Leigh C. Fairbank & Barbara J. Fairbank

United States Tax Court

T.C. Memo. 2023-19

LEIGH C. FAIRBANK AND BARBARA J. FAIRBANK,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 13400-18. Filed February 23, 2023.

—————

Robert S. Williams and Samuel T. Houston, for petitioners.

Sean P. Deneault, Edward A. Waters, Mark J. Tober, David D. Duncan,

and A. Gary Begun, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WEILER, Judge: This case arises from a notice of deficiency dated

April 12, 2018, in which the Internal Revenue Service (IRS or

respondent) determined income tax deficiencies for taxable years 2003,

2004, 2005, 2006, 2007, 2008, 2009, and 2011 (years at issue) of $20,088,

$5,078, $6,136, $23,011, $10,785, $15,910, $28,130, and $95,994,

respectively, and accuracy-related penalties under section 6662 1 of

$4,018, $1,016, $1,227, $4,602, $2,157, $3,182, $5,626, and $19,199,

respectively. After concessions, 2 the issues for decision are whether

1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and all Rule references are to the Tax Court Rules of Practice and

Procedure. All dollar amounts are rounded to the nearest dollar.

2 As part of a Stipulation of Settled Issues dated November 19, 2021,

respondent conceded that there is no deficiency in income tax due for tax year 2011.

Therefore, the taxable years at issue include only 2003 through 2009.

Served 02/23/23

2

[*2] (1) respondent’s notice of deficiency was issued timely under section

6501, (2) respondent’s adjustments to petitioners’ federal income tax for

the years at issue should be sustained on account of Mrs. Fairbank’s

beneficial ownership of a foreign account held at Union Bank of

Switzerland (UBS), and (3) petitioners are liable for accuracy-related

penalties under section 6662(a) and (b)(1) for the tax years at issue.

Petitioners maintain that respondent’s assessment in this case is

time barred by the three-year period of limitations in section 6501(a).

Respondent, however, argues the period of limitations for assessment

remains open under section 6501(c)(8) since petitioners failed to file the

requisite information returns related to Mrs. Fairbank’s foreign bank

accounts with their joint Forms 1040, U.S. Individual Income Tax

Return. We agree with respondent’s position and hold petitioners have

failed to properly report Mrs. Fairbank’s beneficial ownership in her

foreign UBS account; accordingly, the period of limitations under section

6501 remained open at the time respondent’s notice of deficiency was

issued. Therefore, we sustain respondent’s determination of tax

deficiencies and penalties against petitioners as set forth herein.

FINDINGS OF FACT

This case was tried during the Court’s Jacksonville, Florida,

remote trial session. At trial the parties stipulated to most of the facts,

which are so found. Petitioners resided in Florida when they timely filed

their Petition on July 9, 2018. This case concerns Mrs. Fairbank’s

transfers with foreign banking institutions in Switzerland during tax

years 2003 through 2009.

I. Petitioners’ Background

Petitioners have been married since 2003 and were U.S. citizens

during all relevant years at issue. While petitioners resided in

Sopchoppy, Florida, when the Petition was filed, Mrs. Fairbank

previously resided in Fullerton, California.

A. Mr. and Mrs. Fairbank

Leigh Fairbank earned a bachelor’s degree from West Point and

holds a master’s degree in business from Georgia State University.

Mrs. Fairbank’s legal name is Barbara Jean Fairbank. Mrs.

Fairbank was formerly known as Barbara Hagaman, and she held a U.S.

passport during all relevant years at issue. Mrs. Fairbank holds an

3

[*3] associate’s degree from Stephens College in Columbia, Missouri.

During much of her adult life Mrs. Fairbank was mostly a homemaker

and has seldom worked outside the home. Before her marriage to Mr.

Fairbank, Mrs. Fairbank was married to Earl Hagaman, whom she had

met in 1960. On November 24, 1961, Mrs. Fairbank married Mr.

Hagaman in California, and together they had four children. Their

marriage was coming to an end in early 1981 when Mrs. Fairbank (then

Mrs. Hagaman) separated from Mr. Hagaman.

B. Mr. Hagaman

Mr. Hagaman was a certified public accountant (CPA) and

generally worked for large corporations throughout his marriage to Mrs.

Fairbank, until late 1977, when he became an oil broker and began

working for his own companies. Before starting his own business

ventures, Mr. Hagaman had a successful career in industry working for

companies such as Hughes Aircraft, United Convalescent Hospital,

Litton Industries, and Urich Oil Co. Being well versed in financial

matters, Mr. Hagaman took care of the family finances during his

marriage to Mrs. Fairbank. Mr. Hagaman held financial accounts or

foreign entities in Liechtenstein, New Zealand, and Switzerland. In

1985 Mr. Hagaman became a permanent resident of New Zealand.

Despite Mr. Hagaman’s personal financial success, he failed to

file federal income tax returns for tax years 1980 through 1982, a period

during which he moved in excess of $16 million from banks in the United

States to banks in Switzerland and New Zealand. On April 7, 1983, the

IRS served summonses on Mr. Hagaman concerning his failure to pay

income tax from 1980 through 1982 on profits earned in an oil brokerage

business. On July 25, 1985, the IRS sent Mr. Hagaman and Mrs.

Fairbank (then Mrs. Hagaman) a Notice of Jeopardy Assessment and

Right of Appeal (jeopardy assessment notice) regarding tax years 1980

through 1982. In the jeopardy assessment notice the IRS stated that Mr.

Hagaman had “engaged in sham operations, involving the purchase and

sale of crude oil, and [had] derived large profits from these activities.”

According to the jeopardy assessment notice, these foreign

operations earned Mr. Hagaman substantial income within the United

States which he failed to report on his federal income tax returns. The

total amount of tax, additions to tax, and interest due in the jeopardy

assessment notice was $14,766,694 for tax years 1980 through 1982. On

March 3, 1987, the IRS issued Mr. Hagaman and Mrs. Fairbank a Notice

of Levy concerning their joint federal income tax liabilities of

4

[*4] $18,145,524 for tax years 1980 through 1982. The Notice of Levy

was served upon Bank of America in Marina del Rey, California, with a

summons requesting additional information about accounts held jointly

and individually by Mr. Hagaman and Mrs. Fairbank.

On May 9, 1990, Mrs. Fairbank received innocent spouse relief

from her joint and several federal income tax liabilities under section

6013(e) for tax years 1980 and 1981 pursuant to a stipulated decision of

this Court. Mr. Hagaman agreed to settle his federal income tax

deficiencies (with the IRS) for tax years 1980 through 1982 and a

stipulated decision reflecting such was entered by this Court on May 9,

1990.

C. Mr. Hagaman and Mrs. Fairbank’s Divorce and Child

Support Agreements

In early 1981 Mr. Hagaman and Mrs. Fairbank separated, and a

Final Judgment of Dissolution of Marriage was granted on May 21,

1982, by the Los Angeles County Superior Court (Superior Court). As

part of the divorce proceedings, Mr. Hagaman and Mrs. Fairbank signed

an Agreement of Interim and Partial Distribution of Community

Property (interim agreement). At the time the interim agreement was

signed in 1983, Mr. Hagaman and Mrs. Fairbank had yet to resolve all

issues regarding the allocation of their community property and

liabilities from their marriage. The interim agreement’s validity and

enforceability was not dependent upon the approval of the Superior

Court, and it was subject to nondisclosure provisions since it was

intended to remain a private matter as between the parties. During the

divorce proceedings, Mrs. Fairbank was represented by her attorney,

Robert Brock.

According to the interim agreement, Section V, Temporary Child

Support, Mr. Hagaman agreed to pay Mrs. Fairbank child support of

$500 per month per child for a total of $1,000 per month commencing on

April 1, 1983, and continuing until the child turned 18, died, became

self-supporting, married, was emancipated, or was not residing with

Mrs. Fairbank, or until further order of court, whichever event came

first. Despite the terms of the interim agreement, Mr. Hagaman

subsequently orally agreed to pay Mrs. Fairbank child support of

$40,000 per year for 20 years and then to divide the remaining

community assets between them. Mr. Hagaman kept his word pursuant

to the oral amendment to the interim agreement and made the child

5

[*5] support payments to Mrs. Fairbank, who noted receiving $40,000

in child support for years 1984 through 1988.

