UNITED STATES TAX COURT
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T.C. Memo. 2016-133
UNITED STATES TAX COURT
JACK R. DURLAND, JR., Petitioner y.
COMMISSIONER OF INTERNAL REVENUE, Respondent
TINA D. FAUSETT, Petitioner, AND JACK R. DURLAND, JR., Intervenor y.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 27534-10, 28396-10.
Filed July 19, 2016.
Jack R. Durland, Jr., pro se.
Scott T. Banks and Kenneth W. Klingenberg, for petitioner in docket No.
28396-10.
Moenika N. Coleman, Heather L. Lampert, and Linda L. Wong, for
respondent.
SERVED Jul 19 2016
-2[*2]
CONTENTS
FINDINGSOFFACT................................................6
I.
II.
III.
Background...................................................6
A.
Petitioners............................................... 6
B.
C.
Mr. Durland's Disbarment. ................................. 8
Mr. Durland's Transfers of Assets to the Durland 1995 Irrevocable
Trust and Ms. Fausett...................................... 9
D.
Norris R. Harris.......................................... 11
Events Occurring During 1999 and 2000.. . ....... . . . . .......... . . . 12
A.
Mr. Harris Brings Mr. Durland In-House.. . . . . . . . . . . . . . . . . . . . . 12
B.
Checks From T.J. Oil & Gas................................ 13
C.
Gulfport Oil& Gas....................................... 14
D.
Gulfport Oil & Gas' Acquisition of Control of ARXA. . . . . . . . . . . 15
E.
Purported Loans. ........................................ 16
1.
$20,000........................................... 17
2.
$350,000.......................................... 18
3.
$65,000........................................... 19
F.
MatagordaLease.........................................20
G.
Gulfport Oil& Gas Checks. ............................... 26
H.
Private Investor and Investec Checks.. . . . . . . . . . . . . . . . . . . . . . . . 28
I.
2000 Cashier's Checks.................................... 28
J.
Ms. Fausett's Separation From Mr. Durland. . . . . . . . . . . . . . . . . . . 29
K.
2000 Divorce Proceedings. ................................ 32
1.
2000 Oklahoma Divorce Case......................... 32
2.
Mississippi Divorce Case............................. 32
3.
Ms. Fausett's Meeting With the FBI. . . . . . . . . . . . . . . . . . . . 34
4.
Ms. Fausett's Contempt Hearing. . . . . . . . . . . . . . . . . . . . . . . 35
L.
1999Return............................................. 37
M.
BoleynEnergy........................................... 38
Events Occurring During 2001 and 2002.. . . . . . . . . . . . . . . . . . . . . . . . . . 38
A.
B.
2001 Cashier's Checks.................................... 38
Mr. Durland's and Mr. Harris' Assignment of Shares of Gulfport
Oil & Gas Common Stock to Gulfport Oil & Gas. . . . . . . . . . . . . . . 39
-3[*3]
IV.
C.
Checks Issued to Boleyn Energy. ........................... 42
D.
Prytania Street House..................................... 42
E.
Hubbard Litigation....................................... 43
F.
Mr. Durland's Departure................................... 44
G.
2000 and2001 Returns.................................... 44
Events Occurring After2002. ................................... 46
A.
Saint Andrews Court House.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
B.
2002-2007Returns....................................... 46
C.
IRS' Investigation of Mr. Durland..... . . . ........ . . . . . . ..... 46
D.
Mr. Durland's Transfer of 1,500 Shares of Boleyn Energy
Common Stock to Rosewood Ventures. . . . . . . . . . . . . . . . . . . . . . . 47
V.
E.
Mr. Durland's Indictment for Tax Evasion. . . . . . . . . . . . . . . . . . . . 48
F.
Mr. Durland's Plea Agreement.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
G.
20070klahoma Divorce Case. ............................. 51
DeficiencyNotices. ........................................... 51
OPINION.........................................................52
I.
Preliminary Matters............................................52
A.
Credibility of Witnesses and Reliability of Documentary Evidence. 52
B.
JudicialEstoppel......................................... 53
C.
Mr. Durland's Plea Agreement.. . ........ . . . ..... . .... . . . . . . 55
II.
Period of Limitations on Assessment........ . . . ..... ... . . . . . . ..... 56
III.
Unreported Income Adjustments. . . ..... . . . . ....... . . . . . . ........ 58
A.
BurdenofProof.......................................... 58
B.
Specific-Item Method....... . ....... . . . ........ . . . . . . ..... 60
C.
The Parties' Arguments. .................................. 61
D.
Specific Items at Issue for 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
E.
1.
T.J. Oil & Gas Salary Checks Totaling $55,000. . . . . . . . . . . 62
2.
Purported Loans Totaling $435,000.. . . . . . . . . . . . . . . . . . . . 63
Specific Items at Issue for 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
1.
T.J. Oil & Gas Check for $5,000. . . . . . . . . . . . . . . . . . . . . . . 66
2.
Gulfport Oil & Gas Salary Checks Totaling $122,500. . . . . . 66
-4[*4]
F.
IV.
3.
Checks Payable to T.J. Oil & Gas and Gulfport Oil & Gas.. . 67
4.
Cashier's Checks. .................................. 69
Specific Items at Issue for2001............................. 70
Civil Fraud Penalties........................................... 71
A.
Section 6663(a)Generally. ................................ 71
B.
Whether Mr. Durland Is Liable for the Civil Fraud Penalties. . . . . . 73
1.
Collateral Estoppel.................................. 73
2.
Underpayment of Tax................................ 76
3.
Fraudulent Intent. .................................. 76
a.
Understating Income. .......................... 76
b.
Failing To Maintain Adequate Records.. . . . . . . . . . . . 77
c.
Offering Implausible or Inconsistent Explanations.. . . 77
d.
Concealing Assets or Income.. . . . . . . . . . . . . . . . . . . . 77
e.
Providing Incomplete or Misleading Information to
the Taxpayer's Tax Return Preparer. . . . . . . . . . . . . . . 78
V.
f.
Offering False or Incredible Testimony.. . . . . . . . . . . . 79
g.
Filing False Documents. . . . . . . . . . . . . . . . . . . . . . . . . 79
h.
Extensive Dealings in Cash. . . . . . . . . . . . . . . . . . . . . . 80
i.
Summary..................................... 80
Whether Ms. Fausett Is Jointly and Severally Liable.. . . . . . . . . . . . . . . . . 81
A.
B.
Joint and Several Liability Generally.. . . . . . . . . . . . . . . . . . . . . . . . 81
1.
Section6015(b). ................................... 82
2.
Section6015(c)..................................... 82
3.
Section6015(f)..................................... 86
Whether Ms. Fausett Is Eligible for Relief Under Section 6015.. . . 89
1.
Section6015(c)Relief. .............................. 89
a.
b.
VI.
Actual Knowledge............................. 90
i.
1999................................... 90
ii.
2000................................... 91
iii.
2001................................... 94
Duress Exception.............................. 94
2.
Section 6015(b) Relief............................... 97
3.
Section6015(f)Relief. .............................. 98
Conclusion.................................................. 102
-5[*5]
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Chief Judge: Respondent determined the following deficiencies
in Federal income tax and civil fraud penalties under section 6663(a) with respect
to Jack R. Durland, Jr.:¹
Year
Deficiency
Penalty
sec. 6663(a)
1999
2000
2001
$188,709
556,823
17,653
$141,532
417,617
13,240
Respondent determined the following deficiencies in Federal income tax with
respect to Tina D. Fausett:
Year
Deficiency
1999
2000
2001
$188,709
556,823
17,653
The issues for decision are: (1) whether respondent issued the notices of
deficiency to Mr. Durland and Ms. Fausett before the periods of limitations on
assessment expired for 1999-2001; (2) whether Mr. Durland received unreported
¹Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code), as amended and in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Some monetary
amounts have been rounded to the nearest dollar.
-6[*6] income of $490,000, $1,552,940, and $45,000 for 1999, 2000, and 2001,
respectively; (3) whether Mr. Durland is liable for civil fraud penalties under
section 6663(a) of $141,532, $417,617, and $13,240 for 1999, 2000, and 2001,
respectively; and (4) whether Ms. Fausett is eligible for relief from joint and
several liability for the 1999-2001 deficiencies under section 6015(b), (c), or (f).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of
fact and facts drawn from stipulated exhibits are incorporated herein by this
reference. Petitioners resided at separate addresses in Oklahoma City, Oklahoma,
when they petitioned this Court.
I.
Background
A.
Petitioners
Mr. Durland received a law degree from the University of Oklahoma
College of Law in 1962. He received his license to practice law in Oklahoma in
1962, and he practiced law with the Crowe & Dunlevy law firm from 1962 until
1989. In 1989 he and another attorney formed the Berry & Durland law firm.
Berry & Durland subsequently became Durland & Durland; Mr. Durland and his
father, Jack Durland, Sr., were the two name partners of the firm. From before
-7[*7] 1995 until 1997 Mr. Durland shared office space with an attorney named
Darquita Maggard. Mr. Durland practiced law with Durland & Durland until
1999.
Ms. Fausett attended college for approximately three and a half years at
Oklahoma University and Central State College, now the University of Central
Oklahoma, where she majored in history and English education but did not earn a
degree.
Mr. Durland's parents and Ms. Fausett's parents knew each other, and Ms.
Fausett and Mr. Durland saw each other at functions their parents hosted. During
the summer of 1997 Ms. Fausett began working for Mr. Durland as a secretary.
Mr. Durland and Ms. Fausett married on June 26, 1999.
Mr. Durland had two prior marriages before marrying Ms. Fausett. He and
his second wife divorced on December 5, 1995.
Ms. Fausett also was previously married before marrying Mr. Durland. She
married Larry McCall in 1972. On November 6, 1995, Ms. Fausett filed for
divorce from Mr. McCall in the District Court of Oklahoma County, Oklahoma.
After firing her original divorce attorney Ms. Fausett hired Ms. Maggard to
represent her in her divorce from Mr. McCall. The court granted Ms. Fausett a
divorce from Mr. McCall on August 16, 1996.
-8[*8]
B.
Mr. Durland's Disbarment
Mr. Durland's uncle, William T. Durland, established a trust in September
1992. Mr. Durland and Judith Ann Pederson, a niece of William Durland, were
appointed cotrustees of the trust. Without Ms. Pederson's or William Durland's
knowledge, Mr. Durland withdrew $220,000 from the trust for his personal use.
In a letter dated March 21, 1997, Mr. Durland falsely told Ms. Pederson that the
withdrawn funds were invested in certificates of deposit, and he subsequently
presented her with forged certificates of deposit.
Mr. Durland later admitted that his initial story was a lie, and he instead
claimed to have borrowed the withdrawn funds. To support his new claim he
produced unsigned, backdated promissory notes.
On the basis of Mr. Durland's fraudulent conduct with respect to his uncle's
trust the Oklahoma Bar Association brought disciplinary proceedings against him.
Ms. Maggard represented Mr. Durland in those proceedings. On September 8,
1998, a trial panel of the Supreme Court of Oklahoma found that Mr. Durland had
converted for his personal use $220,000 of funds held in trust; had committed
various acts of dishonesty, deceit, fraud, and misrepresentation; and had forwarded
fraudulent certificates of deposit to Ms. Pederson. On the basis of these findings,
-9[*9] the trial panel recommended that he be disbarred. On March 18, 2003, the
Supreme Court of Oklahoma disbarred Mr. Durland.
C.
Mr. Durland's Transfers of Assets to the Durland 1995 Irrevocable
Trust and Ms. Fausett
On a date that is unclear from the record Mr. Durland signed the agreement
for the Jack R. Durland, Jr. 1995 Irrevocable Trust (Durland 1995 Irrevocable
Trust), dated December 8, 1995, as the settlor and trustee of the trust.2 Ms.
2Respondent contends that Mr. Durland backdated the Durland 1995
Irrevocable Trust. Mr. Durland testified that he did not sign the original trust
agreement until 1996 or 1997 (and not in 1995 as the trust agreement states), and
the parties stipulated that Mr. Durland and Ms. Fausett first met in December
1996. However, in September 2000 Ms. Fausett met with the Federal Bureau of
Investigation (FBI) and stated that Mr. Durland executed the trust agreement in
1996, and this is consistent with the documents dated August 19, 1996, that
appointed her as the trustee of the trust. Moreover, the trust agreement refers to
Ms. Fausett primarily as Ms. McCall--her legal name in December 1995--and the
trust agreement and the documents dated August 19, 1996, are all notarized. Ms.
Fausett also testified that her parents and Mr. Durland's parents knew each other
before Mr. Durland and Ms. Fausett began dating and that she had previously met
Mr. Durland at functions their parents hosted.
Additionally, Ms. Maggard--who was then sharing an office with Mr.
Durland--testified that she first met Ms. Fausett at the end of 1995 or during 1996
and that she represented Ms. Fausett before her divorce from Mr. McCall on
August 16, 1996. Ms. Fausett testified that Mr. Durland assisted her in her efforts
to gain full custody of her son. In the light of Ms. Fausett's statement to the FBI
in September 2000, her and Ms. Maggard's testimony at trial, and the
documentary evidence, we find it unlikely that Mr. Durland and Ms. Fausett first
met in December 1996. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181,
195 (1989) (disregarding a stipulation as inconsistent with a stipulated exhibit).
(continued...)
- 10 [*10] Fausett, then referred to as Ms. McCall, was named the beneficiary of the
trust. Ms. Fausett was entitled to all income earned by the assets in the trust
during Mr. Durland's lifetime, and after his death the trust's assets were to be
distributed to her. In the event Ms. Fausett died before Mr. Durland, the trust's
assets were to be distributed to Mr. Durland's descendants. In documents dated
August 19, 1996, Mr. Durland resigned, and Ms. Fausett was appointed trustee of
the trust. Ms. Fausett signed the document appointing her the trustee on August
19, 1996.
In an attachment to the original trust agreement Mr. Durland purported to
transfer 195 items of personal and real property to the trustee of the trust.
Included in these items were oil, gas, and other mineral interests owned by three
partnerships and a 1991 Mercedes.
Additionally, in 1998 Mr. Durland conveyed mineral rights in certain
properties in several counties of Oklahoma and real property in Oklahoma and
Colorado to Ms. Fausett.
2(...continued)
We do not find Mr. Durland's testimony that he backdated the Durland 1995
Irrevocable Trust agreement to be credible, and we are not persuaded that it was.
