-proof rubric normally applied under tax law. In an action to collect taxes, the government bears the initial burden of proof. That burden is satisfied by the IRS’ deficiency determinations and assessments for unpaid taxes, which are presumed correct so long as they are supported by a minimal factual foundation. However, a showing by the taxpayer that a determination is arbitrary, excessive or without foundation shifts the burden of proof back to the IRS. Thus, once the debtor rebuts the presumption, the burden reverts to the IRS to show that its determination was correct.

Although Olshan states that the burden will be shifted to the IRS when its deter- *382 ruinations are “arbitrary, excessive, or without foundation,” the standard in the Fifth Circuit uses different words — i.e., that the. IRS’ determinations must be “arbitrary and erroneous.” 197 Moreover, as the Olshan court notes “where an assessment is based on more than one item, the presumption of correctness attaches to each item. Proof that an item is in error destroys the presumption for that single item; the remaining items retain their presumption of correctness.” 198 However, “a pattern of arbitrariness or carelessness” may destroy the presumption for the entire assessment. 199 In the Fifth Circuit, the idea behind the “arbitrary and erroneous” analysis is that the IRS must have “some factual foundation” for its claims that unreported income is owed. 200

Portillo v. C.I.R. 201 is a leading Fifth Circuit case applying an arbitrary and erroneous analysis. In Portillo, a taxpayer who worked as a contractor reported receiving $10,800 in income from a client, and that client subsequently issued a Form 1099 reporting that the taxpayer had received more than three times this amount. 202 The IRS then sought to collect additional tax from the taxpayer. 203 According to the client who issued the 1099 to the taxpayer, the vast majority of the difference between the $10,800 reported by the taxpayer and the much higher amount reported by the client was based on cash payments for which no records existed. 204 The IRS did little investigation to determine whether the taxpayer had actually received the extra income reported by his client. 205 Since the IRS insisted that its determination that, additional tax was owed be afforded the presumption of correctness, the taxpayer was placed in the unenviable position of needing to prove a negative — that he had not received these cash payments. 206 The Fifth Circuit held that the IRS’ determination was arbitrary and erroneous because faced with a 1040 from Portillo that was inconsistent with a 1099 on file, the IRS simply assumed that Por-tillo was the dishonest one without engaging in any further investigation or substantiation. 207 Thus, the IRS’ determination that additional tax was due had no factual foundation.

These Cases do not present a situation where the IRS’ claim for gift taxes is arbitrary and erroneous by virtue of having absolutely no evidentiary foundation. 208 The IRS reviewed a voluminous record of information gathered from the Wylys and third parties before filing the Proofs of Claim. Nor are they cases where the IRS failed to consider the Wylys’ tax returns and other information relevant to the al *383 leged gifts. 209 In fact, the Debtors’ objections to the IRS gift tax claims are largely legal, not factual. Obviously, allocation of burden of proof and shifts thereof is relevant only to factual issues, not legal ones. 210

For these reasons, the Court finds that the Proofs of Claim were not arbitrary and erroneous. ■

(2) Burden Shifting under 26 U.S.C. § 7491

The Internal Revenue Code provides one more opportunity for the Debtors to shift the burden to prove gift tax deficiencies to the IRS — ie„ 26 U.S.C. § 7491 . An analysis under § 7491 focuses on the taxpayer’s actions and asks if the taxpayer has submitted credible evidence and demonstrated “good behavior” by comporting with certain statutory requirements. Specifically, 26 U.S.C. § 7491 provides as follows:

(a) Burden shifts where taxpayer produces credible evidence.—

(1) General rule. — If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue.

(2) Limitations. — Paragraph (1) shall apply with respect to an issue only if—

(A) the taxpayer has complied with the requirements under this title to substantiate any item;

(B) the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews; and

*[■ H*

(3) Coordination. — Paragraph (1) shall not apply to any issue if any other provision of this title provides for a specific burden of proof with respect to such issue.

* # %

(c) Penalties. — Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.

As explained by the district court in Southgate Master Fund, LLC, 211

The legislative history of Section 7491 defines “credible evidence” as “the quality of evidence which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted *384 (without regard to the judicial presumption of IRS correctness).” S.Rep. No. 105-174, 1998 WL 197371 , at *45. Additionally, “[a] taxpayer has not produced credible evidence for these purposes if the taxpayer merely makes implausible factual assertions, frivolous claims, or tax protestor-type arguments. The introduction of evidence will not meet this standard if the court is not convinced that it is worthy of belief.” Id. at *45-46 .

This is not a case where either side has raised implausible factual assertions, frivolous claims, or tax protestor-type arguments. Rather, the Court finds, based on the evidence discussed more thoroughly in other sections of this opinion, 212 that the Debtors have introduced credible evidence questioning whether gifts were made and thus their liability for gift taxes. Thus, the Court must next consider whether the Debtors’ behavior here satisfied the other statutory requirements.

As this is not a case involving deductions, losses, or credits, the substantiation requirement of § 7491(a)(2)(A) seems to meld into the record keeping requirement of § 7491(a)(2)(B). The legislative history of § 7491 confirms this: 213

Nothing in the provision shall be construed to override any requirement under the Code or regulations to substantiate any item. Accordingly, taxpayers must meet applicable substantiation requirements, whether generally imposed or imposed with respect to specific items, such as charitable contributions or meals, entertainment, travel, and certain other expenses. Substantiation requirements include any requirement of the Code or regulations that the taxpayer establish an item to the satisfaction'of the Secretary. Taxpayers who fail to substantiate any item in accordance with the legal requirement of substantiation will not have satisfied the legal conditions that are prerequisite to claiming the item on the taxpayer’s tax return and will accordingly be unable to avail themselves of this provision regarding the burden of proof. Thus, if a taxpayer required to substantiate an item fails to do so in the manner required (or destroys the substantiation), this burden of proof provision is inapplicable.

The legislative history of § 7491 in turn cites to 26 U.S.C. §§ 6001 , 6038, and 6038A as examples of “generally imposed” substantiation requirements. Section 6001 states, in part, that “[e]very person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe.” Likewise, §§ 6038 and 6038A require taxpayers to file information regarding certain foreign-owned corporations and partnerships. Thus, the very examples that Congress gives of “substantiation” requirements are in actuality requirements to keep records. With this in mind, these substantiation requirements will be analyzed under the framework of § 7491(a)(2)(B)’s record keeping requirement. 214

Under § 7491(a)(2)(B), the taxpayer must maintain all required records to qualify for a shift in the burden of proof to the IRS. The Motions and Claim Ob *385 jections involve a multitude of documents, and the IRS’ case-in-chief was proven largely by documentary evidence. Although there is evidence in the record that French asked that certain documents received by IOM trustees be destroyed, these documents were not destroyed and indeed were submitted as evidence at trial. 215 These are not eases where there was evidence of relevant records not being kept. Indeed, the evidence shows that the Wylys and their family offices kept voluminous records and retained them for long periods of time as opposed to improperly destroying them. 216 As the Court notes later in its opinion, there is no evidence that the Wylys kept inadequate books or records or kept a double set of books. 217 Thus, the Court finds that the Debtors maintained all records required under the Internal Revenue Code.

Under § 7491(a)(2)(B) taxpayers must also cooperate with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews in order to qualify for a shift in the burden of proof. The legislative history of § 7491 explains the cooperation requirement in this way: 218

the taxpayer must cooperate with reasonable requests by the Secretary for meetings, interviews, witnesses, information, and documents (including providing, within a reasonable period of time, access to and inspection of witnesses, information, and documents within the control of the taxpayer, as reasonably requested by the Secretary). Cooperation also includes providing reasonable assistance to the Secretary in obtaining access to and inspection of witnesses, information, or documents not within the control of the taxpayer (including any witnesses, information, or documents located in foreign countries).

Although it is true that the Wylys exercised their rights during the audit process, they did not refuse to meet with IRS agents and worked diligently to respond to information document requests (“IDRs”) submitted to them by the IRS. 219 In addition, the Wylys provided access to searcha-ble databases containing literally millions of documents in response to approximately two hundred IDRs issued over the course of the IRS’ examination. 220 These were certainly not cases where efforts at compliance were at best half-hearted and belated. Thus, the Court finds that the Debtors cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews.