Notwithstanding the terms of the interim agreement and the

subsequent oral amendment thereto, Mr. Hagaman and Mrs. Fairbank

again orally amended the interim agreement in December 1989 when

Mrs. Fairbank traveled with their children to New Zealand for the

holiday season. The second oral amendment to the interim agreement

resulted in Mr. Hagaman’s agreeing to make three lump-sum cash

payments. Under the terms of the second oral amendment, these three

lump-sum payments were to be made in January 1990, October 1993,

and October 1995, respectively, and in the amounts of $190,000,

$190,000, and $160,000, respectively. The interim agreement was silent

as to any foreign bank accounts. From December 2005 to October 2012,

Mr. Hagaman and Mrs. Fairbank renewed litigation in the Superior

Court over their divorce, principally involving the unresolved division of

their community property.

As part of this renewed litigation, on November 29, 2007, Mr.

Hagaman filed with the Superior Court a Responsive Declaration to

Order to Show Cause or Notice of Motion for Injunctive and Other

Restraining Orders. In his declaration, Mr. Hagaman stated that the

“payments to [Mrs. Fairbank] were made through an attorney in

Switzerland, Dr. Walter Müllhaupt, to [Mrs. Fairbank’s] attorney, Dr.

Xavier Lienert, in Switzerland.” Mr. Hagaman further stated that Mrs.

Fairbank “wanted the payments to be made to her Swiss establishment,

Xavana Establishment.”

On October 23, 2012, the Superior Court entered a Judgment on

Reserved Issues. The included stipulation notes Mrs. Fairbank’s

assertion that Mr. Hagaman’s “payments for additional child support

were made by deposit of funds into an account in the name of Xavana

Establishment, an entity formed in Switzerland or Liechtenstein.”

6

[*6] II. Foreign Bank Accounts/Entities and Child Support Payment

Structure

A. Xavana Establishment 3

Xavana Establishment’s foundation deed states that INTROMEX

Treuunternehmen 4 Reg., Mauren (INTROMEX), founded Xavana

Establishment on March 2, 1983, in Mauren, Liechtenstein, and is its

appointed representative. According to the Contract of Mandate, Karin

Bühler is to operate Xavana Establishment “on a trust basis according

to the instructions of the [c]lient, whether these instructions be

communicated to her directly by the [c]lient or through a representative

designated by the [c]lient by registered letter.” The client referenced in

the Contract of Mandate is Rolf Besser, one of the Swiss attorneys with

whom Mrs. Fairbank corresponded regarding Xavana Establishment.

Ms. Bühler worked for INTROMEX and in her capacity as trustee she

received “a fixed annual fee of . . . 2,000 [Swiss francs]” along with

reimbursement for cash expenses and special tasks.

Xavana Establishment was funded with 30,000 Swiss francs for

the “investment and management of assets.” The statutes of Xavana

Establishment state, at Article 7, that Xavana Establishment’s “capital

may not be divided into shares.” According to Article 9 of the statutes,

the capital of Xavana Establishment “and its results as well as any clear

profits of . . . [Xavana] Establishment shall be due to the beneficiaries,

which shall be designated by the founder,” and that such a designation

can be made in a “revocable or irrevocable way.”

On November 19, 2001, a “Declaration of the contracting

partners(s) regarding economic beneficiary” of Xavana Establishment

was signed by Dr. Lienert wherein Mrs. Fairbank is listed as the

beneficial owner of Xavana Establishment, with an address in

Sopchoppy, Florida, and a previous address in Fullerton, California.

Additionally, the “Profile of the business relationship” concerning

Xavana Establishment, which was likewise signed by Dr. Lienert on

November 19, 2001, describes the beneficial owner, Mrs. Fairbank, as a

“[d]ivorced woman with [four], now grown-up, children” and notes the

economic background of the assets as being from the “[d]ivision of

property according to . . . [Mrs. Fairbank’s] divorce [in] 1983.” On the

3 Xavana Establishment was organized as an Anstalt under the laws of

Liechtenstein.

4 Treuunternehmen is German for a trust company/enterprise.

7

[*7] “Profile of the business relationship” form, Dr. Lienert attests that

he has “known [Mrs. Fairbank] since 1983.” Xavana Establishment 5

appears to have held a single asset, namely a UBS account ending in

0857 (UBS account 0857 or UBS account), which had a sole beneficiary.

B. UBS Account 0857 6

The UBS account was opened in March 1983 in the name of

Xavana Establishment. 7 On March 11, 1983, Dr. Lienert signed the UBS

“[d]eclaration on the opening of an account . . . by a Swiss National

bound by professional secrecy” and confirmed that the beneficial owner

of the assets to be deposited with the bank is “known to him personally.”

UBS records reflect that Mrs. Fairbank is the beneficial owner of UBS

account 0857. UBS records also reflect that, as of February 25, 2003,

Mrs. Fairbank was not to receive any correspondence at her U.S.

address; rather, all correspondence was to be sent to Dr. Lienert in

Switzerland. As a result, UBS never mailed account statements to Mrs.

Fairbank in the United States.

As of March 9, 1983, Oswald Bühler and Dr. Lienert had sole

signatory authority over the UBS account, and on February 25, 2003,

Dr. Lienert signed a waiver of right to invest in U.S. securities on behalf

of Xavana Establishment. On April 3, 2008, Dr. Lienert resigned from

his role as signatory on the UBS account and, as of that date, all

correspondence concerning the UBS account was to be sent to Mr.

Besser. Despite no longer being a signatory on the UBS account, Dr.

Lienert, on July 6, 2004, informed UBS that Mrs. Hagaman had

remarried and now bears the surname Fairbank. Moreover, Dr. Lienert

5 According to a UBS account document titled “’Domiciliary Companies’

Decision Sheet” dated February 18, 2003, Xavana Establishment is noted as not being

a “[c]ompany, institute, foundation, trust company, etc., operating in trade,

manufacturing or any other business of a commercial type in the country of domicile.”

It is further noted that Xavana Establishment does not “[o]wn business premises” or

have “staff working exclusively for [it].” Lastly, UBS records indicate that Xavana

Establishment is “[d]omicilied in a ‘tax haven.’”

6 UBS records indicate that UBS account 0857 was invested in mutual funds,

including UBS Investment Funds. Moreover, UBS Income Statements for UBS account

0857 reflect interest income generated between 2003 and 2009 in the same amounts

listed in the notice of deficiency, except for 2009.

7 On December 31, 2001, UBS account 0857 had a balance of $1,406,735, most

(approximately 90%) of which was invested in bonds.

8

[*8] provided UBS updated copies of Mrs. Fairbank’s passport, 8 which

she had provided to him. Similar to the records concerning Xavana

Establishment, UBS records reflect that Dr. Lienert, on November 17,

2004, informed UBS that Mrs. Fairbank had moved and now lives in

Sopchoppy, Florida.

C. Neue Privat Bank

Xong Services, Inc. (Xong Services), was incorporated in the

British Virgin Islands on April 1, 2009. Mr. Besser was the sole member

of the board of directors of Xong Services and was appointed first

director of the company. On May 6, 2009, Xong Services issued to Mrs.

Fairbank 50,000 shares of stock, which made her the sole shareholder

of the foreign corporation. In accordance with a consent action of the sole

director of Xong Services, Mr. Besser facilitated Xong Services’ opening

of a foreign bank account at Neue Privat Bank (NPB) in Zurich,

Switzerland. Mr. Besser was the authorized signatory on the NPB

account. On May 14, 2009, Mr. Besser wrote a letter to UBS directing it

to transfer an initial tranche of $500,000 from UBS account 0857 to the

National Bank of Dubai, United Arab Emirates, in the name of

International Investments Holding Ltd. In that same letter, Mr. Besser

informed UBS that the balance in UBS account 0857 would be

transferred out of the account by the end of May 2009. In a subsequent

letter dated May 25, 2009, Mr. Besser directed UBS to transfer the

“remaining amount of approx[imately] [$]490,000.00 . . . to the account

already specified . . . [in the May 14, 2009, letter].” 9 NPB records reflect

Mrs. Fairbank as the beneficial owner of the NPB account and note her

address as being in Sopchoppy, Florida. 10 An NPB account statement

8 UBS records included photocopies of Mrs. Fairbank’s U.S. passports. One of

the passports bore the name Barbara Jean Hagaman (issued May 3, 1994), and the

other bore the name Barbara Jean Fairbank (issued March 4, 2004). The photocopy of

Mrs. Fairbank’s 2004 U.S. passport includes a handwritten note: “Namensänderung

aufgrund Heirat,” which indicates that Mrs. Fairbank’s surname has changed because

of marriage.