- 11 [*11] During the years in issue Ms. Fausett maintained a brokerage account at
Merrill Lynch (Fausett Merrill Lynch account). In January 2000 she opened a
brokerage account at Charles Schwab (Fausett Charles Schwab account).
D.
Norris R. Harris
In 1977 Norris R. Harris hired Mr. Durland as an attorney for an oil
company, Centex Oil, that he had started in 1976. Mr. Harris attended junior
college in Odessa, Texas. He began working in the oil industry in 1956, and
during the relevant periods owned interests in a variety of business entities. Mr.
Durland subsequently provided legal services to a number of those entities,
including T.J. Oil & Gas, Inc. (T.J. Oil & Gas), and Covington Energy, Inc.
(Covington Energy). T.J. Oil & Gas and Covington Energy had their principal
places of business at the same address in Gulfport, Mississippi.
During the years in issue Mr. Harris was married to Cindy Harris. He has a
son, Jonathan G. Harris, from a previous marriage.
During the years in issue Mr. Harris employed Jonathan Harris and Teresa
Richardson in connection with his various businesses. He hired Ms. Richardson in
June 1999.
Mr. Harris had a close relationship with Betty L. Ferguson, who owned a
check cashing business that did business as Ferguson Check Cashing Co.
- 12 [*12] (Ferguson Check Cashing). Mr. Harris regularly sent others to cash personal
checks for him at Ferguson Check Cashing.
II.
Events Occurring During 1999 and 2000
A.
Mr. Harris Brings Mr. Durland In-House
In 1998, while Mr. Durland's disciplinary proceedings were pending, Mr.
Harris asked Mr. Durland to move to Gulfport to help him manage his oil and gas
businesses. On December 10, 1998, Mr. Durland signed an employment
agreement with Covington Energy. The employment agreement provided that Mr.
Durland would receive an annual salary of $120,000 from Covington Energy. In
January 1999 Mr. Durland moved to Gulfport to work for Mr. Harris and his
various businesses.
In early 1999 Mr. Durland and Mr. Harris called Ms. Fausett to convince
her to join Mr. Durland in Gulfport. They offered to hire Ms. Fausett as Mr.
Durland's secretary.
In June 1999 Ms. Fausett moved to Gulfport. On June 24, 1999, Mr.
Durland purchased a 3.8-carat diamond ring for $19,380. On June 26, 1999, Mr.
Durland and Ms. Fausett married, and he gave the 3.8-carat diamond ring to her as
her wedding band.
- 13 [*13] B.
Checks From T.J. Oil & Gas
After Mr. Durland began working for Mr. Harris, he received the following
checks from T.J. Oil & Gas during 1999:
Check No.
Date
Memo line
Amount
1013
1048
1065
1084
1/13
1/26
2/4
2/16
illegible
"salary"
-----
$5,000
7,500
5,000
7,500
1122
1137
1515
1554
3/5
3/15
4/1
4/15
"salary March"
"salary Mar 15 99"
"salary April 1 99"
---
5,000
5,000
5,000
5,000
1587
4/30
"salary 5-1-99"
5,000
1613
Total
5/14
"legal fees and consulting"
5,000
55,000
Mr. Durland cashed these checks at Ferguson Check Cashing. Petitioners did not
report these amounts on their 1999 return.
On a date that is unclear from the record Mr. Durland executed a backdated
$55,000 promissory note payable to T.J. Oil & Gas.3 The promissory note called
for annual interest payments and two principal payments, none of which were
made.
3The promissory note is dated January 1, 1999. However, it is signed by
Ms. Richardson, who began working for Mr. Harris in June 1999.
- 14 [*14] Jonathan Harris also executed a backdated $23,000 promissory note payable
to T.J. Oil & Gas.4 The promissory note called for annual interest payments and
two principal payments, none of which were made.
On June 1, 2000, T.J. Oil & Gas issued a $5,000 check to Mr. Durland. The
memo line on the check stated, "Loan from Corporation". Mr. Durland cashed the
check at Ferguson Check Cashing. Petitioners did not report this amount on their
2000 return.
C.
Gulfport Oil & Gas
On or about April 12, 1999, Mr. Harris and Mr. Durland incorporated
Gulfport Oil & Gas, Inc. (Gulfport Oil & Gas). On April 30, 1999, Mr. Harris, on
behalf of Gulfport Oil & Gas, and Mr. Durland executed a three-year employment
agreement. The employment agreement provided that Mr. Durland (1) would
receive an annual salary of $120,000; (2) would be the vice president of Gulfport
Oil & Gas; (3) would be granted 39% of the common stock of Gulfport Oil & Gas;
(4) would be entitled to a 39% working interest in any oil and gas leases acquired
by Gulfport Oil & Gas in Mississippi, Louisiana, and Texas or from Hawkins
Ranch, Ltd. (Hawkins Ranch), a limited partnership that owned an oil and gas
4The promissory note was also dated January 1, 1999. However, it too is
signed by Ms. Richardson, who began working for Mr. Harris in June 1999.
- 15 [*15] lease in Matagorda County, Texas; and (5) would have the right to assign his
working interest in any oil and gas leases to a third party.
On June 7, 1999, Mr. Harris and Mr. Durland entered into an agreement
with respect to the ownership of the common stock of Gulfport Oil & Gas. The
agreement provided, among other things, that Mr. Harris and Mr. Durland would
own 61% and 39%, respectively, of the common stock of Gulfport Oil & Gas. Ms.
Fausett and Mrs. Harris signed the June 7, 1999, agreement as witnesses.
On dates that are unclear from the record Mr. Durland discussed with Mr.
Harris and Gene Gibbons, a certified public accountant for an accounting firm in
Mobile, Alabama, then named Gibbons, Gibbons & Buck, PC (Gibbons, Gibbons
& Buck), whether to file Federal income tax returns for Gulfport Oil & Gas.
Gulfport Oil & Gas did not file any returns for the years at issue.
D.
Gulfport Oil & Gas' Acquisition of Control of ARXA
In May 1999 Gulfport Oil & Gas entered into an agreement with ARXA
International Energy, Inc. (ARXA), a publicly traded company, to purchase 6
million shares of ARXA common stock at 20 cents per share. After purchasing
the 6 million shares of ARXA common stock Gulfport Oil & Gas held a
controlling interest in ARXA.
- 16 [*16] On May 27, 1999, Gulfport Oil & Gas opened a brokerage account with
Investec Ernst & Co. (Gulfport Oil & Gas Investec account). Gulfport Oil & Gas
held some of its ARXA common stock in the Gulfport Oil & Gas Investec
account.
On August 23, 1999, Mr. Durland wrote a letter to Mr. Gibbons regarding
ARXA's Federal income tax reporting. In the letter Mr. Durland stated as follows:
Since May 7, 1999, we have been paying salaries out of ARXA
without deducting for Federal Income Tax and State of Mississippi
Income Tax. There have also been no deductions for Social Security
payments. We discussed this with you, and you indicated you would
treat the prior payments as loans and we would start withholding the
next quarter.
ARXA did not file any returns for the years at issue.
E.
Purported Loans
In 1999 Mr. Harris and Mr. Durland received the following purported loans
--which they never repaid--from Gulfport Oil & Gas:
Mr. Harris¹
Mr. Durland
Check
Check
No.
Date
Amount
No.
Date
Amount
10292
10923
05244
Total
6/11
7/12
10/19
$125,500
335,000
75,000
535,500
51054
61090
70537
Total
6/24
7/15
10/28
$20,000
350,000
65,000
435,000
- 17 [*17]
¹Mrs. Harris was the payee on all of the purported loan checks.
2The memo line on check No. 1029 bore the notation "Loan
from company".
3The memo line on check No. 1092 bore the notation "Loan
from company in advance on Deed of Trust". Mr. Harris used this
check to pay off a defaulted mortgage on his and Mrs. Harris' home
in Long Beach, Mississippi. On July 16, 1999, Mr. Harris and Mrs.
Harris executed a land deed of trust in favor of Gulfport Oil & Gas
encumbering their home in Long Beach, Mississippi, in connection
with a promissory note for a $335,000 loan. The land deed of trust
was recorded on July 19, 1999.
4The memo line on check No. 0524 bore the notation "loan
from corporation".
5Mr. Durland and Jonathan Harris signed check No. 1054.
6Mr. Durland and Jonathan Harris signed check No. 1090, and
the memo line on the check states "loan from company and advance
on land deed of trust".
7Mr. Durland and Mr. Harris signed check No. 0537, and the
memo line on the check states "loan from corporation".
Mr. Durland documented the purported loans that he received from
Gulfport Oil & Gas as follows.
1.
$20,000
On a date that is unclear from the record Mr. Durland executed a $20,000
promissory note dated June 25, 1999, payable to Gulfport Oil & Gas. The
promissory note called for annual interest payments and two principal payments,
none of which were made. Mr. Harris and Mrs. Harris signed the promissory note
as witnesses. Mr. Durland executed a security agreement dated June 30, 1999,
granting Gulfport Oil & Gas a security interest in Ms. Fausett's wedding band. On
- 18 [*18] August 16, 2000, in connection with divorce proceedings then occurring in
Mississippi between Mr. Durland and Ms. Fausett, a State of Mississippi UCC-1
financing statement was filed with respect to the purported $20,000 loan. Mr.
Durland, as debtor, and Mr. Harris, as president of Gulfport Oil & Gas, signed the
UCC-1 financing statement.
2.
$350,000
On a date that is unclear from the record Mr. Durland and Ms. Fausett
executed a $350,000 promissory note, dated July 16, 1999, payable to Gulfport Oil
& Gas.5 The promissory note called for annual interest payments and two
principal payments, none of which were made. Mr. Harris signed the July 16,
1999, promissory note as witness.
On October 16, 1999, Mr. Durland and Ms. Fausett signed a contract to
purchase a house on 54th Street in Gulfport, Mississippi (54th Street house) for
$407,500. On November 2, 1999, Ms. Fausett closed on the 54th Street house,
and only her name appears on the deed. On November 3, 1999, Mr. Durland and
Ms. Fausett executed a land deed of trust in favor of Gulfport Oil & Gas
5In September 2000 Ms. Fausett stated to the FBI that she signed the July
16, 1999, promissory note on November 14, 1999.
- 19 [*19] encumbering the 54th Street house in connection with the $350,000
promissory note. The land deed of trust was recorded on November 30, 1999.
3.
$65,000
On November 15, 1999, Ms. Fausett purchased a 2000 Jaguar XK8 for
$72,570. Ms. Fausett used the proceeds from cashing check No. 0537 to purchase
the 2000 Jaguar.
On a date that is unclear from the record Mr. Durland executed a $65,000
promissory note, dated October 28, 1999, payable to Gulfport Oil & Gas. The
promissory note called for annual interest payments and two principal payments,
none of which were made. Mr. and Mrs. Harris signed the promissory note as
witnesses.
On a date that is unclear from the record Mr. Durland executed a security
agreement dated October 28, 1999, granting Gulfport Oil & Gas a security interest
in the 2000 Jaguar. On August 16, 2000, in connection with divorce proceedings
then occurring in Mississippi between Mr. Durland and Ms. Fausett, a State of
Mississippi UCC-1 financing statement was filed with respect to the purported
$65,000 loan. Mr. Durland, as debtor, and Mr. Harris, as president of Gulfport Oil
& Gas, signed the UCC-1 financing statement.
- 20 [*20] F.
Matagorda Lease
On June 29, 1999, Gulfport Oil & Gas and Hawkins Ranch entered into an
oil and gas lease with respect to a 672-acre property in Matagorda County, Texas
(Matagorda lease). Included in the Matagorda lease were Hawkins Ranch Well
No. 1, Lewis Ranch Well No. 4, and Lewis Ranch Well No. 5. The Matagorda
lease was recorded on July 7, 1999.
On July 14, 1999, Gulfport Oil & Gas, Mrs. Harris, and Ms. Fausett
executed an assignment transferring a 61% interest in the June 29, 1999, lease of
Lewis Ranch Well No. 4 and Lewis Ranch Well No. 5 to Mrs. Harris and a 39%
interest in that lease to Ms. Fausett. The July 14, 1999, assignment had an
effective date of May 2, 1999; was signed by Mr. Durland on behalf of Gulfport
Oil & Gas, Mrs. Harris, and Ms. Fausett; and was recorded on July 22, 1999.6
60n November 16, 1999, Gulfport Oil & Gas, Mrs. Harris, and Ms. Fausett
executed an assignment transferring a 61% interest in the June 29, 1999, lease of
Hawkins Ranch Well No. 1 to Mrs. Harris and a 39% interest in that lease to Ms.
Fausett. The November 16, 1999, assignment had an effective date of September
10, 1999; was signed by Mr. Durland on behalf of Gulfport Oil & Gas, Mrs.
Harris, and Ms. Fausett; and was recorded on December 2, 1999. The November
16, 1999, assignment relates to the same underlying property as the July 14, 1999,
assignment, and it is unclear from the record why a second assignment was
required.
- 21 [*21] After August 22, 1999, Gulfport Oil & Gas, Mrs. Harris, and Ms. Fausett
entered into an operating agreement dated May 2, 1999.7 Although the operating
agreement in the record is dated May 2, 1999, the operating agreement originally
had a later date that was subsequently altered without Ms. Fausett's knowledge.
Additionally, several clauses were later added to the May 2, 1999, operating
agreement without Ms. Fausett's knowledge. As modified, the May 2, 1999,
operating agreement provided that (1) Gulfport Oil & Gas would operate Lewis
Ranch Well No. 4, Lewis Ranch Well No. 5, and Hawkins Ranch Well No. 1; (2)
Gulfport Oil & Gas was required to open its records to inspection by Mrs. Harris
and Ms. Fausett; (3) Gulfport Oil & Gas could collect all income earned from
Lewis Ranch Well No. 5 and all other wells drilled and completed on the 672-acre
property in Matagorda County, Texas, until Mrs. Harris and Ms. Fausett paid all
7The parties stipulated that the May 2, 1999, operating agreement was
signed on that date. However, we do not find this stipulation to be credible
because the agreement refers to Ms. Fausett as Tina Fausett Durland and on May
2, 1999, Mr. Durland and Ms. Fausett had not yet married; the agreement was
notarized by Ms. Richardson, who began working for Gulfport Oil & Gas in June
1999; and the May 2, 1999, operating agreement refers to assignments of Gulfport
Oil & Gas' interest in the Matagorda lease to Mrs. Harris and Ms. Fausett that
were executed on July 14 and November 16, 1999. Additionally, in September
2000 Ms. Fausett stated to the FBI that she first began working on the May 2,
1999, operating agreement on August 22, 1999. For these reasons we disregard
the stipulation as inconsistent with stipulated exhibits in the record. See CalMaine Foods, Inc. v. Commissioner, 93 T.C. at 195.