For these reasons, the Court is satisfied that the Debtors have met their burden under 26 U.S.C. § 7491 . Thus, at the end of a long journey through multiple burden of proof analyses, the burden lies with the IRS to prove the Debtors’ liability for gift *386 taxes by a preponderance of the evidence. 221

b) Fraud Penalties for Income Tax and Gift Tax Underpayments

The burden of proof analysis regarding fraud is much more straightforward than the gift tax analyses. The statutes and procedural rules governing practice before the tax court make it clear that the IRS bears the burden of proving fraud by clear and convincing evidence. 222 The Fifth Circuit has also held that it is the IRS who bears the burden of proof on the issue of whether a taxpayer has committed civil tax fraud, and that the IRS must establish this civil fraud by clear and convincing evidence. 223

That the IRS bears the burden of establishing a taxpayer’s fraud by clear and convincing evidence seems to be universally understood, and statements to this effect are found in both tax court cases and Circuit level cases outside of the Fifth Circuit. 224 Just as it must prove fraudulent underpayment under § 6663 by clear and convincing evidence, so too must the IRS prove fraudulent failure to file gift tax returns under § 6651 by clear and convincing evidence. 225

Moreover, courts agree that the IRS must carry its burden of establishing fraud by clear and convincing evidence separately for each tax year at issue. 226 In addition, at least one tax court judge has *387 ruled that fraudulent intent must be proven at the time of filing the return for each year in question. 227

26 U.S.C. § 6663 — the statute mandating penalties for fraudulent underpayment of taxes — itself also contains instructions to follow regarding burdens of proof, and states in subsection (b) that “[i]f the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with inspect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.” 228 In turn, § 6663(c) states that “[i]n the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.” 229

As relevant here then, the burden of proof regarding its claims for fraud penalties pursuant to 26 U.S.C. §§ 6663 and 6651 is on the IRS, who must carry that burden by clear and convincing evidence. Of course, and as the parties agree, if the IRS carries its burden of proof, the statute of limitations under 26 U.S.C. § 6501 (c)(1) remains open for each year in which the IRS proves the return was fraudulent. 230

c) International Failure to File Penalties

Again, the burden of proof analysis regarding international failure to file penalties is straightforward. 26 U.S.C. § 7491 (c) provides that:

Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.

*388 Thus, the IRS has the burden of production and must come forward with “sufficient evidence” that it is appropriate to impose international failure to file penalties on the Debtors, 231

3i The Debtors’ Defenses

The Debtors assert various defenses to their liability to the IRS. Each is discussed below.

a) Reasonable Cause Defenses

The Debtors assert multiple reasonable cause defenses under multiple sections of the Internal Revenue Code. These reasonable cause defenses, if proven by the Debtors, will allow them to avoid liability for various penalties asserted by the IRS in the Proofs of Claim. First, the Debtors assert a reasonable cause defense to the IRS’ assertion of fraud penalties under 26 U.S.C. § 6664 (c). 232 Second, they assert a reasonable cause defense to the IRS’ assertions of international failure to file penalties under 26 U.S.C. § 6677 (d). 233 Third, they assert a different reasonable cause-defense to a different set of international failure to file penalties under § 6038(c)(4)(B). 234

All of these reasonable cause defenses would negate a taxpayer’s liability upon similar showings of a combination of “reasonable cause,” “good faith,” and a “lack of willful neglect.” Absent contrary guidance from Congress (and there is no such contrary guidance here), it makes sense to assume that these phrases have the same meaning throughout the Internal Revenue Code. 235 According to Fifth Circuit precedent, “the [taxpayer] bears the burden of proof on a reasonable cause defense.” 236 And, the evidentiary standard is by a preponderance of the evidence. 237

*389 b) Dee’s Innocent Spouse Defense

Dee’s “innocent spouse defense” is codified at 26 U.S.C. § 6015 . It provides an exception to the general rule of federal income taxation that a husband and wife filing a joint return are jointly and severally liable for the taxes due on that return. 238 According to the Fifth Circuit and the plain language of the statute, “[sjection 6015 provides three distinct types of relief for taxpayers who file joint returns.” 239 Under § 6015(b), ah joint filers have the opportunity to qualify for relief if they meet the five requirements established under § 6015(b)(1)(A) — (E). 240 Under § 6015(c), taxpayers who are no longer married may limit their income tax liability to their separate liability amount. 241 Finally, § 6015(f) provides a kind of wildcard provision for spouses who do not qualify for relief under §§ 6015(b) or (c).

Dee claims that she is eligible for innocent spouse relief under §§ 6015(b) and (c), but not § 6015(f). As relevant here, Dee bears the burden of proof on the innocent spouse defense:

Except for the knowledge requirement of § 6015(c)(8)(C) (the provision disallowing election of separate liability to a spouse with actual knowledge of the item giving rise to the deficiency), the taxpayer bears the burden of proving that she has met all the prerequisites for innocent spouse relief. See Reser v. Comm’r, 112 F.3d 1258, 1262-63 (5th Cir.1997). Section 6015(c)(3)(C) explicitly places the burden of proof on the Secretary. 242

Dee must satisfy her burden here by a preponderance of the evidence. 243 For § 6015(c)(3)(C), the IRS must meet its burden by a preponderance of the evidence. 244

Armed with this understanding of the applicable burdens of proof, we turn to the substantive issues we must address.

B. Was the Debtors’ Underpayment of Income Taxes Due to Fraudulent Intent?

As noted previously, to prevail here on its claim for fraud penalties under 26. U.S.C. § 6663, the IRS must prove, by clear and convincing evidence for each tax year in question, that: (i) the Debtors underpaid their respective income tax that year, 245 and (ii) the underpayment for that *390 year was due to fraud. Fraud for this purpose is defined as intentional wrongdoing, with the specific purpose of avoiding a tax known or believed to be owed. 246 As was obvious from the outset of the Cases, which were filed in large part to bring these tax issues to conclusion, the parties have a vastly, different perspective on what transpired here.

From Sam’s perspective, he is the embodiment of the American dream — small town boy of modest background makes good through, among other things, a close family, hard work, intelligence, business savvy, some good ideas, and a willingness to take entrepreneurial risks, which combine to transform him into one of the wealthiest individuals in the world. This spin on the tale at trial started with a lengthy tracing of Sam’s and Charles’ childhood in small towns in northeastern Louisiana, through their teenage years as Boy Scouts (including a recitation of the Boy Scout oath) and student athletes (according to Sam, he was the better student and Charles was the better athlete), to college at Louisiana Tech where Charles met and ultimately married Dee, his wife of 56 years before his death in 2011, to Sam’s graduate school at the University of Michigan on scholarship, to Sam’s first job at IBM where he met his friend Ross Perot, who was just starting out in the business world like he was, to the start of Charles and his first business venture, and so on. The upshot of Sam’s story is that he is a loyal American, who loves his family 247 and country, and who has never complained about his obligation as an American citizen to pay taxes, which he has done each and every year of his life as advised by his professionals 248 and as required by applicable law.

Conversely, while the IRS does not dispute the impressive rags to riches story of Sam and Charles, or the impressive nature of their overall business successes, it spins its own tale of two brothers, who are extraordinarily wealthy by the early 1990s and who decide to evade taxes in order to *391 preserve as much wealth as possible for themselves and their families by taking much of their wealth offshore in known tax havens, where they continued (and Sam continues to this day) to exercise control over the offshore assets through trustees who follow their every “wish.” 249 The upshot of the IRS’ story is that Sam and Charles, along with their army of lawyers and other professionals, set up one of the most complicated offshore structures ever seen, and then manipulated that structure in such a way as to evade their legitimate tax obligations. And then, when the highly secretive offshore system was about to be fully exposed, Sam asked certain of his most trusted advisors if he could avoid his looming potential tax problems by renouncing his American citizenship. 250

This Court’s job is to take the parties’ respective stories, of which there is certainly evidence of support in the record, and decide which version of the facts or, in all likelihood, combination of versions of the facts, is most credible and reflects what happened here (by clear and convincing evidence if the IRS is to prevail on their fraud penalty claims). To say this has been a difficult process of weighing the conflicting evidence and arguments is a great understatement. The Court’s analysis of the fraud penalties issue — as it relates to the Debtors’ income tax underpayments — follows.

As virtually every case addressing fraud penalties pursuant to 26 U.S.C. § 6663 acknowledges, a taxpayer rarely confesses his or her fraud in what the parties here have called a Perry Mason moment. 251 And, not surprisingly given the parties’ respective stories, there was no Perry Mason moment here. 252 However, when direct proof of fraudulent intent is not available, fraud may be established by circumstantial evidence and reasonable inferences drawn from the record. 253 Courts have developed a nonexclusive list of badges of fraud useful in determining whether there is circumstantial evidence of fraudulent intent. Among the badges of fraud that can be gathered from the case law are the following: (i) understatement of income, (ii) inadequate maintenance of records, (iii) failure to file tax returns or make estimated tax payments, (iv) offering implausible or inconsistent explanations of behavior, (v) concealment of income or assets, (vi) failure to cooperate with tax authorities, (vii) engaging in illegal activities, (viii) dealing in cash, (ix) offering false or incredible testimony, and (x) filing false *392 documents. 254 The taxpayer’s background, level of education, and relative business sophistication is also a relevant consideration, as it informs the court about the taxpayers ability to understand the transactions at issue. 255 Although no single factor may necessarily be sufficient to establish fraud, the existence of several indicia may be persuasive circumstantial evidence of fraud. 256

1. Relevant Statutes and Badges of Fraud

With this general statement of the law in mind, the Court begins by analyzing the relevant statutes and the badges of fraud it believes applicable here. 26 U.S.C. § 6663 provides:

(a)Imposition of penalty. — If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

(b) Determination of portion attributable to fraud. — If the Secretary establishes 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.

(c) Special rule for joint returns. — In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.

In turn, 26 U.S.C. § 6664 provides, in relevant part, that;

(b) Penalties applicable only where return filed. — The penalties provided in this part shall apply only in cases where a return of tax is filed (other than a return prepared by the Secretary under the authority of section 6020(b)).

(c) Reasonable cause exception for underpayments.—

*393 (1) In general. — No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.