9 On July 21, 2009, Mr. Besser wrote Ms. Bühler and informed her that Mrs.

Fairbank had developed other plans for the money held by Xavana Establishment and

that “all accounts at UBS AG are [to] be netted out . . . [and that Mrs. Fairbank] no

longer requires Xavana [Establishment].”

10 NPB records contain a letter dated May 8, 2009, from Mr. Besser, in which

he details the “beneficial ownership and the background of the assets surrounding

Xong Services Ltd.” In the letter, Mr. Besser explains that

9

[*9] from May 31, 2009, indicates that the NPB account, held in the

name of Xong Services, was funded with approximately $979,462. 11

In a July 7, 2009, correspondence with NPB, Mr. Besser informs

the Swiss bank that, per its request, he will be providing a copy of Mrs.

Fairbank’s passport. NPB records include a photocopy of Mrs.

Fairbank’s U.S. passport (issued March 4, 2004). 12 Just as the UBS

records indicated that Mrs. Fairbank was not to receive any

correspondence in the United States with respect to UBS account 0857

and that all correspondence be sent to Dr. Lienert (and subsequently to

Mr. Besser), so too did the NPB records, which indicated that all

“correspondence and statements are to be mailed regularly to” Mr.

Besser in Zurich, Switzerland. Consequently, Mrs. Fairbank never

received NPB account statements in the United States.

D. Child Support Payments/Mrs. Fairbank’s Use of Foreign

Accounts

Mr. Hagaman retained Swiss attorneys Dr. Bernhard Hagenbach

and Dr. Walter Müllhaupt to effect the child support payments to Mrs.

Fairbank. Following their divorce in the early 1980s, Mr. Hagaman kept

his word with respect to the interim agreement and the oral

amendments made thereto and remitted child support payments to Mrs.

[a]t the beginning of the 1980s, the later beneficial owner of the then

Liechtenstein Establishment came into divorce with her husband. He

had considerable problems with the IRS and left the USA hastily,

leaving the beneficial owner [Mrs. Fairbank] behind with four children.

Subsequently, the husband put the beneficial owner under pressure to

either never receive money from him or to transfer undeclared money

to a corresponding account at a Liechtenstein Establishment. The

mother of four children had no choice but to consent, in particular to

secure child support. The aforementioned Liechtenstein Establishment

was founded for the beneficial owner, a citizen of the USA. During the

following months, around 1,5 million USD flowed into this account in

several large amounts. From the very beginning, a Swiss bank with a

management contract took over the administration of the assets of the

Liechtenstein Establishment.

Moreover, Mr. Besser notes that “repeated payments were made in favor of the

beneficial owner, the assets shrank to just over . . . [$]1,0 million at the end of 2008,”

and that he “took over the management of the Liechtenstein Establishment in 2007.”

11 The assets held at NPB were 100% invested in fixed interest instruments,

resulting in a monthly return between 0 and ‒0.07% on the invested funds.

12 This is a copy of the same passport that was included in the UBS records

regarding UBS account 0857 held in the name of Xavana Establishment.

10

[*10] Fairbank. In fact, Mrs. Fairbank retained a record of the child

support payments that she had received as of January 27, 2005. Mrs.

Fairbank’s record notes that Mr. Hagaman paid the $40,000 of child

support in years 1984 through 1988. Similarly, Mrs. Fairbank’s record

also notes the receipt of $190,000 in 1990 and 1993, which corresponds

to the lump-sum child support payments that Mr. Hagaman orally

agreed to pay.

On August 25, 2006, Dr. Lienert requested that UBS transfer

$100,200 from UBS account 0857 to an account held in his name at UBS.

On August 30, 2006, petitioners deposited a $50,000 check from UBS

Zurich (dated August 25, 2006) into their joint bank account at USAA

Federal Savings Bank. The UBS check was made payable to Barbara

Fairbank. Similarly, on August 30, 2006, petitioners deposited $50,000

into their joint bank account at Wakulla Bank.

Just as he had done in 2006, Dr. Lienert requested on August 15,

2007, that UBS transfer $200,000 from UBS account 0857 to his UBS

account. Dr. Lienert directed UBS to issue three bank checks, two for

$60,000 and one for $80,000, to be debited from his account and made

payable to “Mr. Leigh Fairbank” in Sopchoppy, Florida. 13 On September

6, 2007, petitioners deposited $200,000 into their joint bank account in

the United States at Wakulla Bank.

On April 4, 2008, Mr. Besser (Dr. Lienert’s successor), at the

request of Mrs. Fairbank, requested that UBS transfer $100,000 from

UBS account 0857 to the Beneficiary Dajekel Trust at the ANZ National

Bank, Ltd., in Wellington, New Zealand. 14 Moreover, UBS records

indicate that Mrs. Fairbank, along with Dr. Lienert, met with UBS

bankers on February 21, 2008. On the same day, 500 Swiss francs was

withdrawn from UBS account 0857 and ten $1,000 American Express

Travelers Cheques numbered 316835887 through 316835896 were

issued and likewise debited against UBS account 0857. Mrs. Fairbank

deposited five American Express Travelers Cheques totaling $5,000 into

petitioners’ World Savings bank account on February 25, 2008.

Photocopies of the American Express Travelers Cheques included in

World Savings bank records indicate that the travelers cheques were

signed and countersigned by Mrs. Fairbank. Furthermore, the travelers

13 At trial Mrs. Fairbank confirmed that she requested that the three checks

totaling $200,000 be made payable to her husband, Mr. Fairbank, rather than to her.

14 Mrs. Fairbank testified that the $100,000 was transferred to New Zealand

to pay attorney’s fees associated with litigation against Mr. Hagaman.

11

[*11] cheques deposited into petitioners’ World Savings bank account

bear cheque numbers 316835891 through 316835895, which are within

the tranche of cheque numbers borne by the American Express

Travelers Cheques issued by UBS on April 4, 2008.

With respect to Mrs. Fairbank’s NPB account, which was opened

in 2009 by Xong Services, Mrs. Fairbank was issued an NPB travel cash

card on July 8, 2009. Mrs. Fairbank’s travel cash card was repeatedly

loaded with $10,000, the maximum allowed by the bank. From August

21, 2009, to March 24, 2011, Mrs. Fairbank used her NPB travel cash

card to withdraw more than $220,000.

III. Petitioners’ Federal Income Tax Returns

For the tax years at issue, petitioners timely filed their joint

Forms 1040, which were prepared by Rex Holly, a CPA in California. In

preparing petitioners’ annual tax returns, Mr. Holly would send them a

tax organizer, on which petitioners generally checked “No” to the

question about foreign bank accounts. Consequently, the tax returns

contain no information concerning UBS account 0857 or Xavana

Establishment. Moreover, for the tax years at issue, petitioners did not

report any income or deductions relating to UBS account 0857, make an

election under either section 1295 or 1296, file Form 3520, Annual

Return To Report Transactions with Foreign Trusts and Receipt of

Certain Foreign Gifts, or file Form 3520–A, Annual Information Return

of Foreign Trust With a U.S. Owner, with respect to Xavana

Establishment. Furthermore, for the tax years at issue, on Forms 1040,

Schedules B, Interest and Ordinary Dividends, Part III, petitioners

answered “No” to the questions of whether they “have an interest in or

a signature or other authority over a financial account in a foreign

country, such as a bank account, securities account, or other financial

account” or whether they “receive[d] a distribution from, or were . . . the

grantor of, or transferor to, a foreign trust.”

IV. IRS’s Discovery of Foreign Accounts/Entities

In 2008 the IRS issued UBS a “John Doe” summons that

requested information relating to UBS’s U.S. accountholders with

undisclosed foreign accounts. 15 This summons was instrumental in the

15 On August 19, 2008, Mr. Besser wrote a letter to UBS which included a

newspaper excerpt from Mrs. Fairbank titled: “IRS gets OK to request UBS

information.” The newspaper excerpt notes that a federal judge in Miami, Florida, had

12

[*12] U.S. Department of Justice’s (DOJ) securing a settlement with

UBS under which UBS admitted to engaging in a scheme of aiding U.S.

clients hiding income from the IRS. In 2009 UBS entered into a deferred

prosecution agreement 16 with the DOJ on charges of conspiring to

defraud the United States by impeding the IRS’s collection of taxes.