- 22 [*22] expenses related to those wells; and (4) the May 2, 1999, operating
agreement was subject to the terms of an agreement dated May 1, 1999, and
entered into by Gulfport Oil & Gas, Mr. Harris, and Mr. Durland.
After Gulfport Oil & Gas, Mrs. Harris, and Ms. Fausett executed the May 2,
1999, operating agreement, Gulfport Oil & Gas, Mr. Harris, and Mr. Durland
entered into an agreement dated May 1, 1999.8 The May 1, 1999, agreement
provided, in relevant part, that (1) Mr. Harris and Mr. Durland agreed that
Gulfport Oil & Gas would assign its interest in Lewis Ranch Well No. 5 to Mrs.
Harris and Ms. Fausett; (2) Mrs. Harris and Ms. Fausett would be responsible for
all costs and expenses relating to Lewis Ranch Well No. 5 and the drilling and
completion of all other wells on the property subject to the Matagorda lease; and
(3) the related operating agreement would be subject to the May 1, 1999,
agreement.
8The parties stipulated that the May 1, 1999, agreement was signed on that
date. However, we do not find this stipulation to be credible because the
agreement refers to Ms. Fausett as Tina Fausett Durland and on May 1, 1999, Mr.
Durland and Ms. Fausett had not yet married. Additionally, it appears that the
purpose of the May 1, 1999, agreement was to insert additional terms into the May
2, 1999, operating agreement, and we found that the May 2, 1999, agreement was
executed after August 22, 1999. For these reasons we disregard the stipulation as
inconsistent with stipulated exhibits in the record. See Cal-Maine Foods, Inc. v.
Commissioner, 93 T.C. at 195.
- 23 [*23] Gulfport Oil & Gas extracted gas from the wells on the property subject to
the Matagorda lease and sold the gas to Eagle Energy Development Co. (Eagle
Energy). Eagle Energy was supposed to issue production checks to Gulfport Oil
& Gas, and Gulfport Oil & Gas in turn was supposed to issue checks to the lessors
of the Matagorda lease.
Eagle Energy issued the following production checks to ARXA, Gulfport
Oil & Gas, and Gulfport Ventures:9
9ARXA previously had a lease on the property subject to the Matagorda
lease. It is unclear from the record what Gulfport Ventures is, why Eagle Energy
issued production checks to it, and why Gulfport Oil & Gas cashed its production
checks.
- 24 [*24]
Check No.
Date
Payee
Amount
5125
5199
5255
N/A
5395
5452
5526
5580
5641
5696
5731
5814
5876
5967
6029
6038
6103
6114
7/29/1999
8/31/1999
9/30/1999
10/29/1999
11/30/1999
12/30/1999
1/31/2000
3/1/2000
3/31/2000
4/28/2000
5/25/2000
6/30/2000
7/28/2000
8/30/2000
9/30/2000
9/30/2000
10/30/2000
10/31/2000
ARXA
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Oil & Gas
Gulfport Ventures
Gulfport Oil & Gas
Gulfport Ventures
$96,083
106,450
117,828
120,686
50,160
81,206
47,789
84,151
68,784
56,292
67,221
95,955
171,592
149,317
73,114
91,717
71,197
201,875
With Mr. Harris' approval Mr. Durland cashed check Nos. 5731, 5814, 5876,
5967, 6029, 6038, 6103, and 6114 at Ferguson Check Cashing. The checks that
Mr. Durland cashed at Ferguson's Check Cashing totaled $921,988.
Gulfport Oil & Gas paid out the amounts on the production checks that
Eagle Energy issued to it or ARXA from July 1999 until April 2000 to Ms. Fausett
(or Mr. Durland in certain months) and Mrs. Harris in accordance with Ms. Fausett
and Mrs. Harris' interests in the Matagorda lease. However, it did not pay out any
- 25 [*25] amounts from the production checks during the period in which Mr. Durland
cashed the production checks from Eagle Energy at Ferguson Check Cashing.
Gulfport Oil & Gas issued the following checks to Ms. Fausett or Mr.
Durland and Mrs. Harris:
Ms. Fausett or
Mr. Durland
Mrs. Harris
Date
Check No.
Amount
Check No.
Amount
7/29/1999
7/30/1999
9/1/1999
10/1/1999
11/1/1999
12/1/1999
1/3/2000
2/1/2000
3/3/2000
4/3/2000
5/1/2000
Total
1010
1014
1018
0302
0548
0619
0667
0724
0779
0831
0874
$3,664
37,472
41,516
45,953
47,068
19,562
31,670
18,638
¹32,819
¹26,826
¹21,954
327,142
--1012
1017
0301
0547
0618
0666
0723
0778
0830
0873
--$58,611
64,935
71,875
73,619
30,597
49,536
29,151
51,332
41,958
34,338
505,952
¹These checks were made payable to Mr. Durland. The
remainder were made payable to Ms. Fausett.
Mr. Durland cashed the checks made payable to him at Ferguson Check Cashing.
Mr. Durland told Ms. Fausett on May 15, 2000, that he had been receiving the
production checks. Petitioners reported the amounts on these checks on their 1999
and 2000 retums.
- 26 [*26]
G.
Gulfport Oil & Gas Checks
On February 15, 2000, Gulfport Oil & Gas issued check No. 0750 to Mr.
Durland for $3,503. The memo line on the check states "$5,000 gross salary" and
notes withholding for Medicare, Social Security, Federal income tax, and
Mississippi State income tax. Petitioners reported the amount on this check on
their 2000 return.
Gulfport Oil & Gas also issued the following checks to Mr. Durland in
2000:
- 27 [*27]
Check No.
Date
0826
0855
3/31
4/14
"Loan from corporation"
"Loan from corporation"
$5,000
5,000
0872
4/26
"Loan from corporation"
5,000
0891
0922
0946
5/15
6/19
6/27
"Loan from corporation"
"Loan from corporation"
"Repayment of loan to
Gulfport Oil & Gas, Inc."
"Loan from corporation"
"Loan from corporation"
"Loan from corporation"
"Loan from corporation"
"Loan from corporation"
"Loan from corporation"
"Loan from corporation"
"Repayment of principle of
loan to corporation"
"Repayment of principle of
loan to corporation"
"Loan from corporation"
"Loan from corporation"
5,000
5,000
0966
0983
1001
1015
1059
1076
1097
1103
1104
1151
1162
Total
6/30
7/14
7/28
8/15
9/1
9/15
10/13
10/13
10/13
11/1
11/15
Memo line
Amount
15,000
5,000
5,000
5,000
5,000
5,000
5,000
10,000
17,500
15,000
5,000
5,000
122,500
Petitioners did not report these amounts on their 2000 return.¹°
¹°Gulfport Oil & Gas also issued checks totaling $152,500 to Mr. and Mrs.
Harris in 2000. The memo lines on many of these checks bore notations indicating
that the checks were for loans from Gulfport Oil & Gas or repayments of loans
made to Gulfport Oil & Gas.
- 28 [*28] On August 16, 2000, Gulfport Oil & Gas issued a $12,500 check to T.J. Oil
& Gas. With Mr. Harris' approval Mr. Durland cashed the check at Ferguson
Check Cashing. Petitioners did not report this amount on their 2000 return.
H.
Private Investor and Investec Checks
During 2000 Gulfport Oil & Gas sold some of its ARXA common stock to
private investors, and it received checks from those investors in amounts totaling
$327,200. Additionally, during 2000 Gulfport Oil & Gas sold some of the ARXA
common stock that it held in its Investec account, and it received checks in
amounts totaling $163,752 from Investec for its ARXA stock. Ms. Fausett
witnessed promissory notes for some stock purchases." With Mr. Harris'
approval Mr. Durland cashed the private investor and Investec checks at Ferguson
Check Cashing. Petitioners did not report these amounts on their 2000 return.
I.
2000 Cashier's Checks
In 2000 Mr. Durland purchased the following cashier's checks from
Whitney National Bank with cash:
"Ms. Fausett stated to the FBI in September 2000 that Gulfport Oil & Gas
was "bailing and selling" ARXA stock.
- 29 [*29]
Check
No.
Date
08305
08637
08676
08690
08807
6/26
9/25
10/2
10/3
11/2
08945
12/19
Payee
Merrill Lynch
Merrill Lynch
Merrill Lynch
Merrill Lynch
Merrill Lynch
Gulfport Oil &
Gas
Remitter line
Amount
"Gulfport Oil and Gas Inc."
"Jack R. Durland Jr."
"Jack R. Durland Jr."
"Jack R. Durland Jr."
"Deposit for account of
Gulfport Oil & Gas Inc.--
$30,000
35,000
22,930
30,000
Jack R. Durland Jr."
"Payment of Royalties on
Matagorda County, TX
Properties--Jack R.
56,618
Durland Jr."
Total
30,000
204,548
Mr. Durland deposited the cashier's checks into a Merrill Lynch account owned by
Gulfport Oil & Gas.
J.
Ms. Fausett's Separation From Mr. Durland
In the latter half of 1999 Ms. Fausett became concerned about certain
documents she had signed at Mr. Durland's request. She began asking Mr.
Durland for copies of documents she had signed and for records relating to the
Matagorda lease. Mr. Durland refused to give Ms. Fausett the documents and
records, and eventually he told her that Mr. Harris did not want her to have them.
On December 30, 1999, Ms. Fausett separated from Mr. Durland and moved
back to Oklahoma City. On or about January 24, 2000, she moved back to
- 30 [*30] Gulfport with Mr. Durland. On February 25, 2000, she again separated from
him and moved back to Oklahoma City.
In early 2000 Mr. Durland sent a check for $25,000 drawn on the Fausett
Merrill Lynch account to the Internal Revenue Service (IRS). Mr. Durland also
told Ms. Fausett that he had filed for both of them a Form 4868, Application for
Automatic Extension of Time To File U.S. Individual Income Tax Return, for tax
year 1999. On April 12, 2000, Ms. Fausett contacted the IRS, and an IRS
employee informed her that the $25,000 check had not been credited to her and
that no Forms 1099 had been filed showing income to her.
On April 19, 2000, Mr. Durland told Ms. Fausett that he did not want to
obtain releases on the promissory note and the deed of trust relating to the 54th
Street house because "there is no tax liability on loans." Ms. Fausett testified that
Mr. Durland also told her "about a case he handled where they never paid back the
loans and the IRS never caught it."
On April 30 and again on May 15, 2000, Mr. Durland asked Ms. Fausett to
execute a will naming him as the sole beneficiary. Fearing for her safety Ms.
Fausett declined. Mr. Durland also told Ms. Fausett that the purpose of the well
- 31 [*31] assignments was to take money out of Gulfport Oil & Gas and to protect him
and Mr. Harris.¹²
On May 31, 2000, Ms. Fausett again contacted the IRS. An IRS employee
informed her that a Form 4868 was filed for Mr. Durland but not for her and that
she would have to file a joint return to avoid late filing penalties.
In June 2000 Ms. Fausett learned that liens had been filed on the wells
subject to the Matagorda lease because Gulfport Oil & Gas had not paid the
people working on the wells. Ms. Fausett hired an attorney from Piedmont,
Oklahoma, to help her get documents and records from Mr. Durland and Gulfport
Oil & Gas. The attorney wrote letters and made phone calls to Mr. Durland, Mr.
Harris, Gulfport Oil & Gas, and Eagle Energy, but he was unable to secure any of
the records relating to the Matagorda lease.
On June 21, 2000, Mr. Durland called Ms. Fausett and told her that the
wells subject to the Matagorda lease were only nominally assigned to her and Mrs.
Harris and that he and Mr. Harris were the true owners of those wells. He further
told her that, pursuant to the May 2, 1999, operating agreement, she owed
¹²Previously, Mr. Durland had told Ms. Fausett that the purpose of the well
assignments was to protect Ms. Fausett and Mrs. Harris.
- 32 [*32] hundreds of thousands of dollars to Gulfport Oil & Gas for expenses
incurred on wells subject to the Matagorda lease.
Ms. Fausett went with Ms. Maggard to Bay City, Texas, to find an attorney
licensed to practice law in Texas. Ms. Fausett subsequently filed a lawsuit against
Gulfport Oil & Gas and Eagle Energy in the District Court for Matagorda County,
Texas, for the purposes of obtaining documents and records relating to the
Matagorda lease and protecting her interest in the lease.
K.
2000 Divorce Proceedings
1.
2000 Oklahoma Divorce Case
On June 30, 2000, Ms. Fausett filed for divorce from Mr. Durland in the
District Court of Oklahoma County, Oklahoma (2000 Oklahoma divorce case).
Ms. Fausett retained an attorney, Anita F. Sanders, to represent her in the 2000
Oklahoma divorce case. Ms. Fausett transferred $65,000 that she had previously
received under the Matagorda lease into Ms. Sanders' trust fund account.
2.
Mississippi Divorce Case
Meanwhile, on July 12, 2000, Mr. Durland filed for divorce from Ms.
Fausett in the Chancery Court of Harrison County, Mississippi (Mississippi
divorce case). Ms. Fausett retained an attorney to represent her in the Mississippi
divorce case.
- 33 [*33] On July 19, 2000, Mr. Durland filed a financial statement in the Mississippi
divorce case that stated that he had (1) no income since March 15, 2000; (2)
monthly living expenses of $1,415; and (3) total liabilities of $357,000.
On July 27, 2000, Ms. Fausett's Mississippi attorney filed a motion for
temporary relief in the Mississippi divorce case.¹³ On July 27, 2000, the court in
the Mississippi divorce case issued a temporary order that (1) Mr. Durland pay
spousal support of $4,000 per month to Ms. Fausett; (2) Mr. Durland provide an
accounting of Ms. Fausett's share of the income from the wells on the property
subject to the Matagorda lease; (3) Mr. Durland and Ms. Fausett exchange income
tax data; and (4) funds from the Matagorda lease be deposited with Gulfport Oil &
Gas.
On August 3, 2000, Mr. Durland filed a motion to amend the July 27, 2000,
temporary order in the Mississippi divorce case. On August 10, 2000, Mr.