(2) Exception. — Paragraph (1) shall not apply to any portion of an underpayment which is attributable to one or more transactions described in section 6662(b)(6). 257

And, while the Debtors assert a reasonable cause and good faith defense to the imposition of fraud penalties for their income tax underpayments (and which will be discussed infra at pp. 476-513), their initial argument is a bit more nuanced. In short, the Debtors argue that we do not need to get to their reasonable cause and good faith defense as to their income tax underpayments, as the IRS has failed to prove fraudulent intent by clear and convincing evidence, as it is required by law to do. And, the nuance comes by virtue of the Debtors’ argument that their reliance on the advice of their various professionals in preparing and filing their tax returns in each of the relevant years negates any possible fraudulent intent. In other words, according to the Debtors, we received all this advice from all these professionals who said what we are doing was appropriate, so how could we have possibly avoided payment of a tax we believed we owed? 258 So, before analyzing the Debt- or’s reasonable cause defense, the Court determines whether the IRS carried its burden of proof to establish fraudulent intent by clear and convincing evidence for each of the relevant years for each taxpayer, starting with Sam. 259

It bears repeating that the lists of badges of fraud relied upon by courts is described as a non-exclusive list, clearly indicating that the courts have flexibility to analyze the particular facts and circumstances of their cases and to supplement the “typical” or “usual” badges of fraud with ones that may be unique to the facts of any specific case. 260 As is presumably apparent from the parties’ 122 pages of stipulated facts and the additional facts that are set forth herein for context, the *394 facts and procedural history of the Cases are truly unique. In short, the complexity' of the offshore system of trusts and corporations implemented by Sam and Charles (and unknowingly acquiesced in by Dee) is nothing short of mind-numbing (as any reader of this Memorandum Opinion will soon see), with identically named domestic and foreign corporations, and layers upon layers of foreign entities, the business purpose of many of which remains unclear in the record following the conclusion of three weeks of evidence. So, from this Court’s perspective, while certain of the “usual” or “typical” badges of fraud are applicable here, they do not fully address what this Court must grapple with. Thus, the Court will analyze those of the “usual” badges of fraud that could support a finding of fraudulent intent here, along with other badges of fraud that are more tailored to our unique facts and circumstances.

The. more “usual” badges of fraud that the Court will analyze include: 261 (i) understatement of income, (ii) concealment of income or assets, (iii) offering implausible or inconsistent explanations of behavior, (iv) offering false or incredible testimony, (v) filing false documents, and (vi) failure to cooperate with tax authorities. In addition, the Court will consider: (i) the complexity of the offshore system and whether there was any legitimate business purpose to that complexity, (ii) the Wylys’ willingness to commit securities fraud to preserve their secret offshore system and to maintain its tax advantages, (iii) the Wylys’ failure to take action to resolve the conflicting advice they received regarding the 1992 IOM trusts, (iv) the creation of false documents to support the settling of the IOM trusts in 1994 and 1995 to attempt to obtain favorable tax benefits for the Wylys, (v) the treatment of the offshore system as the Wyly family piggy bank, directing purchases of art, jewelry, home furnishings, and real estate for the benefit of individual Wyly family members, while legal title to those assets remains offshore purportedly out of the reach of creditors, including the IRS, and (vi) the planned insolvency of various of the IOM corporations that were supposed to be what made the purpose of the offshore system one of legitimate tax avoidance (not tax evasion). Our analysis starts with the specifically tailored badges of fraud.

a) The Complexity of the Offshore System

The offshore system of trusts and corporations set up by Sam and Charles starting in 1992 is enormously complex. In summary, Sam and/or Charles established 16 offshore trusts and 38 offshore corporations, each of which was owned by one of the 16 offshore trusts. The offshore trusts were all settled in the IOM, which is an *395 autonomous and self-governing island nation in the middle of the Irish Sea between Great Britain and Ireland. While the IOM is a dependency of Great Britain, it is not part of the United Kingdom. 262 The foreign corporations were established in either the IOM (32 of the corporations) or the Cayman Islands (6 of the corporations). In addition to these 54 offshore trusts and corporations, there were 10 domestic corporations established in Nevada, each of which (i) shared an identical name with an IOM corporation, and (ii) was involved in a complicated annuity transaction that will be discussed further below. Finally, Sam and Charles caused a number of other domestic entities to be created that then facilitated complicated real estate transactions that will be discussed in detail in connection with the Court’s gift tax analysis. 263

With this general background of the offshore system in mind, we turn to the specifics of each brother’s offshore system. On March 11, 1992, Sam settled the Bulldog Non-Grantor Trust (“Bulldog IOM Trust”) in the IOM. 264 The Bulldog IOM Trust was intended to be a non-grantor trust to him under 26 U.S.C. §§ 671-679 . 265 Sam contributed corpus of $100.00. 266 The beneficiaries of the Bulldog IOM Trust included (i) the British Red Cross and. the Community Chest of Hong Kong and their respective successors, and (ii) Sam’s children and issue, specifically including, but not limited to, Evan A. Wyly (“Evan”), Laurie W. Matthews (“Laurie”), Lisa L. Wyly (“Lisa”), Kelly Wyly (“Kelly”), Andrew Wyly (“Andrew”), and Christiana P. Wyly (“Christi-ana”), but contingently, that is, only after the expiration of the second anniversary following Sam’s death. 267 The following IOM Corporations are wholly owned by Bulldog IOM Trust: 268

IOM Corporations Date Established

Morehouse Limited March 24,1992

West Carroll Limited March 24,1992

Tensas Limited March 24,1992

Richland Limited March 24,1992

East Carroll Limited March 24,1992

East Baton Rouge Limited March 27,1992

Moberly Limited January 31,1996

Locke Limited February 8,1996

On December 4, 1992, Sam settled the Lake Providence International Trust (“Lake Providence IOM Trust”) in the IOM. 269 .The Lake Providence IOM' Trust was intended to be a non-grantor trust to *396 him under 26 U.S.C. §§ 671-679 . 270 Sara contributed corpus of $100.00. 271 The beneficiaries of the Lake Providence IOM Trust included (i) the British Red Cross and the Community Chest of Hong Kong and their respective successors, and (ii) Sam’s children and issue, specifically including, but not limited to, Evan, Laurie, Lisa, Kelly, Andrew, and Christiana, but contingently, that is, only after the expiration of the second anniversary following Sam’s death. 272 Sarnia Investments Limited, an IOM corporation (“Sarnia Investments Limited (IOM)”), established on January 8, 1991, was ultimately wholly owned by Lake Providence IOM Trust. 273

On December 14, 1992, Sam settled the Delhi International Trust (“Delhi IOM Trust”) 4n the IOM. 274 The Delhi IOM Trust was intended to be a non-grantor trust to him under 26 U.S.C. §§ 671-679 . 275 Sam contributed corpus of $100.00. 276 The beneficiaries of the Delhi IOM Trust included (i) the British Red Cross and the Community Chest of Hong Kong and their respective successors, and (ii)Sam’s children and issue, specifically including, but not limited to, Evan, Laurie, Lisa, Kelly, Andrew, and Christiana, but contingently, that is, only after the expiration of the second anniversary following Sam’s death. 277 Greenbriar Limited, an IOM corporation (“Greenbriar Limited (IOM)”), established on November 10, 1992, was wholly owned by Delhi IOM Trust. 278

On February 2, 1994, Keith King (“King”), a resident of the IOM, settled the Bessie Trust (“Bessie IOM Trust”) in the IOM. 279 The Bessie IOM Trust was intended to be a grantor trust to King under 26 U.S.C. §§ 671-679 . 280 The beneficiaries of the Bessie IOM Trust at various points in time were (i) King, Sam, Sam’s wife, Sam’s issue, (ii) The University of Michigan, any Church of Christ Scientist, the Community Foundations of Texas, (iii) Camp Leelanau and Camp Kohahna, (iv) The Episcopal School of Dallas, (v) the wife or widow of Evan and all the children and more remote issue of Evan, and (vi) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 281 The following IOM Corpora- *397 tións and Cayman Island Exempted Corporations were wholly owned by Bessie IOM Trust, along with other IOM corporations not listed but separately discussed below: 282

IOM Corporations Date Established

Yurta Faf Limited (IOM) June 28,1994

Audubon Asset Limited (f/k/a Fugue Limited) (“Audubon Asset Limited (IOM)”) October 18,1995

Newgale Limited (IOM) March 12,2003

Cayman Exempted Corporations Date Established

Orange L.L.C. (Cayman) June 1,2001

FloFlo L.L.C. (Cayman) June 1,2001

Bubba L.L.C. (Cayman) June 1,2001

Pops L.L.C. (Cayman) June 1,2001

Balch L.L.C. (Cayman) June 1,2001

Katy L.L.C. (Cayman) June 1,2001

The Cayman Exempted Corporations listed above were liquidated in 2006 and ownership of their assets reverted 100% to the Bessie IOM Trust (to the extent there remained any assets after the payment of liabilities). 283 The IOM Corporations listed above remain in existence today, as do those discussed immediately below.