Pursuant to the deferred prosecution agreement, UBS, in response to an

order from the Swiss Financial Markets Supervisory Authority, agreed

to provide the U.S. government with the identities of, and account

information for, certain U.S. customers of UBS’s cross-border

business. 17

On April 27, 2010, UBS sent Mrs. Fairbank a letter informing her

that the IRS has submitted a request 18 to the Swiss Federal Tax

Administration (SFTA) for administrative assistance concerning the

procurement of Reports of Foreign Bank and Financial Accounts

(FBARs). UBS informed Mrs. Fairbank that she was included in the

administrative assistance program since she was the “beneficial owner

of Xavana Establishment and its accounts with UBS AG.” In 2010 UBS

complied with the IRS’s request and consented to SFTA to release to the

IRS “all of the FBAR forms filed . . . during the period of 1999 to 2009

and all other relevant declarations.”

Petitioners’ tax returns for the years at issue were selected for

IRS examination, and Revenue Agent Robert W. Wood III was assigned

to the matter. On July 18, 2012, petitioners met with Revenue Agent

Wood and provided him with a copy of the information that they had

regarding Xavana Establishment and UBS account 0857, including,

among other things, formation documents, an asset management

agreement form, account transfer requests, UBS correspondence,

granted the U.S. government’s request for a court order directing “UBS to produce

records identifying U.S. taxpayers with accounts at UBS in Switzerland who elected

to have their accounts remain hidden from the IRS.” Mr. Besser indicates that Mrs.

Fairbank “asked if this process might be ‘of any concern’ for us or for [UBS].” Mr.

Besser states his belief that “a request from the IRS to UBS is unlikely to trigger any

feedback” since the “assets belonging to Xavana Establishment do not belong to . . .

[Mrs. Fairbank], but to Xavana [Establishment].”

16 As part of the deferred prosecution agreement, UBS agreed to pay the U.S.

government $780 million in fines, penalties, interest, and restitution.

17Sometime in September 2010 respondent received bank records from UBS

concerning UBS account 0857.

18 According to the UBS letter, Mrs. Fairbank first received notice of the

request for administrative assistance from the IRS to the SFTA in September 2009.

13

[*13] etc. 19 On March 27, 2014, petitioners’ counsel provided Revenue

Agent Wood with a copy of the information petitioners had regarding

Xong Services and the NPB account, including Xong Services’ certificate

of incorporation, a stock certificate listing Mrs. Fairbank as the sole

shareholder of Xong Services, the NPB account contract, monthly

account statements, etc. 20

The IRS used the records and information it received from

September 2010 through March 2014 concerning Mrs. Fairbank’s

foreign accounts to make the proposed adjustments reflected in the

notice of deficiency.

V. Petitioners’ Foreign Account Reporting

Upon the advice of counsel, petitioners filed Forms 5471,

Information Return of U.S. Persons With Respect to Certain Foreign

Corporations, reporting Xong Services for tax year 2009 through 2010.

Respondent received Forms 5471 regarding Xong Services on June 18,

2015. Additionally, on February 11, 2014, petitioners filed FBARs,

reporting Mrs. Fairbank’s NPB account for tax years 2009 through 2011.

During the tax years at issue (or thereafter), petitioners never filed

Forms 3520 or 3520–A regarding Xavana Establishment.

VI. Notice of Deficiency

The IRS mailed petitioners a notice of deficiency on April 12,

2018. The IRS determined tax deficiencies and penalties relevant to this

Opinion as follows:

19 On or about January 9, 2014, respondent received additional information

relating to Xavana Establishment, including bank statements for UBS account 0857,

Xavana Establishment’s foundational deed, correspondence between representatives

of Xavana Establishment and UBS, beneficial ownership forms listing Mrs. Fairbank

as the beneficial owner of both Xavana Establishment and UBS account 0857, and

photocopies of Mrs. Fairbank’s U.S. passports.

20 By letter dated October 14, 2013, NPB informed Mrs. Fairbank that the DOJ

was conducting investigations and law enforcement efforts against individuals and

entities that use foreign bank accounts to evade U.S. taxes and reporting

requirements. In the letter NPB informed Mrs. Fairbank that it would have to submit

particularized information regarding accounts held by U.S. persons, covering a period

dating back to August 1, 2008.

14

[*14]

Year Deficiency Penalty

I.R.C. § 6662(a)

2003 $20,088 $4,018

2004 5,078 1,016

2005 6,136 1,227

2006 23,011 4,602

2007 10,785 2,157

2008 15,910 3,182

2009 28,130 5,626

Totals $109,138 $21,828

The deficiency determinations are largely based on unreported

income from Mrs. Fairbank’s beneficial ownership of UBS account 0857.

As relevant to this Opinion, respondent’s unreported income

determinations are supported by UBS income statements in the record

and are outlined below:

15

[*15]

Year 2003 2004 2005 2006 2007 2008 2009

I.R.C. $1,843 — $785 $8,972 $6,619 $6,368 $11,458

§ 1291(a)(1)

PFIC Gain

Taxable 24,920 22,500 22,500 19,222 34,753 30,286 7,122 21

Interest

Itemized 2,002 2,473 2,086 2,616 2,151 (5,986) (21,684)

Deductions

Social — 10,465 10,427 11,544 — — —

Security/RRB

Capital — — — (3,000) (9,091) — —

Gain/Loss

Total $28,765 $35,438 $35,798 $39,354 $34,432 $30,668 ($3,104)

Adjustments

OPINION

I. Summary of the Parties’ Arguments

Petitioners’ principal contention is that all the adjustments in the

notice of deficiency are time barred pursuant to section 6501(a) since the

notice of deficiency was not issued within the applicable period of

limitations. Respondent counters that the IRS timely issued a notice of

deficiency because the period of limitations remained open under section

6501(c)(8) since petitioners failed to notify the Secretary of certain

foreign transfers with respect to Xavana Establishment and UBS

account 0857. More specifically, respondent argues that section

6501(c)(8) is applicable and that the period of limitations remains open

for the years at issue since petitioners never furnished the information

that was required to be reported under section 6048. Petitioners aver

that even if section 6501(c)(8) were to apply, they furnished the

information required to be reported under section 6048. In order to

21 Respondent concedes that petitioners’ taxable interest for tax year 2009 is

$6,122, rather than the $7,122 reflected in the notice of deficiency.

16

[*16] ascertain whether the applicable period of limitations has lapsed,

we must first determine the proper entity classification of Xavana

Establishment for U.S. federal tax purposes. Petitioners argue that

Xavana Establishment should be classified as a controlled foreign

corporation (CFC), while respondent contends that it is properly

classified as a foreign trust.

II. Entity Classification

The Code prescribes the classification of various organizations for

federal tax purposes. Treas. Reg. § 301.7701-1(a)(1). “Whether an

organization is an entity separate from its owners for federal tax

purposes is a matter of federal tax law and does not depend on whether

the organization is recognized as an entity under local law.” Id. In

general, an arrangement will be treated as a trust if it can be shown that

the purpose of the arrangement is to vest in trustees responsibility for

the protection and conservation of property for beneficiaries who cannot

share in the discharge of this responsibility and, therefore, are not

associates in a joint enterprise for the conduct of business for profit. See

Elm St. Realty Tr. v. Commissioner, 76 T.C. 803, 814–15 (1981); Treas.

Reg. § 301.7701-4(a). The four elements of a trust for federal tax

purposes are (1) a grantor, (2) a trustee that takes title to property for

the purpose of protecting or conserving it, (3) property, and

(4) designated beneficiaries. See Treas. Reg. § 301.7701-4(a). 22

This Court applies a facts and circumstances analysis when

determining whether an arrangement should be treated as a trust or a

business entity by determining whether the arrangement includes

(1) associates and (2) an objective to carry on a business and divide the

gains therefrom. See Elm St. Realty Tr., 76 T.C. at 809–18; see also

Morrissey v. Commissioner, 296 U.S. 344, 356–58 (1935). The absence of

either of these essential characteristics will cause an entity to be

classified as a trust. See Estate of Bedell v. Commissioner, 86 T.C. 1207,

1218 (1986); Elm St. Realty Tr., 76 T.C. at 818.

When distinguishing between an association and a trust for tax

classification purposes, relevant features of the arrangement are its

“nature,” “purpose,” and “operations.” See Swanson v. Commissioner,

296 U.S. 362, 365 (1935); Morrissey v. Commissioner, 296 U.S. at 357.

In assessing these features, weight should be given to the arrangement’s

22 It is widely accepted under the laws of all 50 states of this country, and in

many other countries, that a trust consists of these four elements.