Durland filed a supplemental motion to amend the temporary order; notices of
hearing regarding the motion and supplemental motion to amend the temporary
order; and an amended financial statement. The notices of hearing set a hearing
date of August 11, 2000. In the amended financial statement Mr. Durland stated
¹³Ms. Fausett testified that she eventually fired her Mississippi attorney
because he failed to file documents and records on her behalf.
- 34 [*34] that he (1) had not received any salary from Gulfport Oil & Gas and ARXA
since January 1 and March 15, 2000, respectively; (2) had monthly living expenses
of $1,692; and (3) had total liabilities of $1,346,974.
On August 15, 2000, the court in the Mississippi divorce case issued a
supplemental temporary order that (1) the balances in the Fausett Merrill Lynch
and Fausett Charles Schwab accounts be frozen; (2) Ms. Fausett deposit $65,000
into the registry of the court; (3) Ms. Fausett be enjoined from pursuing her civil
action against Gulfport Oil & Gas and Eagle Energy in the District Court for
Matagorda County, Texas; (4) Ms. Fausett provide within seven days the account
statements for the Fausett Merrill Lynch and Fausett Charles Schwab accounts to
Mr. Durland's attorney; and (5) Mr. Durland provide an accounting of the income
and expenses of Gulfport Oil & Gas to Ms. Fausett.
3.
Ms. Fausett's Meeting With the FBI
On or about September 1, 2000, Ms. Fausett met with the FBI at Ms.
Sanders' law office. At the meeting Ms. Fausett discussed with the FBI her
concerns about Mr. Durland's and Mr. Harris' activities. She provided the FBI
with three "lists" in which she expressed those concerns and what she knew about
Mr. Durland, Mr. Harris, and their business associates.
- 35 [*35] In the lists Ms. Fausett stated that she knew Mr. Durland received a salary
of $10,000 per month from one of Mr. Harris' businesses and that Mr. Gibbons
had told Mr. Durland that they could report Mr. Durland's salary as a loan to avoid
paying taxes.¹4 Ms. Fausett also stated to the FBI that Mr. Durland had received
the purported loans from Gulfport Oil & Gas, see supra part II.E, but never
planned to repay the amounts and that the loans were intended to avoid their
having to pay taxes.
4.
Ms. Fausett's Contempt Hearing
Mr. Durland filed a motion to modify the August 15, 2000, supplemental
temporary order and to hold a contempt hearing. On September 7, 2000, the court
in the Mississippi divorce case issued a second supplemental temporary order.
The second supplemental temporary order found that Ms. Fausett had not
deposited the $65,000 with the court's registry and had not provided copies of the
Fausett Merrill Lynch and Fausett Charles Schwab account statements to Mr.
Durland. Consequently, the court ordered that (1) Ms. Fausett deposit the $65,000
to the court's registry within 24 hours from the date of the order; (2) Mr. Durland
no longer be required to pay temporary spousal support to Ms. Fausett; (3) Ms.
¹4Ms. Fausett stated that in a court hearing on May 10, 2000, Mr. Durland
testified that he had not received a salary since March 15, 2000, and Ms. Fausett
wrote that she "know[s] for a fact he was still getting salary."
- 36 [*36] Fausett deliver within five days the 2000 Jaguar and her wedding band to
the court clerk; (4) Ms. Fausett deliver within three days copies of the Fausett
Merrill Lynch and Fausett Charles Schwab account statements to Mr. Durland's
attorney; (5) Ms. Fausett appear for a hearing to show cause why she should not be
held in contempt of court; (6) Mr. Durland be relieved of any obligation to render
an accounting of the income and expenses of Gulfport Oil & Gas; and (7) Ms.
Fausett file a motion to dismiss her civil action against Gulfport Oil & Gas and
Eagle Energy in the District Court for Matagorda County, Texas.
Ms. Fausett's contempt hearing in the Mississippi divorce case was set for
September 25, 2000. By then she had retained a new attorney. When she arrived
for the hearing, she learned that the hearing had been postponed because of a
bomb threat. When the hearing finally convened, her new attorney was not
present, and the presiding judge required her to represent herself at the hearing.
The presiding judge ordered Ms. Fausett to deposit her wedding band and a check
drawn on Ms. Sanders' trust fund account with the court and to call Ms. Sanders
and direct her to file a motion to dismiss the 2000 Oklahoma divorce case. On
September 28, 2000, Ms. Fausett filed a motion to dismiss the 2000 Oklahoma
divorce case.
- 37 [*37] After the September 25, 2000, contempt hearing Mr. Durland told Ms.
Fausett that he would agree to settle the Mississippi divorce case if Ms. Fausett
agreed to certain conditions. Mr. Durland wanted Ms. Fausett to return to
Gulfport, but she refused. Instead, they agreed that Ms. Fausett would move to
New Orleans, Louisiana. Mr. Durland also demanded that Ms. Fausett agree to
form a new entity to receive the income earned under the Matagorda lease and to
sign a joint Federal income tax return for 1999. On October 25, 2000, Mr.
Durland and Ms. Fausett filed a stipulation to have the Mississippi divorce case
dismissed.
L.
1999 Return
On October 16, 2000, Mr. Durland and Ms. Fausett filed a joint Form 1040,
U.S. Individual Income Tax Return, for 1999 (1999 return). On their 1999 return
petitioners reported wages, taxable interest, Schedule E income, and total income
of $25,000, $7,714, $95,544, and $178,761, respectively. On the attached
Schedule E, Supplemental Income and Loss, petitioners reported royalties,
expenses, depreciation expense or depletion, and net income of $209,521,
$67,883, $46,094, and $95,544, respectively. Gibbons, Gibbons & Buck prepared
the 1999 return on the basis of information that Mr. Durland provided to Mr.
Gibbons.
- 38 [*38] M.
Boleyn Energy
On October 17, 2000, Mr. Durland and Ms. Fausett incorporated Boleyn
Energy, Inc. (Boleyn Energy). Ms. Fausett was the president of Boleyn Energy,
and Mr. Durland was vice president, secretary, and treasurer. Ms. Fausett and Mr.
Durland each owned 750 shares of Boleyn Energy. On October 19, 2000, Ms.
Fausett assigned her interest in the Matagorda lease to Boleyn Energy. After they
incorporated Boleyn Energy, Mr. Durland told Ms. Fausett that he had deposited
into an account at Merrill Lynch owned by Boleyn Energy (Boleyn Merrill Lynch)
the funds from the Matagorda lease production checks that he had previously
cashed.
III.
Events Occurring During 2001 and 2002
A.
2001 Cashier's Checks
In 2001 Mr. Durland purchased the following cashier's checks from
Whitney National Bank with cash:
-39[*39]
Check
No.
09016
09302
09902
09930
09959
10000
Total
Date
Amount
1/16
2/13
4/17
4/24
5/3
5/17
$30,000
12,500
5,000
5,000
4,000
1,500
58,000
The payee on the 2001 cashier's checks was Gulfport Oil & Gas, and the remitter
line on the checks indicated that the remitter was Mr. Durland and that they were
for the payment of royalties on the Matagorda lease. Mr. Durland deposited the
cashier's checks into a Merrill Lynch account owned by Gulfport Oil & Gas.
B.
Mr. Durland's and Mr. Harris' Assignment of Shares of Gulfport
Oil & Gas Common Stock to Gulfport Oil & Gas
On January 15, 2001, Mr. Durland and Gulfport Oil & Gas entered into an
agreement (Durland January 15, 2001, agreement) to exchange 573 of Mr.
Durland's 1,170 shares of Gulfport Oil & Gas common stock for the following
promissory notes payable to Gulfport Oil & Gas:
- 40 [*40]
Date
Amount
6/25/1999
7/16/1999
10/28/1999
12/31/2000
Total
$20,000
350,000
65,000
¹34,800
469,800
¹This promissory note is not in
the record.
Mr. Harris, on behalf of Gulfport Oil & Gas, and Mr. Durland signed the Durland
January 15, 2001, agreement. In a document dated January 15, 2001, recorded on
April 11, 2001, and signed by Mr. Harris on behalf of Gulfport Oil & Gas,
Gulfport Oil & Gas released the November 3, 1999, deed of trust encumbering the
54th Street house. In undated documents signed by Mr. Harris on behalf of
Gulfport Oil & Gas and witnessed by Mr. Durland and Ms. Fausett, Gulfport Oil
& Gas acknowledged that the June 25, July 16, and October 28, 1999, promissory
notes were paid in full.¹5
¹sMr. Durland testified that he signed these acknowledgments around
January 15, 2001. We do not find Mr. Durland's testimony to be credible. Instead
we find credible Ms. Fausett's statement to the FBI in September 2000 that Mr.
Durland had her prepare releases and acknowledgments of payments at the same
time as he had her prepare the promissory notes for the purported loans.
- 41 [*41] On January 15, 2001, Mr. Harris and Gulfport Oil & Gas entered into an
agreement (Harris January 15, 2001, agreement) pursuant to which Gulfport Oil &
Gas and Mr. Harris agreed to exchange 896 of Mr. Harris' 1,830 shares of
Gulfport Oil & Gas common stock for the following promissory notes:
Date
Amount
7/16/1999
7/16/1999
10/19/1999
12/31/2000
Total
$335,000
125,000
75,000
¹42,800
577,800
¹This promissory note is not in
the record.
Mr. Durland, on behalf of Gulfport Oil & Gas, and Mr. Harris signed the Harris
January 15, 2001, agreement. In a document dated January 15, 2001, recorded on
April 11, 2001, and signed by Mr. Durland on behalf of Gulfport Oil & Gas,
Gulfport Oil & Gas released the July 16, 1999, deed of trust encumbering Mr. and
Mrs. Harris' home in Long Beach, Mississippi. After Mr. Durland and Mr. Harris
respectively assigned 573 and 896 shares of their Gulfport Oil & Gas common
stock to Gulfport Oil & Gas, Mr. Durland and Mr. Harris continued to own 39%
and 61% of the outstanding Gulfport Oil & Gas common stock, respectively.
- 42 [*42]
C.
Checks Issued to Boleyn Energy
Gulfport Oil & Gas issued the following checks to Boleyn Energy in 2001:
Check No.
Date
Amount
Memo line
1345
1359
1396
3/21
3/21
4/30
$5,000
40,000
15,000
"Repayment of loans to company"
"Loan to company"
"Net working interest payment for
March 2001 Matagorda County,
TX properties"
Mr. Durland cashed these checks at Ferguson Check Cashing. Boleyn Energy
reported the amount on check No. 1396 on its 2001 return, and petitioners reported
that amount on a Schedule E attached to their 2001 return. Boleyn Energy did not
report the amount on check No. 1345 or 1359 on its 2001 return, and petitioners
did not report those amounts on their 2001 return.
D.
Prytania Street House
In late 2000 or early 2001 Mr. Durland informed Ms. Fausett that he would
not divorce her and that he would not give her the records he had promised her.
He then directed her to look for a house to purchase in New Orleans, Louisiana,
and he hired someone to take her around to look for one.
On April 22, 2001, Mr. Durland and Ms. Fausett signed a contract to
purchase a house on Prytania Street in New Orleans, Louisiana (Prytania Street
house), for $622,500. On May 31, 2001, Ms. Fausett closed on the Prytania Street
- 43 [*43] house, and it was titled in her name. Mr. Durland and Ms. Fausett paid for
the Prytania Street house with a certified check from Merrill Lynch and $25,000 in
cash. The certified check from Merrill Lynch was obtained with funds held in an
account owned by Boleyn Energy. Those funds were--at least in part--from
amounts paid to Mr. Durland, Ms. Fausett, or Boleyn Energy under the Matagorda
lease.
On September 26, 2001, Ms. Fausett formed Trinity Art & Antiques, LLC
(Trinity Art), to sell art and antiques. On a date that is unclear from the record Ms.
Fausett transferred the Prytania Street house to Trinity Art. Later Trinity Art
transferred the Prytania Street house back to Ms. Fausett so that she could obtain a
loan on the property. After obtaining the loan Ms. Fausett transferred the Prytania
Street house back to Trinity Art.
E.
Hubbard Litigation
In December 2000 ARXA changed its name to King Resources, Inc. (King
Resources). On March 9, 2001, creditors of King Resources and Gulfport Oil &
Gas sued King Resources, Gulfport Oil & Gas, Mr. Harris, and Mr. Durland in the
U.S. District Court for the Southern District of Mississippi (Hubbard case or
litigation). The plaintiffs in the Hubbard case claimed that King Resources and
Gulfport Oil & Gas had failed to pay the plaintiffs amounts due on promissory
- 44 [*44] notes executed by ARXA and Gulfport Oil & Gas. In November 2002 Ms.
Fausett was added as a defendant in the Hubbard case.
F.
Mr. Durland's Departure
In July 2001 Hawkins Ranch sent a letter to Gulfport Oil & Gas demanding
overdue royalty payments on the Matagorda lease. On September 12, 2001, after
Gulfport Oil & Gas failed to make the required payments, Hawkins Ranch
terminated the lease.
Around September 2001 Mr. Durland stopped working for Mr. Harris and
Gulfport Oil & Gas. By November 2001 Mr. Durland had moved into the Prytania
Street house with Ms. Fausett and had stopped working altogether.
G.
2000 and 2001 Returns
In October 2001 Boleyn Energy filed a Form 1120S, U.S. Income Tax
Return for an S Corporation, for 2000 (2000 Boleyn Energy return), reporting that
it elected to be taxed as an S corporation as of October 17, 2000. An accounting
firm named GibbonsHall, LLC (GibbonsHall),¹6 prepared the 2000 Boleyn Energy
return, and Mr. Durland signed the return as an officer of Boleyn Energy.
¹°GibbonsHall's business address is the same as Gibbons, Gibbons &
Buck's business address.
- 45 [*45] On October 17, 2001, Mr. Durland and Ms. Fausett filed a joint Form 1040
for 2000 (2000 return). On their 2000 return petitioners reported wages, taxable
interest, Schedule E income, and total income of $25,000, $5,254, $133,482, and
$204,238, respectively. On an attached Schedule E petitioners reported royalties,
expenses, depreciation expense or depletion, and net income of $202,716,
$40,000, $29,234, and $133,482, respectively. GibbonsHall prepared the 2000
return on the basis of information that Mr. Durland provided to Mr. Gibbons.