Mi Casa Limited, an IOM corporation (“Mi Casa Limited (IOM)”), established on March 28, 2001, was initially wholly owned by the Bessie IOM Trust. Mi Casa Limited (IOM) was later owned by FloFÍo L.L.C. (Cayman) and the Bessie IOM Trust. 284 After the liquidation of FloFlo L.L.C. (Cayman), Mi Casa Limited (IOM) is once again wholly owned by the Bessie IOM Trust. 285

Cottonwood I Limited, an IOM corporation (“Cottonwood I Limited (IOM)”), established on July 14, 2000, was initially wholly owned by the Bessie IOM Trust. As of June 1, 2002, Cottonwood I Limited (IOM) was owned by Bubba L.L.C. (Cayman) and Bessie IOM Trust. 286 After the liquidation of Bubba L.L.C. (Cayman), Cottonwood I Limited (IOM) was once again wholly owned by the Bessie IOM Trust. 287

Cottonwood II Limited, an IOM corporation (“Cottonwood II Limited (IOM)”), *398 established on July 14, 2000, was initially wholly owned by the Bessie IOM Trust. As of June 1, 2001, Cottonwood II Limited (IOM) was owned by Orange L.L.C. (Cayman), Pops L.L.C. (Cayman), FloFlo L.L.C. (Cayman), Bubba L.L.C. (Cayman), Katy L.L.C, (Cayman), Balch L.L.C. (Cayman), and the Bessie IOM Trust. 288 After the liquidation of Orange L.L.C. (Cayman), Pops L.L.C. (Cayman), FloFlo L.L.C. (Cayman), Bubba L.L.C. (Cayman), Katy L.L.C. (Cayman), and Balch L.L.C. (Cayman), Cottonwood II Limited (IOM) is once again wholly .owned by the Bessie IOM Trust. 289

Spitting Lion Limited, an IOM corporation (“Spitting Lion Limited (IOM)”), established on February 3, 2000, was initially wholly owed by the Bessie IOM Trust. 290 As of June 1, 2001, Spitting Lion Limited (IOM) was owned by Orange L.L.C. (Cay- • man), Pops L.L.C. (Cayman), FloFlo L.L.C. (Cayman), and Bubba L.L.C (Cayman). 291 After the liquidation of Orange L.L.C. (Cayman), Pops L.L.C. (Cayman), FloFlo L.L.C. (Cayman), and Bubba L.L.C (Cayman), Spitting Lion Limited (IOM) is once again wholly owned by the Bessie IOM Trust. 292

Woody Creek Ranch Limited, an IOM corporation formed on September 30, 1999 (whose name was changed to Two Mile Ranch Limited on April 14, 2000, and ultimately to Rosemary’s Circle R Ranch Limited on August 26, 2003) (“Rosemary’s Circle R Ranch Limited (IOM)”), was initially wholly owned by Devotion Limited (IOM), another Sam IOM corporation discussed further below. 293 As of April 11, 2000, Rosemary’s Circle R Ranch Limited (IOM) was owned by the Bessie IOM Trust and Orange L.L.C (Cayman). 294 As of June 1, 2001, Rosemary’s Circle R Ranch Limited (IOM) was, owned by Orange L.L.C. (Cayman), Pops L.L.C. (Cayman), FloFlo L.L.C. (Cayman), Bubba L.L.C. (Cayman), Balch L.L.C. (Cayman), Katy L.L.C. (Cayman), and the Bessie IOM Trust. 295 After the liquidation of Orange L.L.C. (Cayman), Pops L.L.C. (Cayman), FloFlo L.L.C. (Cayman), Bubba L.L.C. (Cayman), Balch L.L.C. (Cayman), and Katy L.L.C. (Cayman), Rosemary’s Circle R Ranch Limited (IOM) is once again wholly owned by Bessie. IOM Trust. 296

On July 18, 1995, the La Fourche Trust (“La Fourche IOM Trust”) was settled in the IOM by Shaun Cairns (“Cairns”), an IOM resident. 297 The La Fourche IOM Trust was intended to be a grantor trust to Cairns under 26 U.S.C. §§ 671-679 . 298 The beneficiaries of the La Fourche IOM Trust at various points in *399 time were (i) Sam, Sam’s wife, Sam’s issue, (ii) The University of Michigan, the First Church of Christ Scientist, the Leaves, Inc., the Community Foundations of Texas, (iii) Denison University and A Grass Roots Aspen Experience, (iv) the Humboldt Legal Foundation, (v) Cairns, and (vi) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 299 Devotion Limited, an IOM corporation (“Devotion Limited (IOM)”), established on July 18, 1995, was wholly owned by La Fourche IOM Trust. 300 Relish Limited, an IOM corporation (“Relish Limited (IOM)”), was also wholly owned by the La Fourche IOM Trust. 301

On March 11, 1992, Sam settled the Tallulah International Trust (“Tallulah IOM Trust”) in the IOM with $100.00. 302 Tallulah IOM Trust was a grantor trust to Sam under 26 U.S.C. §§ 671-679 . 303 Tal-lulah IOM Trust terminated and was dissolved on December 31, 1996. 304 The beneficiaries of the Tallulah IOM Trust were (i) Sam, Sam’s spouse, and Sam’s issue, and (ii) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 305

On December 21, 1995, Sam settled The Crazy Horse Trust (“Crazy Horse IOM Trust”) in the IOM with $100.00. 306 Crazy Horse IOM Trust was a grantor trust to Sam under 26 U.S.C. §§ 671-679 . 307 Crazy Horse IOM Trust terminated and was dissolved on December 31, 1996. 308 The beneficiaries of the Crazy Horse IOM Trust were (i) Sam, Sam’s spouse, and Sam’s issue, and (ii) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 309

On December 28, 1995, Sam settled The Arlington Trust (“Arlington IOM Trust”) in the IOM with $100.00. 310 Arlington IOM Trust was a grantor trust to Sam under 26 U.S.C. §§ 671-679 . 311 Arlington IOM Trust terminated and was dissolved on December 31, 1996. 312 The beneficiaries of the Arlington IOM Trust were (i) Sam, Sam’s spouse, and Sam’s issue, and (ii) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 313

On January 23, 1996, Sam settled The Sitting Bull Trust (“Sitting Bull IOM Trust”) in the IOM with $100.00. 314 Sitting Bull IOM Trust was a grantor trust to *400 Sam under 26 U.S.C. §§ 671-679 . Sitting Bull IOM Trust terminated and was dissolved on December 31, 1996. 315 The beneficiaries of the Sitting Bull IOM Trust were (i) Sam, Sam’s spouse, and Sam’s issue, and (ii) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 316

A chart depicting Sam’s overall offshore system is attached as Exhibit B.

While using fewer entities, a similarly complex offshore system was established simultaneously by Charles. Specifically, on March 23, 1992, Charles settled the Pitkin Non-Grantor Trust (“Pitkin IOM Trust”) in the IOM. 317 The Pitkin IOM Trust was intended to be a non-grantor trust to him under 26 U.S.C. §§ 671-679 . 318 Charles contributed corpus of $100.00. 319 The beneficiaries of the Pitkin IOM Trust included (i) the British Red Cross and the Community Chest of Hong Kong and their respective successors, and (ii) Charles’ children and issue, specifically including, but not limited to, Martha Wyly Miller (“Martha”), Charles J. Wyly, III (“Chip”), Emily Wyly (“Emily”), and Jennifer Wyly Lincoln (“Jennifer”), but contingently, that is, only after the expiration of the second anniversary following Charles’ death. 320 The following IOM Corporations are wholly owned by the Pitkin IOM Trust: 321

IOM Corporations Date Established

Rugosa Limited October 31,1989

Little Woody Limited March 27,1992

Roaring Fork Limited April 3,1992

Roaring Creek Limited April 3,1992

On December 4, 1992, Charles settled the Castle Creek International Trust (“Castle Creek IOM Trust”) in the IOM. 322 Castle Creek IOM Trust was intended to be a non-grantor trust to him under 26 U.S.C. §§ 671-679 . 323 .Charles contributed corpus of $100.00. 324 The beneficiaries of the Castle Creek IOM Trust included (i) the British Red Cross and the Community Chest of Hong Kong and their respective successors, and (ii) Charles’ children and issue, specifically including, but not limited to, Martha, Chip, Emily and Jennifer, but contingently, that is, only after the expiration of the second anniversary following *401 Charles’ death. 325 Quayle Limited, an IOM corporation (“Quayle Limited (IOM)”), established on January 15, 1992, is wholly owned by the Castle Creek IOM Trust. 326

On February 2, 1994, King settled The Tyler Trust (“Tyler IOM Trust”) in the IOM. 327 Tyler IOM Trust was intended to be a grantor trust to King under 26 U.S.C. §§ 671-679 . 328 The beneficiaries of Tyler IOM Trust at various points in time were (i) King, Charles, Dee, Charles’ issue, (ii) the First Church of Christ Scientist or any United States Church associated with the Christian Science faith, (iii) Lady Thatcher’s Archive at the Cambridge Foundation, (iv) Donald R. Miller, Jr., all the children and remote issue of Donald R. Miller, Jr., Deborah Paige Miller, and (vi) such persons or classes of persons appointed as beneficiaries by the Trustees with the pri- or written consent of the Trust Protectors. 329 The following IOM Corporations are wholly owned by Tyler IOM Trust: 330