17

[*17] organizing documents. See Swanson v. Commissioner, 296 U.S.

at 363–65; Morrissey v. Commissioner, 296 U.S. at 360–61. The Supreme

Court noted that the “parties are not at liberty to say that their purpose

was other or narrower than that which they formally set forth in the

instrument under which their activities were conducted.” Helvering v.

Coleman-Gilbert Assocs., 296 U.S. 369, 374 (1935).

Respondent argues that under the facts and circumstances

analysis, Xavana Establishment qualifies as a trust. Xavana

Establishment’s organizing documents state that it is to operate “on a

trust basis,” its purpose is the “investment and management of assets,”

and its “capital and its results as well as any clear profits of [Xavana]

Establishment shall be due to the beneficiaries.” It is irrefutable that

Mrs. Fairbank is reflected as the beneficial owner of Xavana

Establishment; and the record does not indicate that Xavana

Establishment involved any business associates or operated as a joint

enterprise that conducted business. In fact, Xavana Establishment is

explicitly noted as neither owning any business premises nor employing

any staff working exclusively for it. Furthermore, Xavana

Establishment did not operate any trade, manufacturing, or any other

business of a commercial type. Accordingly, we conclude that Xavana

Establishment is properly classified as a trust for federal tax purposes

under Treasury Regulation § 301.7701-4(a). 23

The arrangement here closely resembles a typical trust whereby

a settlor (here, Mr. Hagaman)24 establishes a trust for the benefit of

23 Petitioners argue that Xavana Establishment is properly classified as a

business entity and cites IRS Chief Counsel Attorney Memorandum 2009-012

(attorney memorandum). While the attorney memorandum does conclude, on the basis

of certain information presented by respondent at the time, that Liechtenstein

“Anstalts” or “Establishments” are generally not treated as trusts under Treasury

Regulation § 301.7701-4(a), petitioners’ reliance is misplaced for several reasons. See

I.R.S. Chief Couns. Att’y Mem. AM2009-012, 2009 WL 3336014 (Oct. 16, 2009). First,

this Court is not bound by the attorney memorandum, which clearly states that it “may

not be used or cited as precedent” pursuant to section 6110(k)(3). Id. Second, a

Liechtenstein Anstalt or Establishment is not classified as a corporation under

Treasury Regulation § 301.7701-2(b)(8)(i). Last, the classification and treatment of a

foreign entity for federal tax purposes is a matter of U.S. federal tax law. See Treas.

Reg. § 301.7701-1(a)(1). Therefore, we are not persuaded by petitioners’ argument that

Xavana Establishment is properly classified as a business entity under Treasury

Regulation § 301.7701-2.

24 On the basis of the record, Mr. Hagaman was the grantor of Xavana

Establishment, funding its UBS account 0857 with approximately $1.5 million

constituting child support payments to Mrs. Fairbank.

18

[*18] specified beneficiaries (Mrs. Fairbank), contributes property to the

trust (30,000 Swiss francs, which was used to fund the trust in 1983),

and designates a trustee (Mr. Bühler, Dr. Lienert, and Mr. Besser) to

hold the property for the beneficiaries and act in their best interest. See,

e.g., Cent. States, Se. & Sw. Areas Pension Fund v. Cent. Transp., Inc.,

472 U.S. 559, 572 (1985) (noting that a trust is generally denoted by the

vesting of duties in a trustee, including a duty to preserve and maintain

trust assets); Owner Operator Indep. Drivers Ass’n, Inc. v. Comerica

Bank (In re Arctic Express Inc.), 636 F.3d 781, 792 (6th Cir. 2011) (citing

Restatement (Third) of Trusts for common law definition of a “trust”);

United States v. De Bonchamps, 278 F.2d 127, 133 (9th Cir. 1960)

(noting that a relationship is generally classified as a trust if it is

“clothed with the characteristics of a trust”); Hart v. Commissioner, 54

F.2d 848, 850–51 (1st Cir. 1932), rev’g in part 21 B.T.A. 1001 (1930);

Johnson v. Commissioner, 108 T.C. 448, 475 (1997), aff’d in part, rev’d

in part on other grounds, 184 F.3d 786 (8th Cir. 1999); George Gleason

Bogert, et al., Bogert’s Trusts and Trustees § 582 (2016).

Consequently, we agree with respondent and find that the

governing documents concerning Xavana Establishment, along with

other documents in the record, show that Xavana Establishment was a

trust for federal tax purposes.

Now that we have determined that Xavana Establishment is

properly classified as a trust for federal tax purposes, our analysis turns

to the issue of whether Xavana Establishment is a domestic trust or a

foreign trust. A foreign trust is “any trust other than a trust” that is a

“United States person” (i.e., a domestic trust). I.R.C. § 7701(a)(30)(E),

(31)(B); Treas. Reg. § 301.7701-7(a)(2). Treasury Regulation § 301.7701-

7(a) provides a two-factor test to determine whether a trust is domestic.

A trust is domestic if (1) “[a] court within the United States is able

exercise primary supervision over the administration of the trust” (court

test) and (2) “[o]ne or more United States persons have the authority to

control all substantial decisions of the trust” (control test). Id.

subpara. (1). Failure to satisfy either the court test or the control test

will result in the trust’s being deemed a foreign trust for federal tax

purposes. Id. subpara. (2).

A trust satisfies the court test if the governing document does not

direct that the trust be administered outside of the United States, the

trust, in fact, is administered exclusively in the United States, and the

trust is not subject to an automatic migration provision that would move

it outside the United States if a U.S. court were to attempt to assert

19

[*19] jurisdiction. Treas. Reg. § 301.7701-7(c)(1), (4)(ii). With respect to

the control test, control means having the power, by vote or otherwise,

to make all of the substantial decisions of the trust, with no other person

having the power to veto any of the substantial decisions. Id. para.

(d)(1)(iii). Substantial decisions are those decisions that are “authorized

or required” under the trust instrument and applicable law, which

include, but are not limited to, decisions concerning whether and when

to distribute income or corpus, the amount of any distribution, whether

to terminate the trust, etc. Id. subdiv. (ii).

In this case Xavana Establishment fails to satisfy the court test

as defined by section 7701(a)(30)(E)(i). There is nothing in the record to

suggest that a court within the United States was able to exercise

primary supervision over the administration of Xavana Establishment.

In fact, the Contract of Mandate, which is part of the organizing

documents concerning Xavana Establishment, states that the parties

agree that “disputes relating to this [c]ontract . . . shall be subject to the

law of the Principality of Liechtenstein” and that the “place of

jurisdiction is agreed as Vaduz, [Liechtenstein].” Accordingly, we find

that Xavana Establishment fails the court test. I.R.C.

§ 7701(a)(30)(E)(i); Treas. Reg. § 301.7701-7(a)(1)(i), (c)(1).

Consequently, Mrs. Fairbank’s ownership interest in Xavana

Establishment, a foreign trust, gives rise to reporting obligations under

section 6048. 25

25 We find that Xavana Establishment does satisfy the control test under

Treasury Regulation § 301.7701-7(a)(1)(ii). It is undisputed that Mrs. Fairbank was a

U.S. person during the tax years at issue. UBS records indicate that Mrs. Fairbank

made substantial decisions within the meaning of Treasury Regulation § 301.7701-

7(a)(ii) by corresponding with Dr. Lienert and Mr. Besser to effect transfers from UBS

account 0857 to herself, to her husband, and to a trust account in New Zealand. See

Treas. Reg. § 301.7701-7(d)(1)(ii)(A). UBS records also indicate that in July 2009 Mrs.

Fairbank requested that the remaining funds held in UBS account 0857 be transferred

to the NPB account and stated that the Xavana Establishment would no longer be

required. See id. subdiv. (ii)(E). Nothing in the record suggests that any other person

had the power to or attempted to veto Mrs. Fairbank’s choice in making these

substantial decisions. See id. subdiv. (iii). Therefore, we find that Xavana

Establishment satisfies the control test. See I.R.C. § 7701(a)(30)(E)(ii); Treas. Reg. §

301.7701-7(a)(1)(ii), (d)(1). Notwithstanding satisfaction of the control test, Xavana

Establishment is properly classified as a foreign trust since it fails the court test. See

I.R.C. § 7701(a)(30)(E)(i); Treas. Reg. § 301.7701-7(a)(2).

20

[*20] III. Reporting Obligations

The Code requires disclosures regarding foreign trusts. See I.R.C.