In September 2002 Boleyn Energy filed a Form 1120S for 2001 (2001
Boleyn Energy return). GibbonsHall prepared the 2001 Boleyn Energy return, and
Mr. Durland signed the return as an officer of Boleyn Energy.
On September 3, 2002, Mr. Durland and Ms. Fausett filed a joint Form 1040
for 2001 (2001 return). On their 2001 return petitioners reported wages, taxable
interest, Schedule E income, and total income of zero, $20,876, $275,430, and
$292,852, respectively. On an attached Schedule E petitioners reported royalties,
expenses, depreciation expense or depletion, and net income of $436,341,
$67,816, $96,741, and $275,430, respectively. GibbonsHall prepared the 2001
return on the basis of information that Mr. Durland provided to Mr. Gibbons.
- 46 [*46] IV.
Events Occurring After 2002
A.
Saint Andrews Court House
In July 2003 Mr. Durland and Ms. Fausett moved into a house that Ms.
Fausett purchased on Saint Andrews Court in Frisco, Texas (Saint Andrews Court
house). While she was living in Frisco Ms. Fausett sold antiques through a limited
liability company she owned named Rosewood Ventures, LLC (Rosewood
Ventures).
B.
2002-2007 Returns
Mr. Durland and Ms. Fausett filed joint Federal income tax returns for 2002
and 2003. Mr. Gibbons prepared the joint returns. Mr. Durland and Ms. Fausett
filed separate Federal income tax returns for 2004-07. An accounting firm in
Dallas, Texas, prepared the separate returns.
C.
IRS' Investigation of Mr. Durland
On a date that is unclear from the record the FBI gave the IRS the
information that Ms. Fausett had provided to its agents in 2000. In March 2004
Special Agent Nancy Emmons and Revenue Agent Lisa Wansley met with Mr.
Durland and Ms. Fausett.
On March 30, 2004, Special Agent Emmons and Special Agent Darren
Mayer met with Mr. Harris. During the March 30, 2004, meeting Mr. Harris
- 47 [*47] claimed that Mr. Durland had stolen $3 million and corporate records from
Gulfport Oil & Gas but that he had not yet confronted him about the stolen money
or records. On April 13, 2005, Special Agent Emmons and Revenue Agent
Wansley met with Mr. Harris to review documents relating to Gulfport Oil & Gas
and to ask him additional questions. During the April 13, 2005, meeting Mr.
Harris stated that he had not seen, and did not have, currency transaction reports
(CTRs) maintained by Ferguson Check Cashing and filed in his name even though
the CTRs related to checks that Mr. Durland had cashed.¹7
D.
Mr. Durland's Transfer of 1,500 Shares of Boleyn Energy
Common Stock to Rosewood Ventures
On a date that is unclear from the record Mr. Durland executed a bill of sale
dated December 28, 2004, that purported to transfer 1,500 shares of common stock
¹7Mr. Harris also testified that he had not sent Jonathan Harris to retrieve the
CTRs from Ferguson Check Cashing and that neither Jonathan Harris nor Ms.
Ferguson had given him any CTRs. We do not find Mr. Harris' statement or
testimony to be credible because Jonathan Harris credibly testified that he
retrieved copies of the CTRs from Ferguson Check Cashing, and we find it
implausible that he would have done this on his own or that Mr. Harris did not see
the CTRs that Jonathan Harris retrieved.
- 48 [*48] in Boleyn Energy from himself to Rosewood Ventures.¹8 Mr. Durland
signed the bill of sale as a witness.
E.
Mr. Durland's Indictment for Tax Evasion
On June 21, 2006, the United States filed a criminal indictment against Mr.
Durland with the U.S. District Court for the Southern District of Mississippi. The
indictment charged Mr. Durland with two counts of violating section 7201 with
respect to his 1999 and 2000 Federal income tax liabilities, respectively. With
respect to 2000 the indictment stated as follows:
COUNT 2
On or about October 2, 2001, in Harrison County, in the
Southern Division of the Southern District of Mississippi, the
defendant, JACK R. DURLAND, JR., who was a resident of
Gulfport, Mississippi, did willfully attempt to evade and defeat a
large part of the income tax due and owing by he and his spouse to
the United States of America for the calendar year 2000, by preparing
and causing to be prepared, and by signing and causing to be signed,
a false and fraudulent joint U.S. Individual Income Tax Return, Form
1040, on behalf of themselves, which was filed with the Internal
Revenue Service, wherein it was stated that their joint taxable income
for said calendar year was the sum of $201,164, and that the amount
¹8The parties stipulated that Mr. Durland transferred 1,500 shares of Boleyn
Energy common stock to Rosewood Ventures on December 28, 2004. However,
we do not find this stipulation to be credible because the date on the bill of sale
appears to have been altered and Mr. Durland owned only 750 shares of Boleyn
Energy common stock. We therefore disregard the stipulation as inconsistent with
a stipulated exhibit in the record. See Cal-Maine Foods, Inc. v. Commissioner, 93
T.C. at 195.
- 49 [*49] of tax due and owing thereon was the sum of $56,465, whereas,
as he then and there well knew and believed, their joint taxable
income for the said calendar year was substantially in excess of that
heretofore stated and that upon said additional taxable income a
substantial additional tax was due and owing to the United States of
America.
In violation of Title 26, United States Code, Section 7201.
F.
Mr. Durland's Plea Agreement
In a letter to Mr. Durland's attorneys dated February 28, 2007, for the
purpose of calculating Mr. Durland's sentence under the Federal sentencing
guidelines for the count relating to 1999, the U.S. Attorney's Office for the
Southern District of Mississippi proposed not to include in his income $435,000 in
purported loans from Gulfport Oil & Gas. Additionally, for the purpose of
calculating Mr. Durland's sentence under the Federal sentencing guidelines for the
count relating to 2000, the U.S. Attorney's Office proposed not to include the
$12,500 check payable to T.J. Oil & Gas, $163,751 in Investec checks, and
$327,000 in individual investor checks; and to include only 39% of the $921,989
proceeds from Eagle Energy production checks." Additionally, the U.S.
Attorney's Office proposed not to seek an abuse of trust enhancement on the
"The evidence presented at trial indicated that the individual investor
checks total $327,200. After rounding to the nearest dollar, the Court finds that
the proceeds from Eagle Energy total $921,988, and the Investec checks total
$163,752.
- 50 [*50] theory that Mr. Durland embezzled the unreported income from Gulfport Oil
& Gas.
On April 12, 2007, Mr. Durland entered into a plea agreement with the U.S.
Attorney's Office in which he agreed to plead guilty to count 2 of the June 21,
2006, indictment. Pursuant to the plea agreement, the U.S. Attorney's Office
agreed, among other things, to move to dismiss the open count; to stipulate that
the tax loss for 2000 is $115,557; and to not further prosecute Mr. Durland or Ms.
Fausett for events relating to their 1999-2001 tax years. The plea agreement stated
as follows:
8.
Binding Effect On This District Only. It is further
understood that this plea agreement does not bind any state or local
prosecuting authorities or any other federal district except as to the
use of Defendant's statements voluntarily given hereunder; further,
this agreement does not bind the Attorney General of the United
States in regard to any civil matter involving the tax statutes of the
United States.
*
*
*
*
*
*
*
13. Complete Agreement. It is further understood that this
plea agreement completely reflects all promises, agreements and
conditions made by and between the United States Attorney's Office
for the Southern District of Mississippi and Defendant.
On July 27, 2007, the U.S. District Court for the Southern District of
Mississippi accepted a guilty plea as to count 2, and dismissed count 1, of the June
- 51 [*51] 21, 2006, indictment. The court sentenced Mr. Durland to a term of
imprisonment of 11 months and supervised release of 3 years and required him to
pay an assessment of $100, a fine of $30,000, and restitution of $97,475. Mr.
Durland was imprisoned in a Federal prison camp in Pensacola, Florida, from
August 2007 until June 2008.2°
G.
2007 Oklahoma Divorce Case
On November 15, 2007, Ms. Fausett filed for divorce from Mr. Durland in
the District Court of Oklahoma County, Oklahoma (2007 Oklahoma divorce case).
On March 2, 2009, the court in the 2007 Oklahoma divorce case dissolved
petitioners' marriage. The divorce decree states that both Mr. Durland and Ms.
Fausett are liable for the tax for the years at issue.
V.
Deficiency Notices
On September 28, 2010, respondent issued duplicate original notices of
deficiency to Mr. Durland and Ms. Fausett. In an attached Form 886-A,
Explanation of Adjustments, respondent determined that the following amounts
2°Respondent introduced into evidence several letters that Mr. Durland
wrote to Ms. Fausett while he was incarcerated. Mr. Durland objected to the
introduction of these letters on the basis of the marital communications privilege.
At trial we reserved ruling on Mr. Durland's objection, and by order we overruled
Mr. Durland's objection and admitted the letters into evidence. We note, however,
that the parties did not rely on any of those letters in their posttrial briefs, and we
likewise do not base any of our findings of fact on the contents of those letters.
- 52 [*52] represented diverted corporate income to Mr. Durland and/or Ms. Fausett for
1999-2001:
Entity or source
1999
2000
2001
T.J. Oil & Gas
Gulfport Oil & Gas
Eagle Energy
$55,000
435,000
-0-
$17,500
122,500
921,988
-0$45,000
-0-
-0-
163,752
-0-
-0490,000
327,200
1,552,940
-045,000
Investec
Individual investors
Total
Respondent also determined that Mr. Durland and Ms. Fausett were entitled to
additional Schedule E deductions of $144,548 for 20002¹ and that Mr. Durland
was liable for civil fraud penalties with respect to the entire underpayment of tax
for 1999, 2000, and 2001.
OPINION
I.
Preliminary Matters
A.
Credibility of Witnesses and Reliability of Documentary Evidence
In Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 84 (2000)
(citing Boehm v. Commissioner, 326 U.S. 287, 293 (1945), and Wilmington Tr.
2¹In a document dated June 14, 2005, Revenue Agent Wansley determined
that petitioners substantiated royalty payments of $30,000 deducted on the
Schedule E attached to their 2000 return and that they were entitled to claim
further Schedule E deductions of $144,548 relating to Whitney National Bank
cashier's check Nos. 08945, 08637, 08676, 08690, and 08807.
- 53 [*53] Co. v. Helvering, 316 U.S. 164, 167-168 (1942)), afCd, 299 F.3d 221 (3d
Cir. 2002), we stated as follows:
Before turning to the issues at hand, we pause to pass on our
perception of the trial witnesses [and the reliability of much of the
documentary evidence]. We observe the candor, sincerity, and
demeanor of each witness in order to evaluate his or her testimony
and assign it weight for the primary purpose of finding disputed facts.
We determine the credibility of each witness, weigh each piece of
evidence, draw appropriate inferences, and choose between
conflicting inferences in finding the facts of a case. The mere fact
that one party presents unopposed testimony [or other evidence] on
his or her behalf does not necessarily mean that the elicited testimony
[or other evidence] will result in a finding of fact in that party's favor.
We will not accept the testimony of witnesses at face value if we find
that the outward appearance of the facts in their totality conveys an
impression contrary to the spoken word. * * *
The Court's statement in Neonatology Assocs. is particularly apt here. The
parties called several witnesses to testify and introduced numerous documents.
Unless we otherwise herein expressly find, we did not find the testimony of Mr.
Durland, Ms. Fausett, Mr. Harris, or Ms. Richardson to be credible. Additionally,
we have little confidence in the genuineness or accuracy of many of the documents
that Mr. Durland drafted, maintained, or subscribed.
B.
Judicial Estoppel
Under the doctrine ofjudicial estoppel, a party that wins judicial acceptance
of a theory in one case cannot pursue a contradictory theory in a later case. See
- 54 [*54] New Hampshire v. Maine, 532 U.S. 742, 749 (2001); Fazi v. Commissioner,
105 T.C. 436, 445 (1995) (citing Huddleston v. Commissioner, 100 T.C. 17, 28-29
(1993)). Judicial estoppel is an equitable principle the purpose of which is to
"protect the integrity of the judicial process * * * by prohibiting parties from
deliberately changing positions according to the exigencies of the moment". N w
Hampshire v. Maine, 532 U.S. at 749-750 (first quoting Edwards v. Aetna Life
Ins. Co., 690 F.2d 595, 598 (6th Cir. 1982), then quoting United States v.
McCaskey, 9 F.3d 368, 378 (5th Cir. 1993)). "[J]udicial estoppel does not bar a
party from contradicting itself, but from contradicting a court's determination that
was based on that party's position." Teledyne Indus., Inc. v. NLRB, 911 F.2d
1214, 1217 n.3 (6th Cir. 1990).
Mr. Durland contends that respondent should be barred, under the doctrine
ofjudicial estoppel, from asserting a deficiency greater than the tax loss that the
sentencing court in his criminal case relied on to determine his restitution
obligation for 2000. In particular Mr. Durland asserts that the tax loss that the
sentencing court relied on was based upon certain concessions that the U.S.
attorney proposed to make in the February 28, 2007, letter to his attorneys. This
contention is without merit because respondent has not asked this Court to accept
- 55 [*55] a position contrary to one that the Government successfully asked the court
in Mr. Durland's criminal case to accept.
C.
Mr. Durland's Plea Agreement
Mr. Durland contends respondent should be bound by the terms of his plea
agreement--under which the count relating to 1999 was dismissed and the
Government agreed not to further prosecute Mr. Durland and Ms. Fausett for
1999-2001--and by certain representations that the U.S. Attorney's Office
purportedly made to him that were not memorialized in the plea agreement. These
contentions, however, are without merit. Mr. Durland's plea agreement expressly
stated that the Government was not barred from pursuing any civil tax matter and
that it contains the entire agreement between the U.S. Attorney's Office for the
Southern District of Mississippi and Mr. Durland.
Similarly, Mr. Durland's contention that the doctrine of equitable estoppel
should bar respondent from asserting the deficiencies at issue is without merit. An
appeal in these cases would lie, absent a stipulation to the contrary, in the U.S.
Court of Appeals for the Tenth Circuit. See sec. 7482(b)(1)(A), (2). That court
has held that
[t]o state a claim of estoppel against a private party, a litigant must
establish four elements: "(1) the party to be estopped must know the
facts; (2) the party to be estopped must intend that his conduct will be
- 56 [*56] acted upon or must so act that the party asserting the estoppel
has the right to believe that it was so intended; (3) the party asserting
the estoppel must be ignorant of the true facts; and (4) the party
asserting the estoppel must rely on the other party's conduct to his
injury."