IOM Corporations Date Established

Soulieana Limited (IOM) July 26,1995

Elysium Limited (IOM) July 10,1995

Gorsemoor Limited (IOM) January 29,1999

Little Woody Creek Road Limited OM) November 5,1999

Stargate Farms Limited (IOM) December 18,2000

On July 8, 1995, Cairns settled The Red Mountain Trust (“Red Mountain IOM Trust”) in the IOM. 332 Red Mountain IOM Trust was intended to be a grantor trust to Cairns under 26 U.S.C. §§ 671-679 . 333 The beneficiaries of Red Mountain IOM Trust are (i) Charles, Dee, Charles’ issue, (ii) the First Church of Christ Scientist or any United States Church associated with the Christian Science faith, (iii) Cairns, and (iv) such persons or classes of persons appointed as beneficiaries by the *402 Trustees with the prior written consent of the Trust Protectors. 334 Elegance Limited, an IOM corporation (“Elegance Limited (IOM)”) established on July 10,1995, is wholly owned by Red Mountain IOM Trust. 335

On March 23, 1992, Charles settled the Woody International Trust (“Woody Int’l IOM Trust”) with $100.00 in the IOM. 336 Woody Int’l IOM Trust was a grantor trust to Charles under 26 U.S.C. §§ 671-679 : Woody Int’l IOM Trust terminated and dissolved on December 31, 1996. 337 The beneficiaries of Woody Int’l IOM Trust were (i) Charles, Dee, Charles’ issue, and (ii) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 338

On December 28, 1995, Charles settled the Maroon Creek Trust (“Maroon Creek IOM Trust”) with $100.00 in the IOM. Maroon Creek IOM Trust was a grantor trust to Charles under 26 U.S.C. §§ 671-679 . 339 Maroon Creek IOM Trust terminated and dissolved on December 31, 1996. 340 The beneficiaries of Maroon Creek IOM Trust are (i) Chaxies, Dee, and Charles’ issue, and (ii) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 341

On January 23, 1996, Charles settled The Lincoln Creek Trust (“Lincoln Creek IOM Trust”) with $100.00 in the IOM. Lincoln Creek IOM Trust was a grantor trust to Charles under 26 U.S.C. §§ 671-679 . Lincoln Creek IOM Trust terminated and dissolved on December 31, 1996. 342 The beneficiaries of Lincoln Creek IOM Trust were (i) Charles, Dee, Charles’ issue, and (ii) such persons or classes of persons appointed as beneficiaries by the Trustees with the prior written consent of the Trust Protectors. 343

A chart depicting Charles’ overall offshore structure is attached as Exhibit C.

Once the offshore system was established (or at least part of it was established), Sam and Charles undertook a series of complex annuity transactions in order to get substantial amounts of their wealth offshore in the IOM. Specifically, in 1992 and 1996, Sam and Charles entered into multiple transactions whereby they transferred securities that they had earned from Sterling Software, Sterling Commerce, and Michaels Stores in exchange for private annuities. These transactions are described in detail in Joint Stipulations ¶¶ 119-160, but two of Sam’s transactions will be summarized here for context.

For example, in 1992, Sam transferred 375,000 options to purchase stock in Mi-chaels Stores to East Baton Rouge Ltd. (Nevada), a newly formed entity that had no assets, in exchange for an unsecured private annuity. 344 Immediately thereaf *403 ter, East Baton Rouge Ltd. (Nevada) transferred the options and the obligation to pay the private annuity to East Baton Rouge Limited (IOM), an IOM entity that had no assets or liabilities prior to the transfer of the options and the private annuity obligation to it. 345 East Baton Rouge Ltd. (Nevada) was wholly owned by East Baton Rouge Limited (IOM), which was wholly owned by the Bulldog IOM Trust. 346 Sam did five more similarly structured private annuity transactions in 1992, but using five different Nevada and IOM corporations. 347

The structure of the private annuity transactions changed in 1996, 348 although those transactions were equally complex for no apparent business reason. For example, on December. 29, 1995, Sam assigned 650,000 options to purchase stock of Sterling Software to Crazy Horse IOM Trust, a foreign trust he settled, which trust then assigned the options to Locke Limited (IOM), an entity wholly owned by the Bulldog IOM Trust, in exchange for an unsecured private annuity payable to Crazy Horse IOM Trust. Crazy Horse IOM Trust was then terminated, the effect of which was to put the right to receive the annuity payments to Sam who, as just noted, was the grantor of the now-liquidated Crazy Horse IOM Trust. Sam did five more similarly structured annuity transactions in 1996, using different entities. 349

The structure of the annuity transactions undertaken by Charles was identical to those undertaken by Sam in 1992 and 1996. Charles did four private annuity transactions in 199 2 350 and four more in 1996. 351

After deferring receipt of his annuity payments, 352 Sam began receiving annuity payments on some of the annuities in 2004 and on others in 2007. 353 Similarly, after deferring receipt of his annuity payments, 354 Charles’ annuity payments com *404 menced in 2003, 2004, and/or 20 06. 355 To date, in exchange for approximately $105 million worth of options, Sam has received — and paid tax on — approximately $282 million in annuity payments. 356 However, Sam has forgiven approximately $60,972,221 in annuity payments from three IOM corporations (and agreed to forego all future annuity payments from those corporations) 357 and does not expect to receive $70,544,877 in annuity payments currently due (or any further annuity payments) from another four IOM corporations, 358 because all of those corporations have been rendered insolvent financing the Wyly “family’s lifestyle and domestic busi *405 ness interests,” 359 thereby enabling the remaining Wyly wealth to remain offshore untaxed, 360 as will be discussed further below. And, as the IRS correctly points out (and as will be discussed further below), the annuity payments only commenced after the Wylys admittedly learned of serious potential risks associated with their offshore system and/or when it became apparent to them that the offshore system would likely come under public scrutiny through some combination of (i) the filing of certain disclosures their then tax lawyers recommended they file with the IRS regarding potential problems with the positions they had taken on prior filed tax returns, (ii) an IRS audit, (iii) an impending Senate subcommittee investigation of them and tax haven abuses in general, and (iv) investigations of securities fraud allegations against them by, among others, the SEC. 361

The Wylys offered some explanation for the complexity of their offshore structures, but often those explanations only lead to an analysis of other badges of fraud. For example, Sam’s private annuity transactions in 1992 involved six Nevada corporations 362 and six identically named IOM corporations and Charles’ private annuity transactions that year involved four Nevada corporations and four identically named IOM corporations. All of those transactions could have been accomplished in a single transfer for Sam (and another for Charles), as one of the attorneys on whose advice the Debtors are relying, Michael Chatzky (“Chatzky”), admitted on cross-examination. 363 However, if structured as a single assignment of opinions and warrants, the IOM entity that ultimately received the options and warrants would have been subject to SEC reporting requirements, which the Wylys were desperate to avoid. In fact, considerable effort went into attempting to insure that no IOM entity held more than 5% of the stock of Sterling Software, Sterling Commerce, and/or Michaels Stores, on whose boards Sam and Charles sat, as will be discussed further below. 364

*406 Similarly, no explanation was provided as to why the 1996 private annuity transactions were structured as they were (other than the attempt to avoid SEC reporting once again). As noted previously, unlike the 1992 annuity transactions, in 1996 Sam assigned options and warrants in Sterling Software, Sterling Commerce, and/or Mi-chaels Stores to four IOM grantor trusts he had settled in 1992, 1995 and 1996 (Tallulah IOM Trust, Crazy Horse IOM Trust, Arlington IOM Trust, and Sitting Bull IOM Trust), who then assigned the options and warrants to six IOM corporations (Locke Limited (IOM), Moberly Limited (IOM), Sarnia Investments Limited (IOM), Audubon Asset Limited (IOM), Yurta Faf Limited (IOM), and Devotion Limited (IOM)) in exchange for those corporations issuing an annuity back to the four IOM trusts. Shortly after those four IOM trusts received the annuities, the trusts were terminated and the annuity contracts were assigned to Sam, who had been the grantor of those trusts. So, if the purpose of the transaction was for Sam to assign options and warrants to offshore entities in exchange for annuities, why not do it simply and directly? The inference the IRS asks this Court to draw from the elaborate and apparently unnecessary structure is that the use of so many entities and so many transfers would make the scheme harder to unravel and understand, which is a reasonable inference given the absence of any evidence suggesting a legitimate business purpose to this myriad of entities and transfers.

Similarly complex structures were undertaken through the Bessie IOM Trust’s ownership of five IOM corporations (Mi Casa Limited (IOM), Cottonwood I Limited (IOM), Cottonwood II Limited (IOM), Rosemary’s Circle R Ranch Limited (IOM), and Spitting Lion Limited (IOM)) that were used to indirectly purchase and hold title to real estate in the United States through the five IOM corporations establishment of a domestic “management” trust, which would then establish a Texas or Colorado limited liability company depending on where the real property was located, which would hold legal title to the real property. As the IRS correctly points out, if the Bessie IOM Trust had wanted to invest in U.S. real estate, it certainly could have done so in a much simpler structure. But, the layers upon layers of entities made it that much more likely that the existence and complexity of the offshore system could remain secret from the IRS. And, through this structure, a Wyly family member or former family member could obtain a small percentage ownership interest in the management trust and then, according to Wyly family tax lawyers, enjoy the benefits of that real property, by living in a home rent free or operating a business rent free in the property. In addition to the alleged lack of economic substance to these structures, the IRS attacks them as gifts from Sam to the respective family member(s) ’ who enjoyed the use of the real property, which will be discussed further below. 365

Another IOM entity owned by the Bessie IOM Trust, Audubon Asset Limited (IOM), 366 and an entity owned by Tyler IOM Trust, Soulieana Limited (IOM), 367 were used to purchase works of art, household furnishings, jewelry, and similar items of personal property that were then provided to various Wyly family members *407 to use and enjoy pursuant to “possession agreements” between the IOM entity and the applicable Wyly family member. 368 While these transactions will be analyzed in greater detail in connection with the Court’s analysis of another badge of fraud — i. e., the use of the offshore system as the Wyly families’ personal piggy bank, the point here is structural — if the two IOM trusts had wished to own items of personal property, they could have simply made the purchase and held title to the asset directly. However, the additional layer of entities made it more likely that the offshore system would remain undiscovered by the IRS.