§ 6048. Pursuant to section 6048(b), each United States person 26 who is

treated as the owner of any portion of a foreign trust, under the grantor

trust rules of sections 671 through 679, is responsible for ensuring that

the trust annually “makes a return . . . which sets forth a full and

complete accounting of all trust activities and operations for the year,

the name of the United States agent for such trust, and such other

information as the Secretary may prescribe.” I.R.C. § 6048(b)(1)(A). This

prescribed information is provided by filing Form 3520–A. See Rost v.

United States, 44 F.4th 294, 298 (5th Cir. 2022); Wilson v. United States,

6 F.4th 432, 434 (2d Cir. 2021). Moreover, any United States person who

is a beneficiary of a foreign trust and receives any distribution from that

foreign trust must file an information return that includes the name of

the trust, the aggregate amount of the distribution received from the

trust during the taxable year, and such other information as the

Secretary may prescribe. I.R.C. § 6048(c)(1). Per IRS guidance, this

mandatory reporting requirement is satisfied when the U.S. beneficiary

files Form 3520. See I.R.S. Notice 97-34, 1997-1 C.B. 422; see also

Wilson, 6 F.4th at 434.

Respondent argues that Mrs. Fairbank is the owner of the foreign

trust pursuant to section 679(a), which provides that any United States

person who directly or indirectly transfers property to a foreign trust

shall be treated as the owner for his taxable year of the portion of the

trust attributable to that property if for the year there is a United States

beneficiary of any portion of the trust. Respondent relies on SEC v. Wyly,

56 F. Supp. 3d 394, 414–16 (S.D.N.Y. 2014), and avers that Mrs.

Fairbank merely named Mr. Hagaman the grantor of Xavana

Establishment to avoid triggering section 679(a) and to circumvent the

grantor trust rules. We are not persuaded by respondent’s argument,

and we are unable to conclude that Mrs. Fairbank is deemed the owner

of Xavana Establishment under section 679(a). Respondent has neither

introduced evidence that sheds a light on Mr. Hagaman’s citizenship

status at the time the foreign trust was established nor shown to our

satisfaction that Mr. Hagaman was acting as Mrs. Fairbank’s nominee

in 1983, the year in which Xavana Establishment was founded.

26 A “United States person” includes U.S. citizens and residents. I.R.C.

§ 7701(a)(30)(A).

21

[*21] However, “[w]hen a grantor or other person has certain powers in

respect of trust property that are tantamount to dominion and control

over such property, the Code ‘looks through’ the trust form and deems

such grantor or other person to be the owner of the trust property and

attributes the trust income to such person.” Estate of O’Connor v.

Commissioner, 69 T.C. 165, 174 (1977); see also I.R.C. § 671. A person

other than the grantor shall be treated as the owner of any portion of a

trust with respect to which that person has a power exercisable solely

by himself to vest the corpus or the income therefrom in himself. I.R.C.

§ 678(a)(1).

Mrs. Fairbank exercised authority over Xavana Establishment,

and the record provides numerous instances in which Mrs. Fairbank

corresponded with Dr. Lienert and Mr. Besser to effect transfers from

UBS account 0857 to herself, to her husband, and to a trust account in

New Zealand. Dr. Lienert even escorted Mrs. Fairbank during her in-

person visit to UBS in February 2008 when she received travelers

cheques and made a cash withdrawal from her UBS account. 27

Consequently, we find that Mrs. Fairbank’s powers over Xavana

Establishment (and its UBS account) were sufficiently extensive to

cause her to be the owner thereof under section 678. See Estate of

O’Connor, 69 T.C. at 174. Therefore, as the owner of Xavana

Establishment, Mrs. Fairbank was obligated to file Form 3520–A during

the tax years at issue. See I.R.C. § 6048(b)(1)(A).

The documentary evidence in the record has established that Mrs.

Fairbank was the beneficial owner of both Xavana Establishment and

UBS account 0857 during the tax years at issue. Furthermore, Mrs.

Fairbank, as the beneficiary, received distributions and was obligated to

file Form 3520 to provide respondent the requisite information in

accordance with I.R.S. Notice 97-34. See Wilson, 6 F.4th at 434.

Accordingly, Mrs. Fairbank, as a United States person deemed the

owner of Xavana Establishment and its named beneficiary, held

reporting obligations under the Code to file both Forms 3520–A and

3520.

Next, we address petitioners’ contention that they complied with

their filing obligations under section 6048, notwithstanding their failure

27 This in-person visit to UBS is corroborated by UBS bank records and the

records maintained by the U.S. Department of Homeland Security’s TECS system,

which indicate that Mrs. Fairbank departed from Zurich, Switzerland on February 23,

2008.

22

[*22] to report Mrs. Fairbank’s ownership interest in either Xavana

Establishment or UBS account 0857 on any IRS prescribed forms;

therefore, the period of limitations on assessment under section 6501

has passed.

IV. Statute of Limitations

In general, section 6501(a) provides that any tax imposed under

the Code shall be assessed within three years after the return was filed

(whether or not the return was filed on or after the date prescribed) and

no proceeding in court without assessment for the collection of the tax

shall be begun after the expiration of that period.

For a timely filed return, the three-year period begins to run as of

the due date of the return. See I.R.C. § 6501(b). 28 It is undisputed that

petitioners timely filed their Forms 1040 for the years at issue and it is

also undisputed that more than three years had passed between these

tax return filings and the time respondent issued the notice of deficiency

at issue. 29 In fact, eight or more years had passed since the filings of

petitioners’ Forms 1040 for the years at issue.

Subsection (c) provides for a number of exceptions to the general

three-year period of limitations rule found in section 6501(a). In this

case, respondent asserts subsection (c)(8), entitled “Failure to notify

Secretary of certain foreign transfers,” is applicable. Section 6501(c)(8)

provides as follows:

In the case of any information which is required to be

reported to the Secretary under section 6038, 6038A,

6038B, 6046, 6046A, or 6048, the time for assessment of

any tax imposed by this title with respect to any event or

period to which such information relates shall not expire

before the date which is 3 years after the date on which the

28 For a return filed before the due date, the filing date of the return is deemed

to be the return’s due date. See I.R.C. § 6501(b)(1).

29 For example, petitioners timely filed their 2009 Form 1040 on or before April

15, 2010, while the IRS issued its notice of deficiency in this matter some years later

on April 12, 2018.

23

[*23] Secretary is furnished the information required to be

reported under such section.[30]

Respondent argues that section 6501(c)(8) applies since

petitioners failed to report the foreign transactions pursuant to section

6048 during the tax years at issue. As we have established above,

petitioners were required to report Mrs. Fairbank’s interest in Xavana

Establishment, and the parties agree that section 6501(c)(8) is

applicable; however, they disagree over the specific phrase “furnished

the information required to be reported under [section 6048]” of section

6501(c)(8).

Petitioners contend that no specific form is required under section

6501(c)(8) and argue that they provided the IRS the “information

required to be furnished” under section 6048 pursuant to a request by

the IRS in 2014; therefore, the period of limitations is closed, and the

assessment is time barred. Petitioners further argue that had they filed

Forms 3520–A and 3520, they would “simply be transposing the

information already provided to the IRS onto an IRS form.” Respondent

argues that section 6501(c)(8) is not satisfied “unless and until a

taxpayer has filed the required information returns [Forms 3520–A and

3520].”

Now we turn to section 6048(b) and (c) to determine the statutory

reporting obligations of Mrs. Fairbank as the United States owner and

beneficiary of Xavana Establishment and whether petitioners have

furnished the information required to be reported under that section.

Section 6048(b), entitled “United States Owner of foreign trust,”

provides that each United States person treated as the owner of any

portion of a foreign trust shall be responsible to ensure that (A) the trust

makes a return for the year which sets forth a full and complete

accounting of all trust activities and operations for the year, the name

of the United States agent for such trust, and such other information as

the Secretary may prescribe and (B) the trust furnishes such

information as the Secretary may prescribe to each United States person

(i) who is treated as the owner of any portion of the trust or (ii) who

30 In a 2010 amendment to section 6501(c)(8), Congress added a reasonable

cause exception for failure to furnish the information required under this section,

effective for returns filed after March 18, 2010. Petitioners did not adequately raise

the issue of reasonable cause for their failure to comply with the reporting obligations

under section 6048.

24

[*24] receives (directly or indirectly) any distribution from the trust.

I.R.C. § 6048(b)(1).

Section 6048(c), entitled “Reporting by United States

beneficiaries of foreign trusts,” provides that any United States person

who receives (directly or indirectly) during any taxable year of the

person any distribution from a foreign trust shall make a return with

respect to that trust for the year which includes (A) the name of the

trust, (B) the aggregate amount of the distributions so received from the

trust during the taxable year, and (C) the other information as the

Secretary may prescribe. I.R.C. § 6048(c)(1).