Rios v. Ziglar, 398 F.3d 1201, 1208 (10th Cir. 2005) (quoting Kowalczyk, 245
F.3d 1143, 1149 (10th Cir. 2001)). "A claim of estoppel against the [G]overnment
requires an additional element: the party asserting estoppel must show that the
[G]ovemment has engaged in 'affirmative misconduct.'" R (citing Kowalczyk,
245 F.3d at 1149).
Mr. Durland's plea agreement expressly stated that the Government was not
barred from pursuing any civil tax matter and disclaimed any extrinsic agreements.
Mr. Durland has presented no credible evidence that he was misled in any way.
Accordingly, respondent is not barred from asserting the deficiencies at issue.
II.
Period of Limitations on Assessment
Generally, pursuant to section 6501(a), the amount of any tax must be
assessed within three years of the filing of a return. Section 6501(c)(1), however,
provides that "[i]n the case of a false or fraudulent return with the intent to evade
tax, the tax may be assessed * * * at any time." The determination of fraud for
purposes of section 6501(c)(1) is the same as the determination of fraud for the
purposes of the penalty under section 6663. Neely v. Commissioner, 116 T.C. 79,
- 57 [*57] 85 (2001). In the case of income tax deficiencies on joint returns, proof of
fraud against either spouse prevents the running of the period of limitations as to
both spouses. Vannaman v. Commissioner, 54 T.C. 1011, 1018 (1970).
The statute of limitations is an affirmative defense, and the party asserting it
must specifically plead it and carry the burden of showing its applicability. See
Rules 39, 142(a); Robinson v. Commissioner, 117 T.C. 308, 312 (2001); Adler v.
Commissioner, 85 T.C. 535, 540 (1985). Petitioners properly pleaded the statute
of limitations as a defense in their respective petitions, and the burden of proof for
this issue is on them. However, respondent bears the burden of proving that an
exception to the general three-year period of limitations applies. See Harlan v.
Commissioner, 116 T.C. 31, 39 (2001) (citing Reis v. Commissioner, 142 F.2d
900 (6th Cir. 1944), § 1 T.C. 9 (1942)); Bardwell v. Commissioner, 38 T.C. 84,
92 (1962), aff'd, 318 F.2d 786 (10th Cir. 1963). Additionally, to the extent that
respondent relies on the doctrine of collateral estoppel to preclude Mr. Durland's
arguing that the 2000 return was not fraudulent, the burden of proof is on
respondent. See Rules 39, 142(a).
Mr. Durland is precluded by the doctrine of collateral estoppel from arguing
that the 2000 return was not fraudulent. See infra part IV.B.1. Respondent
concedes, however, that Ms. Fausett is not precluded from arguing that the 2000
- 58 [*58] return was not fraudulent because she was not a party to Mr. Durland's plea
agreement. See Vannaman v. Commissioner, 54 T.C. at 1018. We will therefore
determine on the basis of the evidence in these cases whether the 1999-2001
returns were fraudulent.
Because we conclude below that the 1999-2001 returns were fraudulent, see
infra part IV.B.3, respondent has met his burden of showing that an exception to
the general three-year period of limitation applies, see sec. 6501(c)(1); Neely v.
Commissioner, 116 T.C. at 85; Vannaman v. Commissioner, 54 T.C. at 1018.
Accordingly, petitioners' statute of limitations defense fails.
III.
Unreported Income Adjustments
A.
Burden of Proof
Generally, the Commissioner's determination of a deficiency is presumed
correct, and the taxpayer bears the burden of proving that the determination is
improper. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
However, if a taxpayer produces credible evidence22 with respect to any factual
issue relevant to ascertaining the taxpayer's liability for any tax imposed by
22"Credible evidence is 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 (without regard to the judicial presumption of
IRS correctness)." Higbee v. Commissioner, 116 T.C. 438, 442 (2001) (quoting
H.R. Conf. Rept. No. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995).
- 59 [*59] subtitle A or B of the Code and satisfies the requirements of section
7491(a)(2),23 the burden of proof on any such issue shifts to the Commissioner.
S_e_e sec. 7491(a)(1).
With respect to some of the factual issues in these cases petitioners have
failed to introduce credible evidence. We decide the remainder on the
preponderance of the evidence. Because we can decide all of the issues in these
cases without regard to the ultimate allocation of the burden of proof under section
7491(a)(1), we need not decide whether petitioners satisfied the requirements of
section 7491(a)(2). See Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir.
2005), affg T.C. Memo. 2003-212; Knudsen v. Commissioner, 131 T.C. 185, 1881 89 (2008).
In unreported income cases the U.S. Court of Appeals for the Tenth Circuit
has held that the presumption of correctness does not attach until the
Commissioner has produced some substantive evidence demonstrating that the
taxpayer received the unreported income. See United States v. McMullin, 948
23Sec. 7491(a)(2) requires a taxpayer to demonstrate that he or she (1)
complied with requirements under the Code to substantiate any item, (2)
maintained all records required under the Code, and (3) cooperated with
reasonable requests by the Secretary for witnesses, information, documents,
meetings, and interviews. See also Higbee v. Commissioner, 116 T.C. at 440-441.
The term "Secretary" means the Secretary of the Treasury or his delegate. Sec.
7701(a)(11)(B).
- 60 [*60] F.2d 1188, 1192 (10th Cir. 1991); Erickson v. Commissioner, 937 F.2d
1548, 1551 (10th Cir. 1991), af[g T.C. Memo. 1989-552. The parties have
stipulated that Mr. Durland received the amounts that respondent determined to be
income to him for the years at issue and that these amounts were not reported on
Mr. Durland and Ms. Fausett's 1999-2001 returns. Petitioners, to be sure, dispute
respondent's determination that these amounts were income to Mr. Durland.
However, the stipulations are sufficient to allow the presumption of correctness to
attach to respondent's determination. See McMullin, 948 F.2d at 1192; Erickson
v. Commissioner, 937 F.2d at 1551.
B.
Specific-Item Method
A taxpayer must maintain books and records establishing the amount of his
or her gross income. See sec. 6001. If a taxpayer fails to maintain and produce
the required books and records, the Commissioner may determine the taxpayer's
income by any method that clearly reflects income. See sec. 446(b); Petzoldt v.
Commissioner, 92 T.C. 661, 693 (1989); sec. 1.446-1(b)(1), Income Tax Regs.
The Commissioner's reconstruction of income "need only be reasonable in light of
all surrounding facts and circumstances." Petzoldt v. Commissioner, 92 T.C. at
687. The specific-item method is an indirect method of income reconstruction that
consists of evidence of specific amounts of income received by a taxpayer and not
- 61 [*61] reported on the taxpayer's return. See Estate of Beck v. Commissioner, 56
T.C. 297, 353, 361 (1971).
Mr. Durland failed to maintain accurate books and records for the years at
issue. Respondent was therefore justified in using the specific-item method to
determine petitioners' tax liabilities for the years at issue. See id. at 353-354.
C.
The Parties' Arguments
Respondent generally asserts that the unreported income that he determined
comprises Mr. Durland's wages and diverted income from Gulfport Oil & Gas that
petitioners should have reported on their returns. Petitioners argue that (1) any
amounts Mr. Durland received and retained were nontaxable loans and (2) he gave
substantial amounts of the allegedly diverted income to Mr. Harris.
Gross income includes "all income from whatever source derived". Sec.
61(a). This includes compensation for services, such as wages, salaries, and
bonuses, see sec. 61(a)(1), "wrongful appropriations", James v. United States, 366
U.S. 213, 219 (1961), and dividends, see sec. 61(a)(7).
To the extent that petitioners contend that any of the specific items at issue
were loans, they must show that the underlying transactions created bona fide
indebtedness. "Whether a bona fide debtor-creditor relationship exists is a
question of fact to be determined upon a consideration of all the pertinent facts in
- 62 [*62] the case." Fisher v. Commissioner, 54 T.C. 905, 909 (1970). Factors
indicative of a bona fide debt include whether: (1) evidence of indebtedness
exists; (2) any security is requested; (3) there has been a demand for repayment;
(4) the parties' records reflect the transaction as a loan; (5) any payments have
been made; and (6) any interest was charged. See, e.g., Alpert v. Commissioner,
T.C. Memo. 2014-70, at *20 (citing Sundby v. Commissioner, T.C. Memo. 2003204). The key question is: "Was there a genuine intention to create a debt, with a
reasonable expectation of repayment, and did that intention comport with the
economic reality of creating a debtor-creditor relationship?" Litton Bus. Sys., Inc.
v. Commissioner, 61 T.C. 367, 377 (1973).
D.
Specific Items at Issue for 1999
Respondent determined that petitioners failed to report on their 1999 return
(1) salary checks totaling $55,000 that T.J. Oil & Gas paid to Mr. Durland and (2)
fictitious loans totaling $435,000 that Gulfport Oil & Gas paid to Mr. Durland.
1.
T.J. Oil & Gas Salary Checks Totaling $55,000
Mr. Harris owned T.J. Oil & Gas. Mr. Durland signed an employment
contract with Covington Energy, another entity owned by Mr. Harris, in December
1998 and with Gulfport Oil & Gas in 1999. His various employment contracts
called for a monthly salary of $10,000. The checks from T.J. Oil & Gas were in
- 63 [*63] amounts of around $10,000 per month, and the memo line on several of the
checks indicated that the purpose of the checks was to pay salary to Mr. Durland.
Mr. Durland performed services for T.J. Oil & Gas and several other entities in
1999, but petitioners reported receiving wages of only $25,000 on their 1999
return. Although Mr. Durland executed a backdated $55,000 promissory note,
petitioners introduced no credible evidence showing that any payments were ever
made on the promissory note he executed or on a similar one executed by Jonathan
Harris. Indeed, Jonathan Harris credibly testified that the $23,000 amount on the
promissory note he executed was his salary and that he signed it only because Mr.
Durland told him that he otherwise would not be paid. We conclude that Mr.
Durland received wages of $55,000 from T.J. Oil & Gas that he failed to report on
petitioners' 1999 return.
2.
Purported Loans Totaling $435,000
Although Mr. Durland and Ms. Fausett executed promissory notes of
$20,000, $350,000, and $65,000 dated June 25, July 16, and October 28, 1999,
respectively, petitioners introduced no credible evidence showing that they made
any of the payments required under those notes. Additionally, Ms. Fausett stated
to the FBI that she signed the July 16, 1999, promissory note on November 14,
1999, and the UCC-01 financing statements with respect to the promissory notes
- 64 [*64] dated June 25 and October 28, 1999, were not filed until August 16, 2000,
when it was in Mr. Durland's interest to do so in the 2000 divorce proceedings.
Petitioners contend that Mr. Durland repaid the $435,000 in purported loans
by transferring 573 shares of his Gulfport Oil & Gas common stock to Gulfport
Oil & Gas in the Durland January, 15, 2001, agreement. However, the Durland
January 15, 2001, agreement was executed on the same date as the Harris January
15, 2001, agreement; and after both agreements were executed, Mr. Durland and
Mr. Harris still owned 39% and 61%, respectively, of the common stock issued by
Gulfport Oil & Gas. Because the January 15, 2001, agreements did not affect Mr.
Durland's and Mr. Harris' ownership interests in Gulfport Oil & Gas, the
agreements did not effect a transfer of anything of value from Mr. Durland and
Mr. Harris to Gulfport Oil & Gas. We therefore conclude that Mr. Durland never
repaid--and never intended to repay--the $435,000 in purported loans.
However, we also do not accept respondent's contention that Mr. Durland
embezzled the $435,000 because (1) Jonathan Harris and Mr. Harris signed the
checks that Gulfport Oil & Gas issued to Mr. Durland in connection with the
$435,000 in purported loans; (2) Mr. Harris signed the Durland January 15, 2001,
agreement that purported to document the repayment of the $435,000 in fictitious
loans, and (3) Mr. Harris himself, through Mrs. Harris, received at least $535,000
- 65 [*65] in fictitious loans from Gulfport Oil & Gas in 1999 and engaged in the same
meaningless transaction as Mr. Durland did to "repay" the loans. Instead, we
conclude that the $435,000 was corporate income diverted from Gulfport Oil &
Gas to Mr. Durland. Petitioners have introduced no credible evidence showing
that the income was not taxable in whole or in part.24 We therefore sustain
respondent's determination that the $435,000 is includible in Mr. Durland's gross
income for 1999.
E.
Specific Items at Issue for 2000
Respondent determined that petitioners failed to report on their 2000 return
(1) a check for $5,000 that T.J. Oil & Gas issued to Mr. Durland; (2) salary checks
totaling $122,500 that Gulfport Oil & Gas issued to Mr. Durland; and (3) checks
totaling $1,425,440 payable to T.J. Oil & Gas or Gulfport Oil & Gas that Mr.
Durland cashed at Ferguson Check Cashing.25 Mr. Durland appears to contend
24Mr. Durland failed to prove that Gulfport Oil & Gas had any earnings and
profits or that he had any basis in his ownership interest of Gulfport Oil & Gas.
Mr. Durland therefore failed to prove that any part of the diverted corporate
income was not taxable. See sec. 301; Truesdell v. Commissioner, 89 T.C. 1280,
1295-1296 (1987).
25These include a check payable to T.J. Oil & Gas for $12,500; individual
investor checks payable to Gulfport Oil & Gas totaling $327,200; Investec checks
payable to Gulfport Oil & Gas totaling $163,752; and production checks payable
to Gulfport Oil & Gas totaling $921,988.
- 66 [*66] that he is entitled to additional deductions for cashier's checks that he
bought with cash and deposited into an account of Gulfport Oil & Gas.
1.
T.J. Oil & Gas Check for $5,000
Mr. Durland performed services for T.J. Oil & Gas and several other entities
in 2000, but on petitioners' 2000 return he reported receiving wages of only
$25,000. He did not include a $5,000 check that T.J. Oil & Gas issued to him as
wages and that had an entry on the memo line showing the payment as a loan from
the corporation. We do not find the entry on the memo line of the check to be
credible. Petitioners introduced no credible evidence showing that Mr. Durland
ever repaid this purported loan or that any promissory note was executed for it.
Finally, the $5,000 check is similar in amount to the checks that we found to be
salary to Mr. Durland in 1999. See supra part III.D.1. We conclude that Mr.
Durland received a wage payment of $5,000 from T.J. Oil & Gas that he failed to
report on petitioners' 2000 return.