As the above analysis demonstrates, the Wyly’s offshore system was more complex than it needed to be. There is little credible evidence in the record suggesting a legitimate business reason requiring this level of complexity. As the Court can now independently attest, attempting to understand the structure and the myriad of transactions undertaken through the structure has required days and days (if not weeks and weeks) of thoughtful analysis. With little legitimate business explanation for the complexity, the Court infers— which inference is unquestionably supported by the record — that a primary reason for making the offshore system this complex was the hope that no one, including the Court, could ever figure out what was going on here and why. This badge of fraud was established by clear and convincing evidence from 1992 through 2013 as to Sam, which are all of the tax years at issue in the Motions, and' from 1992 through 2011 as to Charles.

As this badge of fraud relates to Dee, however, the Court concludes that there is simply no evidence that Dee participated in the formation of the offshore system to any great extent, although she did sign some documents that Charles asked her to sign — albeit, without reading them. Dee testified credibly that (i) she was not involved in Charles’ business affairs, (ii) never discussed business with him, and (iii) trusted him such that when he asked her to sign a document she would, without question. The Court believes her and simply cannot imagine her even being inter *408 ested in having a conversation with Charles about the complexities of the Wyly offshore system. Although Dee is intelligent, she is not financially sophisticated. The Court is satisfied that even if she had asked Charles questions, it is unlikely that she would have understood the implications of what she heard — particularly given the complexities of the offshore system here.

By way of background, and to give context for the above findings, Dee and Charles met and married while in college at Louisiana Tech. While Dee completed three years of college, she did not finish her degree after they married. In short, Dee was a homemaker who raised their children while Charles supported the family financially. 369 Dee is now 82 years old; the offshore system began to be established when she was about 58. After having asked no questions about Charles’ business affairs for 36 plus years of their married life to that point, it strains credibility to think that she would have started in 1992 when the offshore system began to be implemented.

For these reasons this badge of fraud does not apply to Dee.

b) The Wylys’ Willingness to Commit Securities Fraud to Preserve the Secret Offshore System and to Maintain its Tax Advantages.

The SDNY Court made the following findings and conclusions, which this Court has given collateral estoppel effect to and most of which were independently established here:

Between 1992 and 1996, Sam and Charles Wyly created a number' of IOM trusts, each of which owned several subsidiary companies. Michael French, the Wylys’ family attorney, Sharyl Robertson, the Chief Financial Officer (“CFO”) of the Wyly family office, and Michelle Boucher, the CFO of the Irish Trust Company, a Wyly-related entity in the Cayman Islands, served as protectors of the IOM trusts. French, Robertson, and Boucher conveyed the Wylys’ investment recommendations to the trust management companies administering the Wylys’ IOM trusts (the “IOM trustees”). All of the IOM trustees’ securities transactions were based on the Wy-lys’ recommendations and the IOM trustees never declined to follow a Wyly recommendation. 370

The Wylys served as directors of Mi-chaels Stores, Sterling Software, Sterling Commerce, and Scottish Annuity and Life Holdings, Ltd. (“Scottish Re”). As part of their compensation, the Wy-lys received stock options and warrants. “Between 1992 and 1999, Sam and Charles Wyly sold or transferred to the [IOM] trusts and companies stock options in Michaels Stores, Sterling Software and Sterling Commerce” in exchange for private annuities while simultaneously disclaiming beneficial ownership over the securities in public *409 filings with the SEC. Between 1995 and 2005, the IOM trusts and companies exercised these options and warrants, separately acquired options and stock in all four companies, and sold the shares, without filing disclosures. 371 The jury found that the Wylys were beneficial owners of the Issuer securities transferred to, held, and sold by the IOM trusts because the Wylys, directly or indirectly, had or shared voting and/or investment power over these securities. Thus, the jury concluded that the Wylys failed to accurately disclose the extent of their beneficial ownership in the Issuer securities under sections 13(d) and 16(a) of the Securities Exchange Act (the “Exchange Act”). The jury also found that the Wylys caused the Issuers to violate section 14(a) of the Exchange Act, because the Wylys misrepresented the extent of their beneficial ownership to the Issuers in their Director and Officer (“D & 0”) questionnaires, which were incorporated by the Issuers in proxy statements. 372

In addition to these disclosure violations, the Wylys were found liable for securities fraud in violation of section 10(b) of the Exchange Act and section 17(a) of the Securities Act of 1933 (the “Securities Act”), and for aiding and abetting the Issuers’ and the IOM trusts’ securities law violations. 373

In early to mid-1991, Sam Wyly asked Robertson to attend a seminar held by lawyer and trust promoter David Ted-der on the use of foreign trusts as a method of asset protection and tax deferral. Shortly thereafter, the Wylys, Robertson, and French attended another Tedder seminar in New Orleans. Tedder, French, and the Wylys then had a private meeting at Sam Wyly’s house in Malibu, California. At that meeting, Tedder “talked about establishing trusts that would provide tax deferral, and how the Wylys could transfer assets to those trusts and get tax deferral on the growth of those assets.” 374

Specifically, Tedder recommended transferring the Wylys’ stock options in Sterling Software and Michaels Stores to a foreign trust in exchange for a private annuity “in a tax-free kind of *410 transaction.” Under Tedder’s plan, it was “expressly intended that [the Wy-lys] ... irrevocably surrender the enjoyment, control, ownership, and all economic benefits attributable to the ownership of the [options] which are sold in exchange for the private annuity.” 375

The Wylys pursued the offshore program primarily for its tax advantages. 376 However, because Tedder suggested transferring stock options in publicly traded companies — Sterling Software and Michaels Stores — any such transaction would implicate the securities laws. French testified that he raised concerns about whether the Wylys would continue to have filing obligations as directors of Sterling Software and Michaels Stores, even after the transfers. Tedder responded that making SEC filings could threaten the Wylys’ tax benefits, because “disclosure of the offshore trusts in SEC filings may lead the IRS to discover and investigate the tax issue, and ... the IRS might use the Wylys’ SEC filings against them if the tax issue was ever litigated.” 377

But Sam Wyly corroborated French’s account by testifying that Tedder told him that SEC filings ‘could trigger tax problems if you had these things on file and [were] reporting the trust shares on [Schedule] 13Ds.’ Further, it would be logical to draw an inference that the Wylys would have been concerned about taking inconsistent positions in their SEC and IRS filings when millions of dollars of tax savings were at stake. 378

The jury found that the Wylys always had beneficial ownership over the options, warrants, and securities held by the IOM trusts. 379

Thus, the Wylys were obligated to disclose, on the filings required by sections 13 and 16, any time they or the trusts transacted in those securities. Because beneficial ownership under the securities laws turns on having-voting and/or investment power, truthful SEC filings would have forced the Wylys to admit having some element of control over the securities held by the trusts. To the Wylys, this would mean conceding some element of control over the trustees. But the Wylys believed — rightly or wrongly — that it was critical to conceal their control of the trustees in order to maintain the tax-free status of the trusts, including income from transactions in the Issuer securities. 380

*411 Footnote 91.[ 381 ] (Sam Wyly) (“We took steps to avoid control, and those are steps to create the appearance of avoiding control. It’s reality and it’s appearance. You want the appearance to match the reality.”) Accord PX 890 (11/3/00 email from Robertson to Evan Wyly) (“Remember that it is critical from a U.S. tax standpoint that there is no appearance that the Wyly’s [sic] are in control of the trusts or the protectors.”). 382

Because the Wylys made public filings showing the transfer of options to foreign trusts, and at other times publicized their relationship to the foreign trusts, the Wylys also took affirmative steps to minimize the trusts’ SEC filings to conceal the ultimate exercise and sale of those options. For example, the Wyly family office tracked the percentage of ownership each trust management company had in a particular Issuer to avoid triggering mandatory SEC reporting. Thus, as Sam Wyly testified, not making SEC filings was logically “something that consistently went on” throughout the duration of the offshore system. 383

Even when it would have been otherwise helpful to assert beneficial ownership over the stock held by the foreign trusts, such as during Sam Wyly’s proxy battle for control of Computer Associates (the acquirer of Sterling Software) in February 2002, the Wylys chose not to do it in fear of inconsistent tax positions. From these facts, it is logical to draw the inference that making misleading statements in SEC filings, or not making SEC filings at all, was part of the Wylys’ plan to maintain the appearance of separation and independence from the foreign trusts. 384

*412 Footnote 95. See PX 1101 (2/26/02 email from Keeley Hennington, tax director and, starting in 2000, CFO of the Wyly family office, to Boucher, attaching Hennington’s note to Sam Wyly) (“The trusts are record owners of the shares on C[omputer] Associates]’ books. If it is represented [that] there are $2.9 shares [sic], I think it is likely CA may say we show the Wyly’s [sic] only own 1.5M options and again the difference would need to be explained.... Our friendly IRS agent is still looming around and although he has verbally agreed not to look further at any foreign entities or trusts, I would not want to give him any fresh ammunition,”). 385