Petitioners’ citation of section 6501(c)(8) and their argument on

brief that the period of limitations has run is incomplete. 31 Section

6501(c)(8) refers the reader to the requirements under section 6048;

therefore, a detailed analysis of a taxpayer’s statutory obligations under

section 6048 is necessary. We conclude that Mrs. Fairbank, as the

deemed U.S. owner of Xavana Establishment, has failed to provide any

written return to respondent setting forth a full and complete

accounting of Xavana Establishment’s activities for the years at issue.

See I.R.C. § 6048(b)(1). Similarly, we conclude that Mrs. Fairbank, as

Xavana Establishment’s U.S. beneficiary, has failed to make any return

that includes the name Xavana Establishment and which outlines the

aggregate amount of distributions she received during each of the tax

years at issue from Xavana Establishment. See I.R.C. § 6048(c)(1).

Finding that petitioners have not complied with section 6048(b)

and (c), we similarly find that the period of limitations has not expired

under section 6501(c)(8). Our conclusion is consistent with those of other

courts that have considered this issue. See Rost, 44 F.4th at 298; Wilson,

6 F.4th at 434.

Accordingly, we are constrained to conclude that the period of

limitations has not expired for the tax years at issue since petitioners

31 On brief petitioners state that “the Court must determine what qualified as

the ‘furnishing’ of ‘information required to be reported under [section 6038 and/or

6048].’” However, there is little analysis by petitioners of how these legal requirements

were in fact satisfied, notwithstanding their failure to file either Form 3520–A or Form

3520. Rather, petitioners continue to maintain that Mrs. Fairbank was unaware of her

interest in the foreign trust and that petitioners furnished to the IRS, during the audit,

bank statements, banker notes, transaction ledgers, internal letters, incorporation

documents, and other correspondence notes “between agents of Xavana Establishment

and UBS.”

25

[*25] neither filed IRS Form 3520–A or Form 3520 nor satisfied their

reporting obligations under section 6048, assuming those obligations

could be satisfied without the filing of the forms prescribed by the IRS. 32

Consequently, we find respondent’s notice of deficiency in this case was

timely issued. 33

V. Deficiencies

Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the burden of

proving error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Section 61(a) provides that gross income “means all income from

whatever source derived,” including gains derived from interest. I.R.C.

§ 61(a)(4). However, a special rule applies to determinations of

unreported income. In cases of unreported income, the Commissioner’s

determinations are presumptively correct if supported by a minimal

evidentiary foundation connecting the taxpayer with an income-

32The U.S. Supreme Court has also held that certain documents drafted by

taxpayers that do not comply with the forms prescribed by the Secretary will

nevertheless be treated as valid returns, for purposes of the statute of limitations, if

they contain certain elements. See Badaracco v. Commissioner, 464 U.S. 386, 397

(1984); Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944); Zellerbach Pager Co. v.

Helvering, 293 U.S. 172 (1934); Lucas v. Pilliod Lumber Co., 281 U.S. 245 (1930);

Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453 (1930). In Beard v.

Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986), we

summarized the Supreme Court’s test for a valid return as follows:

First, there must be sufficient data to calculate [the] tax liability;

second, the document must purport to be a return; third, there must be

an honest and reasonable attempt to satisfy the requirements of the

tax law; and fourth, the taxpayer must execute the return under

penalties of perjury.

Even if we were to consider the foregoing elements here, we cannot conclude

that all four elements prescribed above have been satisfied. While the information

petitioners provided the IRS was sufficient data to calculate petitioners’ correct tax

liabilities, there has been no showing by petitioners that the documents furnished

purport to be information returns (i.e., Forms 3520–A or 3520), that they made an

honest attempt to satisfy their legal obligations under section 6048, and that the

information was furnished under penalties of perjury. Moreover, petitioners have cited

no precedent binding on this Court to support their contention that filing anything but

Forms 3520–A or 3520 commences the running of the period of limitations under

section 6501(c)(8).

33 We note that if we were to accept petitioners’ argument that a specific form

is not required to trigger the running of the period of limitations, we would create

uncertainty in an area of the law where absolute clarity benefits both the IRS and

taxpayers.

26

[*26] producing activity. See Blohm v. Commissioner, 994 F.2d 1542,

1549 (11th Cir. 1993), aff’g T.C. Memo. 1991-636; United States v.

McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991). Once the Commissioner

has established some evidentiary foundation linking the taxpayer with

an income-producing activity, the burden shifts to the taxpayer to prove

that the determinations are arbitrary or erroneous. See Blohm v.

Commissioner, 994 F.2d at 1549; Erickson v. Commissioner, 937 F.2d

1548, 1551–52 (10th Cir. 1991), aff’g T.C. Memo. 1989-552.

To satisfy his burden, respondent has introduced extensive

banking records concerning UBS account 0857. These records establish

that from 2003 through 2009, Mrs. Fairbank derived income from her

beneficial ownership of the UBS account, which generated income in the

form of interest and gains from foreign investment instruments, namely,

mutual funds, which are considered “passive foreign investment

company” (PFIC) assets. The record is replete with evidence of Mrs.

Fairbank’s control, use, and enjoyment of the funds held in UBS account

0857. Respondent has therefore supplied a “minimal evidentiary

foundation” that connects petitioners with unreported income. See

McMullin, 948 F.2d at 1192. Consequently, petitioners bear the burden

of proving that respondent’s determinations of unreported income are

arbitrary or erroneous. 34

Petitioners do not deny that UBS account 0857 earned interest

income and that it generated investment income from trading foreign

investment instruments. Rather, petitioners contend that Mrs.

Fairbank is not subject to tax since she did not have control over the

accounts. In fact, Mrs. Fairbank testified that she does not “know

anything about UBS,” did not engage Dr. Lienert or Mr. Besser, and

never asked anyone to create Xong Services on her behalf. 35 We are not

convinced. Mrs. Fairbank was listed as the “beneficial owner” of both

Xavana Establishment and UBS account 0857, and the records admitted

into evidence show that Mrs. Fairbank exercised significant control over

34 The record does not support a shifting of the burden back to respondent. See

I.R.C. § 7491(a); Higbee v. Commissioner, 116 T.C. 438, 442 (2001).

35 As the trier of fact, we observe a witness’s candor, sincerity, and demeanor

in order to evaluate the testimony and assign it appropriate weight in determining

disputed facts. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 84 (2000),

aff’d, 299 F.3d 221 (3d Cir. 2002). We are not bound to accept a taxpayer’s self-serving

testimony. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). We

find Mrs. Fairbank’s testimony to be self-serving, unreliable, unverified, and in

contradiction with some of the stipulated documents in this case.

27

[*27] them. 36 In 2009 the remaining funds held in UBS account 0857

were transferred to Mrs. Fairbank’s NPB account. Additionally, through

Mr. Besser, Mrs. Fairbank indicated to UBS that all accounts were to be

netted out and that she would no longer be requiring Xavana

Establishment.

This course of conduct clearly shows that Mrs. Fairbank had the

requisite control over the account. See Rutkin v. United States, 343 U.S.

130, 137 (1952) (holding that a gain “constitutes taxable income when

its recipient has such control over it that, as a practical matter, he

derives readily realizable economic value from it”). It does not matter

that Mrs. Fairbank did not withdraw additional funds from the UBS

account or otherwise receive distributions therefrom. See Harrington v.

Commissioner, T.C. Memo. 2021-95, at *19, aff’d, No. 22-9000, 2022 WL

17333080 (10th Cir. Nov. 30, 2022). A taxpayer need not actually

withdraw cash for an investment gain to be taxable. See Treas. Reg. §

1.451-2(a) (“Income although not actually reduced to a taxpayer’s

possession is constructively received by him in the taxable year during

which it is credited to his account, set apart for him, or otherwise made

available so that he may draw upon it at any time . . . .”). Petitioners

provided no evidence that Mrs. Fairbank’s requests that funds be

transferred out of UBS account 0857 were “subject to substantial

limitations or restrictions.” See id. To the extent that Mrs. Fairbank

forwent any additional transfers from her UBS account, we find that she

willingly did so. See Murphy v. United States, 992 F.2d 929, 931 (9th Cir.

1993) (holding that a taxpayer constructively received income where

“his failure to receive cash was entirely due to his own volition”).

Respondent does not dispute that the funds originally transferred

to UBS account 0857 were nontaxable child support payments.