2.
Gulfport Oil & Gas Salary Checks Totaling $122,500
Mr. Durland testified that he admitted to the U.S. attorney that the $122,500
was income to him for 2000, and this testimony is consistent with the evidence.
Mr. Durland's employment contract with Gulfport Oil & Gas called for a monthly
salary of $10,000. Mr. Durland performed services for Gulfport Oil & Gas and
- 67 [*67] several other entities in 2000, but he reported receiving wages of only
$25,000 on petitioners' 2000 return. Petitioners introduced no credible evidence
showing that Mr. Durland ever repaid or made these purported loans or that any
promissory notes were ever executed for them. Although the memo line on the
checks stated that the amounts on the checks were for loans from the corporation
or repayment of loans to the corporation, we do not find these entries to be
credible. Finally, the amounts on the checks are for the most part similar in
amounts to the checks that we found to be salary to Mr. Durland in 1999. See
supra part III.D.l. We conclude that Mr. Durland received wage payments of
$122,500 from Gulfport Oil & Gas that he failed to report on petitioners' 2000
return.
3.
Checks Payable to T.J. Oil & Gas and Gulfport Oil & Gas
Mr. Durland testified that he gave all of the cash that he received from
cashing the checks payable to T.J. Oil & Gas and Gulfport Oil & Gas at Ferguson
Check Cashing to Mr. Harris. We do not find Mr. Durland's testimony on this
point to be entirely credible. Mr. Durland and Mr. Harris repeatedly diverted
gross receipts of Gulfport Oil & Gas to themselves and their nominees (seemingly,
to defraud its creditors and investors). We so find.
- 68 [*68] Mr. Harris testified that Mr. Durland never gave him any of the money. We
do not find Mr. Harris' testimony to be credible. He repeatedly claimed to not
remember important facts, and his demeanor suggested that his testimony was
generally untruthful. He falsely testified that he did not send Jonathan Harris to
retrieve the CTRs filed in his name from Ferguson Check Cashing, and he falsely
told the IRS that he had not seen the CTRs. Additionally, the record demonstrates
that Mr. Harris engaged in the same tax evasion tactics as those employed by Mr.
Durland during the years in issue. In short, Mr. Harris was not a credible witness.
Not only was Mr. Harris not a credible witness, but his testimony struck us
as entirely implausible. In particular we find it remarkable that, although Mr.
Harris had ownership interests of 100% and 61% in T.J. Oil & Gas and Gulfport
Oil & Gas, respectively, neither he nor Jonathan Harris made any attempt to
recover Mr. Harris' share of the $12,500 and $1,412,940 that Mr. Durland
allegedly diverted from T.J. Oil & Gas and Gulfport Oil & Gas, respectively, in
2000. Additionally, before Mr. Durland started cashing the production checks
from Eagle Energy, Gulfport Oil & Gas had been making payments to Mrs. Harris
and Ms. Fausett in amounts that were exactly proportional to Mr. Harris' and Mr.
Durland's respective ownership interests in it, and Mr. Harris and Mr. Durland
both received fictitious loans from Gulfport Oil & Gas in 1999. We infer from
- 69 [*69] this and find that Mr. Harris and Mr. Durland both received portions of the
proceeds in accordance with their ownership interests: Mr. Harris had a 61%
ownership interest and Mr. Durland a 39% ownership interest. We conclude that
Mr. Durland actually received 39% of the $1,425,440 in checks payable to T.J. Oil
& Gas or Gulfport Oil & Gas in 2000, or $555,922.26
We further conclude that the $555,922 that Mr. Durland actually received
was corporate income diverted from Gulfport Oil & Gas to Mr. Durland.
Petitioners have introduced no credible evidence showing that the diverted
corporate income was not taxable. Accordingly, the $555,922 is includible in Mr.
Durland's gross income for 2000.
4.
Cashier's Checks
Mr. Durland introduced copies of cashier's checks that he bought with cash
and deposited into an account of Gulfport Oil & Gas in 2000. However,
respondent already allowed additional Schedule E deductions of $144,548 for the
excess of these checks over the Schedule E deductions that petitioners claimed on
their 2000 return. Accordingly, no further adjustments are warranted.
26Because the check payable to T.J. Oil & Gas was drawn on an account of
Gulfport Oil & Gas, we infer that Mr. Durland received his share of that check too.
- 70 [*70] F.
Specific Items at Issue for 2001
Respondent determined that petitioners failed to report on their 2001 return
checks totaling $45,000 payable to Boleyn Energy from Gulfport Oil & Gas.
Respondent did not allow any additional Schedule E deductions for cashier's
checks that Mr. Durland bought with cash and deposited into an account of
Gulfport Oil & Gas during 2001.
Mr. Durland performed services for Gulfport Oil & Gas and several other
entities in 2001, but he did not report receiving any wages on petitioners' 2001
return. Petitioners introduced no credible evidence showing that Mr. Durland
made loans to or received loans from any entity in these amounts or that Mr.
Durland executed promissory notes for these amounts. We conclude that the
$45,000 was compensation to him for the services that he provided. Although the
payee on the checks was Boleyn Energy, the $45,000 was wage income to him that
he failed to report on petitioners' 2001 return.
Mr. Durland introduced copies of cashier's checks that he bought with cash
and deposited into an account of Gulfport Oil & Gas in 2001. The amounts on the
cashier's checks total $58,000. However, that amount is less than the amount
petitioners claimed as Schedule E expense deductions on their 2001 return.
- 71 [*71] Accordingly, no adjustment to the Schedule E expense deductions that
petitioners claimed on their 2001 return is warranted.
IV.
Civil Fraud Penalties
A.
Section 6663(a) Generally
Section 6663(a) provides: "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." The Commissioner bears the burden of proving fraud by clear and
convincing evidence. See sec. 7454(a); Rule 142(b). To satisfy that burden, the
Commissioner must show: (1) an underpayment exists and (2) the taxpayer
intended to evade taxes known to be owing by conduct intended to conceal,
mislead, or otherwise prevent the collection of taxes. See Sadler v. Commissioner,
113 T.C. 99, 102 (1999).
The Commissioner is not required to establish the precise amount of the
deficiency to prove an underpayment. See DiLeo v. Commissioner, 96 T.C. 858,
886 (1991), M, 959 F.2d 16 (2d Cir. 1992). However, he cannot discharge his
burden by simply relying on the taxpayer's failure to prove error in his
determination of the deficiency. See id. (citing Otsuki v. Commissioner, 53 T.C.
96, 106 (1969), and Pigman v. Commissioner, 31 T.C. 356, 370 (1958)). Once the
- 72 [*72] Commissioner establishes an underpayment by clear and convincing
evidence, the deficiency determination enjoys its usual presumption of
correctness. See id. (citing Compton v. Commissioner, T.C. Memo. 1983-642,
and Cleveland v. Commissioner, T.C. Memo. 1983-299).
Any conduct likely to mislead or conceal may constitute an affirmative act
of evasion, and an intent to mislead may be inferred from a pattern of such
conduct. See Spies v. United States, 317 U.S. 492, 499 (1943). Fraud "does not
include negligence, carelessness, misunderstanding or unintentional
understatement of income." United States v. Pechenik, 236 F.2d 844, 846 (3d Cir.
1956). If the Commissioner establishes that some portion of the underpayment is
attributable to fraud, the entire underpayment is treated as attributable to fraud,
except with respect to any portion of the underpayment that the taxpayer
establishes is not attributable to fraud. See sec. 6663(b).
Because fraudulent intent may be difficult to prove by direct evidence, the
Commissioner may establish fraud by circumstantial evidence. See Bradford v.
Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), § T.C. Memo. 1984-601;
DiLeo v. Commissioner, 96 T.C. at 875. Courts have developed a nonexclusive
list of factors--often referred to as badges of fraud--that demonstrate fraudulent
intent. Those badges include: (1) understating income; (2) failing to maintain
- 73 [*73] adequate records; (3) offering implausible or inconsistent explanations; (4)
concealing income or assets; (5) providing incomplete or misleading information
to the taxpayer's tax return preparer; (6) offering false or incredible testimony; (7)
filing false documents, including filing false income tax returns; and (8) engaging
in extensive dealings in cash. See Bradford v. Commissioner, 796 F.2d at 307-
308; Parks v. Commissioner, 94 T.C. 654, 664-665 (1990); Recklitis v.
Commissioner, 91 T.C. 874, 910 (1988); Lipsitz v. Commissioner, 21 T.C. 917,
937 (1954), aff d, 220 F.2d 871 (4th Cir. 1955); Morse v. Commissioner, T.C.
Memo. 2003-332, slip op. at 8, aff d, 419 F.3d 829 (8th Cir. 2005). The existence
of any one factor is not dispositive, but the existence of several factors is
persuasive circumstantial evidence of fraud. See Niedringhaus v. Commissioner,
99 T.C. 202, 211 (1992); Petzoldt v. Commissioner, 92 T.C. at 700.
B.
Whether Mr. Durland Is Liable for the Civil Fraud Penalties
1.
Collateral Estoppel
Under the doctrine of collateral estoppel, once an issue of fact or law is
"actually and necessarily determined by a court of competent jurisdiction, that
determination is conclusive in subsequent suits based on a different cause of
action involving a party to the prior litigation." Montana v. United States, 440
U.S. 147, 153 (1979). Collateral estoppel is a judicially created equitable
- 74 [*74] principle the purposes of which are to protect the parties from unnecessary
and redundant litigation, to conserve judicial resources, and to foster certainty in
and reliance on judicial action. Id. at 153-154.
Before we may apply collateral estoppel in the context of a factual dispute,
the following five conditions must be satisfied: (1) the issue in the second suit
must be identical in all respects with the issue decided in the first suit; (2) the issue
in the first suit must have been the subject of a final judgment entered by a court of
competent jurisdiction; (3) the person against whom collateral estoppel is asserted
must have been a party or in privity with a party in the first suit; (4) the parties
must actually have litigated the issue in the first suit and resolution of the issue
must have been essential to the prior decision; and (5) the controlling facts and
applicable legal principles must remain unchanged from those in the first suit. See
Bussell v. Commissioner, 130 T.C. 222, 239-240 (2008); Peck v. Commissioner,
90 T.C. 162, 166-167 (1988), afd, 904 F.2d 525 (9th Cir. 1990).
Mr. Durland pleaded guilty to tax evasion under section 7201 for 2000. A
conviction for tax evasion pursuant to section 7201, either upon a guilty plea or
upon a jury verdict, conclusively establishes the existence of fraud in a subsequent
proceeding through the doctrine of collateral estoppel. See DiLeo v.
Commissioner, 96 T.C. at 885. It also conclusively establishes liability for the
- 75 [*75] civil fraud penalty under section 6663(a) because the elements of criminal
tax evasion under section 7201 and civil fraud under section 6663(a) are virtually
identical. M Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir. 2012), af[g
T.C. Memo. 2009-44. Accordingly, Mr. Durland is precluded by the doctrine of
collateral estoppel from arguing that the 2000 return is not fraudulent or that he is
not liable for a civil fraud penalty under section 6663(a) for 2000. He therefore
bears the burden of establishing the portion, if any, of the underpayment for 2000
that is not due to fraud. See sec. 6663(b). However, as explained above, see supra
part II, respondent cannot rely on the doctrine of collateral estoppel for the
purpose of proving that the fraud exception to the general three-year period of
limitations applies with respect to Ms. Fausett.27 Accordingly, we will determine
whether Mr. Durland is liable for the section 6663(a) penalty for all of the years in
issue--and therefore whether the 1999-2001 returns were fraudulent--without
reliance on the doctrine of collateral estoppel.
27However, even as with respect to Ms. Fausett, Mr. Durland's guilty plea
can be--and is--clear and convincing evidence that he intended to evade a tax due
and owing for 2000. See Norris v. Commissioner, T.C. Memo. 2011-161, 102
T.C.M. (CCH) 26, 31 (2011).
- 76 [*76]
2.
Underpayment of Tax
Respondent has proven by clear and convincing evidence that Mr. Durland
failed to report income for each of the years in issue. M supra part III.D-F.
Accordingly, respondent has met his burden of proving by clear and convincing
evidence that an underpayment exists for each of the years in issue. See DiLeo v.
Commissioner, 96 T.C. at 886 (citing Compton v. Commissioner, T.C. Memo.
1983-642, and Cleveland v. Commissioner, T.C. Memo. 1983-299).
3.
Fraudulent Intent
a.
Understating Income
A pattern of substantially underreporting income for several years is strong
evidence of fraud, particularly if the reason for the understatements is not
satisfactorily explained or is not due to innocent mistake. See Holland v. United
States, 348 U.S. 121, 137-139 (1954); Spies, 317 U.S. at 499. On the basis of
clear and convincing evidence we determined that Mr. Durland failed to report
substantial income for each of the years in issue. This failure appears to be
deliberate because Mr. Durland took affirmative steps to hide his receipt of this
income. These steps include executing bogus promissory notes, causing Gulfport
Oil & Gas to state on the memo lines of checks that it issued to him that the checks
- 77 [*77] were for loans that never existed, and cashing checks at Ferguson Check
Cashing. Accordingly, this factor favors a finding of fraud for 1999-2001.
b.
Failing To Maintain Adequate Records
Because Mr. Durland failed to maintain accurate books and records during
the years in issue, respondent had to resort to the specific-item method to
reconstruct Mr. Durland's income for the years in issue. Accordingly, this factor
favors a finding of fraud for 1999-2001.
c.
Offering Implausible or Inconsistent Explanations
Mr. Durland's testimony and statements to the IRS in which he testified and
stated that certain salary checks issued to him in 1999-2001 were for loans from
various entities to him or for repayments of loans he made to the entities are
implausible. Accordingly, this factor favors a finding of fraud for 1999-2001.
d.
Concealing Assets or Income
An intent to evade tax may be inferred from "concealment of assets or
covering up sources of income". Spies, 317 U.S. at 499; Ruark v. Commissioner,
449 F.2d 311, 312-313 (9th Cir. 1971), § T.C. Memo. 1969-48. Mr. Durland
concealed his 1999 income by drafting bogus promissory notes and by cashing his
salary checks at Ferguson Check Cashing; he concealed his 2000 income by
causing Gulfport Oil & Gas to include false statements on the memo lines of the
- 78 [*78] checks that it issued to him and by cashing the checks at Ferguson Check
Cashing; and he concealed his 2001 income by causing Gulfport Oil & Gas to
include false statements on the memo lines of the salary checks that it issued to
him and by cashing the checks at Ferguson Check Cashing. Mr. Durland also
concealed his ownership interest in assets by assigning them to Ms. Fausett.