The Wylys ultimately hired Tedder to help establish the first group of offshore trusts and subsidiary companies in 1992 (together with the Plaquemines Trust, the “Bulldog Trusts”). These trusts were settled by Sam or Charles Wyly and had beneficiaries including the Wy-lys’ wives and children and several charitable organizations. The trust deeds permitted the protectors to “add[] or substituye]” a charitable organization “by notice in writing to the trustees.” These trusts were explicitly set up as “non-grantor trust[s] rather than [ ] grantor trust[s] under Section 671-678 of the Code.” Under the terms of the trusts, no United States beneficiary could receive a distribution from the trust until two years after the settlor’s death. 386

Footnote 97. (Robertson). The 1992 Trusts relevant to the remedies phase are: 1) the Bulldog Non-Grantor Trust; 2) Lake Providence International Trust; 3) the Delhi International Trust; 4) the Pitkin Non-Grantor Trust; and 5) the Castle Creek International Trust. In 1995, the Bulldog Trust settled the Plaquemines Trust, which had a class of beneficiaries including Sam Wyly’s children. These trusts are referred to as the “Bulldog Trusts” for purposes of this Opinion and Order. The terminology was coined by defendants’ expert, Professor Robert Danforth, and has been adopted by the parties in their briefing and argument, 387

As the above findings and conclusions make clear, and the record here independently establishes, Sam and Charles went to great lengths, using elaborate webs of entities, to avoid accurately and completely reporting the extent of their offshore holdings and the securities transactions that were occurring offshore at their direction. As found by the SDNY Court, and as independently established here, the offshore program was pursued primarily for its tax advantages. 388 That Sam and Charles were prepared to commit securities fraud to attempt to preserve those tax benefits is clear as Tedder told them before the first offshore trust was ever established (and the first private annuity transaction was ever undertaken) that “disclosure of the offshore trusts in SEC filings may lead the IRS to discover and *413 investigate the tax issue, and ... the IRS might use the Wylys’ SEC filings against them if the tax issue was ever litigated.” 389

These facts support the existence of a badge of fraud by clear and convincing evidence as to Sam and Charles from the outset of the implementation of the Wyly offshore system in 1992 through 2005. However, there is no evidence that Dee participated in the securities fraud. While she may have benefited from it, that alone is insufficient for it to constitute a badge of fraud against her here,

c) The Failure to Take Action to Resolve the Conflicting Advice Sam and Charles Received Regarding the 1992 IOM Trusts

In his role as the Wylys’ primary outside lawyer, French handled the details and was fully authorized to hire and consult with specialist advisors when he considered it necessary. 390 Moreover, as the Wylys’ primary outside lawyer, French was intimately involved in the creation and maintenance of the Wyly offshore structure from its inception in 1992 until his relationship with the Wylys ended in 2001. 391 In fact, while not a tax specialist, French played a key role in the implementation of the Wyly offshore system and in facilitating many of the transactions undertaken through that system until his relationship with the Wylys ended in 2001. 392

As was found in the SEC Action, and was independently established here: 393

[i]n 1993, French approached the law firm of Morgan, Lewis & Bockius (“Morgan Lewis”) to- discuss whether the Bulldog Trust was ‘a grantor or non-grantor trust.’ Morgan Lewis prepared a memorandum concluding 1) that there was a ‘significant risk that the [Bulldog] *414 Trust will be characterized as a grantor trust under § 679 [because] income is being currently accumulated for the benefit of U.S. beneficiaries,’ and 2) that ‘[i]t is also likely that the Trustee’s power to add or substitute other foreign charities (within the class [of beneficiaries]) causes the Trust to be characterized as a grantor trust under § 674. Charles Lu-bar, the partner at Morgan Lewis retained to work on this matter, gave the memorandum to French and spoke with him about its conclusions. 394

To amplify this finding a bit based on our record, Lubar was an experienced tax lawyer with impressive credentials. He graduated from Yale University in 1963 magna cum laude, received his JD from Harvard Law School in 1966 and received an LLM in tax from Georgetown University in 1967. 395 Lubar explained the significance of the distinction between foreign grantor and non-grantor trust status as follows: “[i]f you are a U.S. citizen and you set up a foreign trust that is treated as a grantor trust, then you are treated as owning all of the income of that trust, even if it is a completed gift to the foreign trust.” 396 If the foreign trust was a valid non-grantor trust, “[t]here would be no tax.” 397

Recall that Sam settled the Bulldog IOM Trust as a foreign non-grantor trust in 1992 and that Charles settled the Pitkin IOM Trust as a foreign non-grantor trust then too. Obviously, if Lubar’s concerns were well-founded, the impact on the Wyly offshore system and the annuity transactions undertaken by Sam and Charles in 1992 created substantial tax problems for them.

On this record there can be no doubt that French was Sam’s and Charles’ agent. French was undoubtedly acting on their behalf when he went to Lubar for a second opinion, as he had been authorized to do, on whether the 1992 IOM trusts settled by Sam and Charles were non-grantor trusts. 398 That French sought a second opinion in 1993 is significant because it confirms that: (i) French had lingering concerns about Tedder’s legal opinion (ghost-written by Chatzky) concerning the tax consequences to the Wylys of the 1992 annuity transactions undertaken by Sam and Charles through the Bulldog IOM Trust and the Pitkin IOM Trust, respectively, and (ii) supports this Court’ later finding that French had no specialized tax knowledge with which to evaluate the *415 proper status of the offshore trusts and the tax consequences flowing from the Wy-lys’ 1992 annuity transactions. Significantly, knowledge of four facts can be imputed 399 to Sam and Charles from French’s actions as their agent: (i) that French had lingering concerns about the proper characterization of the 1992 IOM trusts and the tax consequences flowing to the Wylys from the 1992 annuity transactions and the Wylys’ reporting requirements regarding the 1992 IOM trusts, (ii) that French sought a second opinion from Lubar, a prominent international tax lawyer, (iii) that French learned that Lubar believed there was a “significant risk” that the 1992 IOM trusts would be characterized as grantor trusts to Sam and Charles, and (iv) that French learned that the tax consequences to the Wylys were vastly different if the 1992 IOM trusts were grantor trusts as to Sam and Charles.

Charged with knowledge of these facts, neither Sam nor Charles did anything further themselves, or acting through French, to resolve the conflicting advice they now had from two tax professionals they had hired to give them advice — Tedder and Lubar. And, rather than resolve this legal uncertainty, Sam and Charles continued with the offshore structure in its then form. And, they then chose to expand the offshore structure the following years through the settling of other foreign trusts with falsified documents, which we discuss below, and by continuing to transact business through the offshore system. These facts support the existence of a badge of fraud by clear and convincing evidence from 1993 through 2013 as to Sam and from 1993 through 2011 as to Charles.

However, there is no evidence that Dee ever knew about Lubar’s conclusions— whether in 1993 or in 2003 400 — or that if she had known she would have understood the implications of those conclusions. This badge of fraud does not apply to Dee.

d) The Creation of False Documents to Support the Settling of IOM Trusts in 1994 and 1995 to Attempt to Obtain Favorable Tax Benefits for the Wylys

The SDNY Court made the following findings and conclusions, which are independently established here:

The following year, French asked Lubar to advise the Wylys about whether a trust settled by “a foreign person who had done business with Sam Wyly” would be treated as a grantor trust. Lubar advised that “as long as there wasn’t an indirect transfer of assets by the U.S. person and the foreign person put the money up, and there were certain powers in the trust, then it would be a foreign grantor trust, and the distributions then would not be taxable.” For the purposes of rendering his opinion, Lubar assumed that the foreign grantor would be the “sole transferor of property to the trust[ ],” unless the taxpayers transferred funds “on an ‘arm’s length’ basis.” 401

In 1994 and 1995, two foreign citizens established several trusts for the benefit of the Wylys and their families (collectively, the “Bessie Trusts”). The Bessie *416 Trust and the Tyler Trust were purportedly settled by Keith King, an individual associated with Ronald Buchanan, an IOM trustee selected by the Wylys, with initial contributions of $25,000 each. However, no such contribution was ever made. The trusts “were settled with a factual dollar bill ... plus an indebtedness of $24,999 each on the part of Keith King as settlor.” That indebtedness was immediately forgiven. 402

Footnote 107. The 1994/1995 trusts relevant to this Opinion and Order are: 1) the Bessie Trust; 2) the La Fourche Trust; 3) the Red Mountain Trust; and 4) the Tyler Trust. These trusts will be referred to as the “Bessie Trusts,” as per Professor Danforth’s grouping. 403

The La Fourche Trust and the Red Mountain Trusts [sic] were purportedly settled by Shaun Cairns, another individual associated with Buchanan, also with initial contributions of $25,000 each. Cairns testified that French prepared letters stating that Cairns was establishing the trusts “to show [his] gratitude for [the Wylys’] loyalty to our mutual ventures and '[their] personal support and friendship;” and asked Cairns to sign them. In truth, Cairns had never met nor dealt with the Wylys before establishing the trusts, and had provided only $100 towards the trusts. Shortly after these trusts were settled, Cairns’s trust management company was hired to serve as trustee for some of the Wylys’ IOM trusts. 404