However, respondent argues, and we agree, that Mrs. Fairbank was

required to report the activities within UBS account 0857 on her federal

income tax returns during the years at issue. Consequently, we find that

petitioners have not carried their burden of proving that respondent’s

determinations of unreported income are “arbitrary or erroneous.” See

Erickson v. Commissioner, 937 F.2d at 1554–55. Accordingly, we sustain

respondent’s deficiency determinations and computational adjustments

36 Having already determined Mrs. Fairbank to be a beneficial owner of a

foreign trust under section 678, said income of the trust is attributable to her under

the grantor trust rules. See I.R.C. §§ 671–679.

28

[*28] since Mrs. Fairbank earned interest and investment income from

her UBS account, as outlined below.

A. Interest Income

For tax years 2003 through 2009 respondent determined total

taxable interest income of $160,303. While petitioners placed the entire

notice of deficiency at issue, they neither presented any evidence

disputing the amount of interest earned in the UBS account nor

disputed respondent’s characterization of this amount as interest

income. Accordingly, respondent’s interest income determination is

sustained.

B. UBS Investment Income

Through Mrs. Fairbank’s beneficial ownership of UBS account

0857, she earned income from the trading of PFIC assets. See I.R.C.

§§ 1297, 1298(a)(3). Respondent determined PFIC income and tax

according to section 1291. Petitioners do not dispute the amount of PFIC

income earned in the account but rather ask this Court to disallow the

PFIC-related adjustments on the grounds that Xavana Establishment

is properly classified as a CFC, therefore not subject to the PFIC-related

adjustments under sections 1291 and 1297. 37 Having already

determined that Xavana Establishment is properly classified as a

foreign trust for federal tax purposes, we are not persuaded by

petitioners’ argument. Moreover, petitioners neither presented evidence

rebutting respondent’s PFIC adjustment amounts reflected in the notice

of deficiency nor made an election under either section 1295 or section

1296 for the tax years at issue. Consequently, we sustain respondent’s

PFIC income determinations.

37 By default, PFIC income is taxed according to section 1291, unless a taxpayer

elects otherwise. See I.R.C. §§ 1291(a)–(c), 1295, 1296. In 1996 Congress enacted

section 1296, allowing taxpayers to elect mark-to-market treatment. In 2002 the

Secretary promulgated proposed regulations setting forth the rules for making such

an election. Prop. Treas. Reg. § 1.1296-1, 67 Fed. Reg. 49,634, 49,639 (July 31, 2002).

Those regulations became final in 2004. T.D. 9123, 2004-1 C.B. 907; see Treas. Reg.

§ 1.1296-1(h)(1). Under either the proposed or the final regulations, for a taxpayer’s

PFIC income to be taxed according to section 1296, he generally must make an election

by the due date for filing his income tax return for the first year to which the election

will apply. Treas. Reg. § 1.1296-1(h)(1); Prop. Treas. Reg. § 1.1296-1(h)(1), 67 Fed. Reg.

at 49,642.

29

[*29] VI. Accuracy-Related Penalties

Respondent determined accuracy-related penalties under section

6662(a) and (b)(1) for negligence. Section 6662(a) and (b)(1) imposes a

penalty equal to 20% of the portion of an underpayment that is

attributable to negligence or disregard of rules or regulations.

“Negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the internal revenue laws or to exercise

ordinary and reasonable care in the preparation of a tax return. I.R.C.

§ 6662(c); Treas. Reg. § 1.6662-3(b)(1). “Disregard” includes any

careless, reckless, or intentional disregard of rules or regulations. I.R.C.

§ 6662(c); Treas. Reg. § 1.6662-3(b)(2)

The Commissioner bears the burden of production with respect

to a penalty imposed by section 6662(a) and is required to present

sufficient evidence showing that the penalty is appropriate. See I.R.C.

§ 7491(c); Higbee, 116 T.C. at 446–47. This includes showing compliance

with the procedural requirements of section 6751(b)(1). 38 See I.R.C.

§ 7491(c); Graev v. Commissioner, 149 T.C. 485, 493 (2017),

supplementing and overruling in part 147 T.C. 460 (2016). Once the

Commissioner meets his burden of production, the taxpayer bears the

burden of proving that the Commissioner’s determination is incorrect.

Higbee, 116 T.C. at 447.

Pursuant to this Court’s Order dated November 30, 2021,

granting respondent’s motion for partial summary judgment filed

October 13, 2021, we find that respondent has established compliance

with the managerial approval requirements of section 6751(b).

Respondent has likewise satisfied his burden of production to show that

the imposition of the section 6662(a) and (b)(1) penalties is appropriate

since the evidence in the record shows that petitioners, during the tax

years at issue, never made any attempt to comply with the federal tax

reporting obligations stemming from Mrs. Fairbank’s ownership

interest in Xavana Establishment and UBS account 0857. Accordingly,

respondent has satisfied his burden of production for the imposition of

the accuracy-related penalties under section 6662(a) and (b)(1).

Therefore, the only issue remaining is whether petitioners are entitled

to a reasonable cause defense.

38 Section 6751(b)(1) provides that no penalty shall be assessed unless “the

initial determination” of the assessment was “personally approved (in writing) by the

immediate supervisor of the individual making such determination.”

30

[*30] A taxpayer may avoid a section 6662(a) penalty by showing that

there was reasonable cause for any portion of the underpayment and

that the taxpayer acted in good faith. I.R.C. § 6664(c)(1). Reasonable

cause requires that the taxpayer have exercised ordinary business care

and prudence as to the disputed item. See United States v. Boyle, 469

U.S. 241, 246 (1985). Whether a taxpayer acted with reasonable cause

and in good faith within the meaning of section 6664(c)(1) is determined

on a case-by-case basis, taking into account all relevant facts and

circumstances. Treas. Reg. § 1.6664-4(b)(1). The most important factor

is the extent of the taxpayer’s effort to assess his proper tax liability for

the year. Id. Circumstances that may indicate reasonable cause and

good faith include an honest misunderstanding of fact or law that is

reasonable under all of the circumstances, including the taxpayer's

education, experience, and knowledge. Id.

During the years at issue, petitioners timely filed their joint

Forms 1040, which were prepared by Mr. Holly. In preparing

petitioners’ tax returns, Mr. Holly sent them a tax organizer each year,

on which petitioners generally checked “No” to the question about

foreign bank accounts. Additionally, on petitioners’ Forms 1040 filed for

the tax years at issue, petitioners checked “No” to the questions of

whether they “have an interest in or a signature or other authority over

a financial account in a foreign country, such as a bank account,

securities account, or other financial account” or whether they

“receive[d] a distribution from, or were . . . the grantor of, or transferor

to, a foreign trust.”

Where a taxpayer claims reliance on professional advice, section

6664(c) will apply if “the taxpayer meets each requirement of the

following three-prong test: (1) the adviser was a competent professional

who had sufficient expertise to justify reliance, (2) the taxpayer provided

necessary and accurate information to the adviser, and (3) the taxpayer

actually relied in good faith on the adviser’s judgment.” Neonatology

Assocs., P.A., 115 T.C. at 99. The record establishes that petitioners did

not satisfy this test with respect to any of their advisers who assisted

preparing their federal income tax returns for the years at issue.

As for Mrs. Fairbank’s reliance on Mr. Holly, petitioners have

failed to demonstrate that they have satisfied the latter two prongs of

the Neonatology test. As to the first Neonatology prong, we accept that

Mr. Holly, as a CPA, was a competent professional who had sufficient

expertise to justify reliance. As to the second Neonatology prong,

petitioners have provided no evidence that they supplied Mr. Holly with

31

[*31] necessary and accurate information. In fact, petitioners told him

that they had no foreign accounts, all while Mrs. Fairbank was

corresponding with Dr. Lienert and Mr. Besser to effect transfers from

UBS in Switzerland. As to the final Neonatology prong, petitioners have

not demonstrated that their reliance on Mr. Holly was in good faith. In

this case, Mrs. Fairbank provided Mr. Holly with inaccurate information

regarding her ownership interests in foreign bank accounts, thereby

negating the relied-in-good-faith prong.

On the basis of the facts and circumstances of this case as

established by the evidence in the record, we find that petitioners are

not entitled to the reasonable cause defense to the section 6662(a)

accuracy-related penalties asserted and sustain respondent’s

determination accordingly.

VII. Conclusion

We have considered all of the arguments that the parties made

and to the extent they are not addressed herein, we find the arguments

to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.