These transactions were shams intended to circumvent the grantor trust rules. French and Buchanan, acting as the Wy-lys’ agents, recruited King and Cairns to create a falsified record of a gratuitous foreign grantor trust. The trust documents are admittedly false — King and Cairns never contributed $25,000 towards the initial settlement. 405

There were no gratuitous transfers here. First, I am doubtful that King provided even the factual $1 towards the trusts. In a November 26, 1995 fax to French, Buchanan writes that “Keith never produced the money.” Buchanan explains that the King-related trusts “were settled with a factual dollar bill” only so that “there [was] no question of the[] [trusts], being voidable by reason of the *417 absence of assets” pending the Wylys’ transfer of options. Even if King had contributed the $1, the premise that an unreimbursed dollar bill is sufficient to establish a tax-free foreign grantor trust cannot be taken seriously. Second, Cairns’s transfer of $100 cannot be considered gratuitous because shortly after settling these trusts, he received lucrative work from the Wylys as trustee. Finally, in light of the falsified trust deeds and supporting documentation surrounding these trusts, it would be unjust to consider anyone but the Wylys to be the true grantors of these trusts. 406

As was unquestionably established— both here and in the SEC Action — the establishment of the Bessie IOM Trust and the Tyler IOM Trust by King in 1994 and the establishment of the La Fourche IOM Trust and the Red Mountain IOM Trust by Cairns in 1995 was highly irregular from the outset. Of significance, the SDNY Court found that French and Buchanan were acting as Sam’s and Charles’ agents. This Court has given collateral estoppel effect to that finding, but at least as to French, the record here independently supports such a finding — by clear and convincing evidence. Moreover, that French was acting within the scope of that agency when he (i) consulted with Lubar about the potential tax ramifications to U.S. beneficiaries of a foreign trust settled by a non-U.S. person, and (ii) then proceeded to facilitate the implementation of those trusts through false documentation and other acts cannot be questioned. 407

The law is clear, Sam and Charles, as French’s principals, are charged with French’s conduct in (i) facilitating the creation of the 1994 and 1995 IOM trusts, and (ii) creating false documentation that pur *418 ports to support the creation of the trusts. In explaining why this is so, the Court will first analyze the law regarding the general rule that an agent’s conduct is imputed to his principal and will then explain why the Debtors’ attempt to distinguish their situation from this general rule is ineffective.

First, and of significance, the Debtors have never argued that French was not the Wylys’ agent regarding the implementation of the Wyly offshore system. Nor could they. Under Texas law, “an agency relationship arises when the principal consents to the agent acting on the principal’s behalf.” 408 An agency relationship need not be expressly established, and instead may be implied based on the conduct of the parties under the circumstances. 409

Second, the evidence here unquestionably established that French was acting as Sam’s and Charles’ agent regarding the implementation of the Wyly offshore system from 1992 until his association with the Wylys’ ended in early 2001. 410 For example, when explaining the roles of Robertson and French regarding the implementation of the 1992 IOM trusts, Evan testified that Robertson “as CFO, she did a lot of the research as well because there’s accounting and finance related to this as well. So she would head up that part of the details, and Mike [French] would head up the legal details. That’s typically how it worked whenever they worked on a project.” 411 Then, Evan explained how the allocation of responsibility to implement the 1994 and 1995 IOM trusts was allocated between Robertson and French when he testified “[t]hat was handled by Mike French and Shari Robertson again ... We really left the legal part for Mike to work on. We left the accounting and financial part for Shari to work on. So we didn’t get into too much of the details, but we felt comfortable that it was,- you know, a fair and appropriate structure.” 412 Sam also admitted that French acted with his authority with respect to the offshore system when he testified that French was “sort of the coordinator or the commander of the lawyers” who worked on creating the entities to create the offshore system. 413

It is well settled that “a principal is chargeable with notice or knowledge concerning a matter within the scope of the agency, received by his agent while acting within the scope of his authority.” 414 Comment b to § 5.03 of the Restatement (Third) of Agency illustrates the operation of, and reasoning behind, this legal rule: 415

Imputation charges a principal with the legal consequences of having notice of a material fact, whether or not such fact would be useful and welcome. If an agent has actual knowledge of a fact, the principal is charged with the legal *419 consequences of having actual knowledge of the fact. If the agent has reason to know a fact, the principal is charged with the legal consequences of having reason to know the fact. A principal may not rebut the imputation of a material fact that an agent knows or has reason to know by establishing that the principal instructed the agent not to communicate such a fact to the principal. Imputation thus reduces the risk that a principal may deploy agents as a shield against the legal consequences of facts the principal would prefer not to know.

The Fifth Circuit, citing Texas law, also agrees that “[i]t is a fundamental rule of agency law that notice to the agent constitutes notice to the principal.” 416 Moreover, long standing precedent from the Texas Supreme Court holds that an agent’s knowledge may be imputed to a principal, 417 as has its more recent jurisprudence, which confirmed that Texas law “regard[s] it as well settled that if an agent’s acts are within the scope, of his authority, then notice to the agent of matters over which the agent has authority is deemed notice to the principal.” 418

While an agent’s knowledge is not imputed to the principal when the agent is acting in a manner that is actively adverse to that of his principal, 419 that adverse interest exception to the general rule is not applicable here, as French’s actions were not adverse to the Wylys but were to benefit them. Even the Debtors agree in their post-trial briefing that the adverse interest exception is inapplicable here— ie., we “have never argued that the ‘adverse interest exception’ applies.” 420

In an attempt to get out from under their agent’s objective acts or conduct here, the Debtors argue that French’s subjective fraudulent intent cannot be imputed to Sam and Charles for piurposes of determining whether Sam and Charles underpaid their taxes in any year with fraudulent intent for purposes of 26 U.S.C. § 66681 The Court agrees that it is improper to impute French’s subjective fraudulent intent .to Sam and Charles *420 when it is Sam’s and Charles’ subjective intent that is at issue in determining whether fraud penalties are appropriate here, but that is not what the Court is doing, as will be explained below.

Moreover, relying on the Restatement (Third) of Agency, the Debtors argue that “[i]n other words, imputation is the general rule, but there is an exception ‘when knowledge as distinguished from reason to know is important,’ and circumstances exist where personal knowledge — as opposed to imputed knowledge — is the relevant question.” 421 The Debtors go on to state that “case law bears out these principles and shows that only the Debtors’ personal knowledge — not imputed knowledge— should be considered for purposes of the fraud penalties.” 422 Significantly, the Debtors then cite to five cases decided in the tax law area and provide a parenthetical explanation of the holding of those cases. However, if those cases are examined closely, what the courts there are addressing is whether the specialized knowledge of a tax advisor can be imputed to the taxpayer in the context of the taxpayer’s reliance on the advice of a tax professional to defeat the recovery of fraud or negligence penalties by the IRS.

For example, the first case cited by the Debtors is Henry v, C.I.R., 423 with a parenthetical explanation as follows: (“holding that ‘there is no evidence that [accountant] ever told [taxpayer] of this risk or of the [relevant treasury] regulation, and [accountant’s] knowledge of the risk cannot be imputed to [taxpayer]’ ”). First, that is not the actual holding of the case, but irrespective of this, the quote does appear in the decision. Second, the Ninth Circuit’s point in Henry is simply that the specialized knowledge of the accountant cannot be imputed to the taxpayer consistent with the Supreme Court’s decision in U.S. v. Boyle 424 where the Supreme Court observed:

When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a ‘second opinion,’ or to try to monitor counsel on the provisions of the [Tax] Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place. ‘Ordinary business care and prudence’ do not demand such actions. 425

The next case cited by the Debtors is Davis v. C.I.R., 426 along with the following parenthetical (“[t]o hold a taxpayer guilty of fraud, who [files a return] without actual knowledge that a return is false, and after a full disclosure to the expert preparing the same, would be untenable.”) While this quote appears in the Tenth Circuit’s decision, once again it appears in the context of imputing the tax expert’s knowledge to the taxpayer as the court made clear when it also stated:

[t]o impute to the taxpayer the mistakes of his consultant would be to penalize him for consulting an expert; for if he must take the benefit of his counsel’s or accountant’s advice cum mere, then he *421 must be held to a standard of care which is not his own and one which, in most cases, would be far higher than that exacted of a layman. 427

By way of one last example, the Debtors next cite Haywood Lumber & Min. Co. v. C.I.R., 428 along with the following parenthetical (“[t]o impute to the taxpayer the mistakes of his consultant would be to penalize him for consulting an expert[.]”). While this quote appears in the Second Circuit’s decision, it is simply repeating the substance of the Davis court’s holding, but now in the context of deciding whether the taxpayer’s reasonable cause defense should prevent the imposition of a 25% penalty.

As the Debtors themselves acknowledge later in their Post-Trial Brief, “[s]pecial rules have developed in the tax context for purposes of determining how to analyze taxpayer’s relations with their advis-ors.” 429 According to the Debtors, “[b]e-cause tax law is such a complex area, specific rules have developed regarding the ability of taxpayers to rely on tax advice.” 430 According to the Debtors, because of this complexity,

taxpayers have no obligation to second-guess or monitor their tax advisors. Because the imputation of knowledge rule that exists in other areas of the law is grounded in the principal’s a

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