Accordingly, this factor favors a finding of fraud for 1999-2001.
e.
Providing Incomplete or Misleading Information to
the Taxpayer's Tax Return Preparer
Mr. Durland provided to Mr. Gibbons the information upon which Gibbons,
Gibbons & Buck and GibbonsHall prepared petitioners' 1999-2001 returns. Mr.
Durland appears to have included information relating to the amounts we
determined to be income to him in handwritten documents that he gave to Mr.
Gibbons for 1999. Additionally, Mr. Gibbons was aware that Gulfport Oil & Gas
was characterizing salaries it paid to its employees in 1999 as loans.
Mr. Durland did not include information relating to the amounts we
determined to be income to him in a letter that he sent to Mr. Gibbons for 2000 or
in the letters that he sent to Mr. Gibbons for 2001. Accordingly, this factor does
not favor a finding of fraud for 1999 but it does favor a finding of fraud for 2000
and 2001.
- 79 [*79]
f.
Offering False or Incredible Testimony
Mr. Durland repeatedly testified that the salary checks he received during
1999-2001 were for loans from various entities to him or for repayments of loans
he made to the entities. He also testified that he gave all of the cash that he
received from cashing the checks payable to T.J. Oil & Gas and Gulfport Oil &
Gas at Ferguson Check Cashing to Mr. Harris. His testimony was mostly
incredible. Accordingly, this factor favors a finding of fraud for 1999-2001.
g.
Filing False Documents
Fraudulent intent may be inferred when a taxpayer files a document
intending to conceal, mislead, or prevent the collection of tax. See Spies, 317 U.S.
at 499. Filing false documents with the IRS constitutes "an 'affirmative act' of
misrepresentation sufficient to justify the fraud penalty." Zell v. Commissioner,
763 F.2d 1139, 1146 (10th Cir. 1985), af[g T.C. Memo. 1984-152. Mr. Durland
filed Federal income tax returns for 1999-2001, and for each year he knowingly
omitted substantial amounts of his income. Accordingly, this factor favors a
finding of fraud for 1999-2001.
- 80 [*80]
h.
Extensive Dealings in Cash
Extensive dealings in cash to avoid scrutiny of a taxpayer's finances is a
badge of fraud. See Bradford v. Commissioner, 796 F.2d at 307-308. Fraudulent
intent may be inferred when a taxpayer handles his affairs in a manner designed
"to avoid making the records usual in transactions of the kind". Spies, 317 U.S. at
499. Mr. Durland cashed numerous checks during each of the years in issue at
Ferguson Check Cashing, and he kept large amounts of cash in his office at
Gulfport Oil & Gas. This factor favors a finding of fraud for 1999-2001.
i.
Summary
Many of the badges of fraud are present here. We conclude that respondent
has proven by clear and convincing evidence that Mr. Durland underpaid his tax
liabilities for 1999-2001 and that some part of the underpayment for each year was
due to fraud. Mr. Durland failed to prove that any portion of the underpayment for
any of the years in issue was not attributable to fraud. Accordingly, to the extent
that we sustain respondent's deficiency determinations, see supra part III.D-F, we
hold that Mr. Durland is liable for section 6663(a) civil fraud penalties for each of
the years in issue.
- 81 [*81] V.
A.
Whether Ms. Fausett Is Jointly and Severally Liable
Joint and Several Liability Generally
Pursuant to section 6013(a) spouses may file a joint Federal income tax
return. Spouses who elect to file a joint return for a taxable year are required to
compute their tax for the taxable year on the aggregate income of both spouses,
and the liability for that tax is joint and several. M sec. 6013(d)(3). However, to
remedy certain injustices that may occur, section 6015 allows a spouse to obtain
relief from joint and several liability in certain circumstances.
Section 6015(a)(1) provides that a spouse who has made a joint return may
seek relief from joint and several liability under subsection (b) (dealing with relief
from liability for an understatement of tax with respect to a joint return). Section
6015(a)(2) provides that an eligible spouse may elect to limit that spouse's
liability for any deficiency with respect to a joint return under subsection (c)
(providing relief from joint and several liability for taxpayers who are no longer
married, are legally separated, or are no longer living together). If a taxpayer does
not qualify for relief under either subsection (b) or (c), the taxpayer may seek
equitable relief under subsection (f).
- 82 [*82]
1.
Section 6015(b)
Under section 6015(b)(1)(A)-(E), the following requirements must be
satisfied for the IRS to grant relief from joint and several liability: (1) the spouses
filed a joint return for the taxable year; (2) an understatement of tax is attributable
to an erroneous item of the nonrequesting spouse; (3) the requesting spouse
establishes that in signing the return he or she did not know, and had no reason to
know, of the understatement; (4) after taking into account all the facts and
circumstances, it is inequitable to hold the requesting spouse liable for the
deficiency attributable to the understatement; and (5) the requesting spouse timely
elects the benefits of subsection (b).
2.
Section 6015(c)
Under section 6015(c), if the requesting spouse is either (1) no longer
married to the nonrequesting spouse, (2) legally separated from the nonrequesting
spouse, or (3) not a member of the same household as the nonrequesting spouse
during the 12-month period ending on the date such election is filed, the
requesting spouse may elect to limit his or her liability for a deficiency as provided
in subsection (d). Sec. 6015(c)(1), (3)(A)(i). A requesting spouse may elect
section 6015(c) relief any time after the Secretary asserts a deficiency but no later
- 83 [*83] than two years after the date on which the Secretary has begun collection
activities with respect to the requesting spouse. R subsec. (c)(3)(B).
Section 6015(d) provides that, in general, any items giving rise to a
deficiency on a joint return are allocated to the spouses as if they had filed
separate returns. M 4 subsec. (d)(3)(A). The allocation is made without regard
to community property laws. See 4 subsec. (a) (flush language). The requesting
spouse is liable only for his or her proportionate share of the deficiency that results
from such allocation. M 4 subsec. (d)(1). If an item giving rise to a deficiency
provided a tax benefit on the joint return to the nonrequesting spouse, the item is
allocated to the nonrequesting spouse. See 4 subsec. (d)(3)(B). The requesting
spouse bears the burden of establishing the amount of the deficiency allocable to
him or her. See 4 subsec. (c)(2).
Relief under section 6015(c) is not available where the Commissioner
proves that the requesting spouse had "actual knowledge, at the time such
individual signed the return, of any item giving rise to a deficiency * * * which is
not allocable to such individual". E subsec. (c)(3)(C). Actual knowledge is "an
actual and clear awareness (as opposed to reason to know) of the existence of an
item which gives rise to the deficiency (or portion thereof)." Cheshire v.
Commissioner, 115 T.C. 183, 195 (2000), affd, 282 F.3d 326 (5th Cir. 2002). In
- 84 [*84] a case of omitted income the requesting spouse must have had an actual and
clear awareness of the factual circumstances that resulted in the omission of the
income. See King v. Commissioner, 116 T.C. 198, 204 n.6 (2001) (citing
Cheshire v. Commissioner, 115 T.C. 183); Cheshire v. Commissioner, 115 T.C. at
195; see also sec. 1.6015-3(c)(2)(i)(A), Income Tax Regs. The requesting spouse
has actual knowledge when he or she knows that the item giving rise to the
deficiency is incorrectly reported on the tax return. See Cheshire v.
Commissioner, 115 T.C. at 195. The Commissioner bears the burden of proving
by a preponderance of the evidence that the requesting spouse had actual
knowledge when signing the return of any item giving rise to the deficiency. See
sec. 6015(c)(2), (3)(C); Culver v. Commissioner, 116 T.C. 189, 195 (2001); sec.
1.6015-3(c)(2)(i), Income Tax Regs.
Even when the requesting spouse has actual knowledge of any item giving
rise to the deficiency, he or she may still be entitled to section 6015(c) relief if the
return was signed under duress. Sec. 6015(c)(3)(C). The exception for duress
focuses on the existence or nonexistence of duress in signing the return. Id. The
regulations define duress for the purposes of section 6015(c):
Abuse exception.--Ifthe requesting spouse establishes that he
or she was the victim of domestic abuse prior to the time the return
was signed, and that, as a result of the prior abuse, the requesting
- 85 [*85] spouse did not challenge the treatment of any items on the
return for fear of the nonrequesting spouse's retaliation, the limitation
on actual knowledge in this paragraph (c) will not apply. * * *
Sec. 1.6015-3(c)(2)(v), Income Tax Regs. Duress is therefore established for
purposes of section 6015(c) if the requesting spouse proves that he or she was a
victim of domestic abuse and that he or she did not challenge the treatment of any
items on the return for fear of the nonrequesting spouse's retaliation. Id. The
requesting spouse has the burden of proving that he or she signed the return under
duress. See sec. 6015(c)(3)(C).
Because a spouse seeking relief from joint and several liability under
section 6015 has an incentive to exaggerate the degree of any physical and
psychological abuse to which he or she was subjected, if any, we have generally
required substantiation, or at least specificity in allegations, of both physical and
psychological abuse. See Nihiser v. Commissioner, T.C. Memo. 2008-135, slip
op. at 24-25. We have also tried to distinguish between run-of-the mill marital
strife and genuine physical or psychological abuse. See
060
slip op. at 25. This is
often difficult to do when, in so many of these cases, there is no expert testimony
to assist the Court, and the evidence of abuse and duress is limited to the
testimony of the requesting spouse and his or her children and friends,
unsupported by any credible evidence from third parties such as a doctor, police,
- 86 [*86] or even another court. In Nihiser, we relied upon certain common features
of domestic abuse in domestic relations law to identify a nonexclusive list of
factors that are indicative of psychological abuse by a spouse. Those factors are:
(1) isolating the victim; (2) encouraging exhaustion by, for example, intentionally
limiting food or interrupting sleep; (3) behaving in an obsessive or possessive
manner; (4) threatening to commit suicide, to murder the victim, or to cause the
death of family or friends; (5) using degrading language including humiliation,
denial of victim's talents and abilities, and name calling; (6) abusing drugs or
alcohol, including administering substances to the victim; (7) undermining the
victim's ability to reason independently; or (8) occasionally indulging in positive
behavior in order to keep alive hope that the abuse will cease. R at 26.
3.
Section 6015(f)
Under section 6015(f), relief from joint and several liability is available if
(1) taking into account all the facts and circumstances, it would be inequitable to
hold the requesting spouse liable for any unpaid tax and (2) relief is not available
to the requesting spouse under subsection (b) or (c). See sec. 6015(f)(1) and (2).
The Commissioner has published revenue procedures listing the factors that
he considers in determining whether he will grant section 6015(f) relief. See Rev.
Proc. 2013-34, 2013-43 I.R.B. 397, modifying and superseding Rev. Proc.
- 87 [*87] 2003-61, 2003-2 C.B. 296. We consider these factors in the light of the
attendant facts and circumstances, but we are not bound by them. See Pullins v.
Commissioner, 136 T.C. 432, 438-439 (2011).
Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. at 399-400, sets forth seven
threshold conditions that a requesting spouse must satisfy to be eligible for relief
under section 6015(f): (1) the requesting spouse filed a joint Federal income tax
return for the tax year or years for which relief is sought; (2) the requesting spouse
does not qualify for relief under section 6015(b) or (c); (3) the claim for relief is
timely filed; (4) no assets were transferred between the spouses as part of a
fraudulent scheme; (5) the nonrequesting spouse did not transfer disqualified
assets to the requesting spouse; (6) the requesting spouse did not knowingly
participate in the filing of a fraudulent joint return; and (7) the liability from which
relief is sought is attributable to an item of the nonrequesting spouse.
When a requesting spouse satisfies the threshold conditions of Rev. Proc.
2013-34, sec. 4.01, the Commissioner considers whether the requesting spouse is
entitled to a streamlined determination of equitable relief under section 6015(f)
pursuant to Rev. Proc. 2013-34, sec. 4.02, 2013-43 I.R.B. at 400. If a requesting
spouse is not entitled to a streamlined determination because the requesting spouse
- 88 [*88] does not satisfy all the elements in Rev. Proc. 2013-34, sec. 4.02,28 the
requesting spouse's request for relief may be considered using the equitable relief
factors in Rev. Proc. 2013-34, sec. 4.03, 2013-43 I.R.B. at 400.
Under Rev. Proc. 2013-34, sec. 4.03, equitable relief under section 6015(f)
may be granted if, taking into account all the facts and circumstances, it would be
inequitable to hold the requesting spouse responsible for all or part of the liability.
In making the decision, the Commissioner weighs a number of factors, including,
but not limited to:
(a) Marital status. Whether the requesting spouse is no longer
married to the nonrequesting spouse as of the date the Service makes
its determination. * * *
(b) Economic hardship. Whether the requesting spouse will
suffer economic hardship if relief is not granted. * * *
(c) Knowledge or reason to know. * * * In the case of an
income tax liability that was properly reported but not paid, whether,
as of the date the return was filed or the date the requesting spouse
reasonably believed the return was filed, the requesting spouse knew
or had reason to know that the nonrequesting spouse would not or
28A requesting spouse is eligible for a streamlined determination if the
following elements are satisfied: (1) on the date of the request for relief, the
requesting spouse is no longer married to, or is legally separated from, the
nonrequesting spouse; (2) on the date the return was filed, the requesting spouse
did not know, and had no reason to know, that there was an understatement or
deficiency on the joint income tax return; and (3) the requesting spouse will suffer
economic hardship if the Commissioner does not grant relief. Rev. Proc. 2013-34,
sec. 4.02, 2013-43 I.R.B. 397, 400.
- 89 [*89] could not pay the tax liability at that time or within a reasonable
period of time after the filing of the return. * * *
(d) Legal obligation. Whether the requesting spouse or the
nonrequesting spouse has a legal obligation to pay the outstanding
Federal income tax liability. * * *
(e) Significant benefit. Whether the requesting spouse
significantly benefitted from the unpaid income tax liability or
understatement. * * *
(f) Compliance with income tax laws. Whether the requesting
spouse has made a good faith effort to comply with the income tax
laws in the taxable years following the taxable year or years to which
the request for relief relates. * * *
(g) Mental or physical health. Whether the requesting spouse
was in poor physical or mental health. * * *
Il sec. 4.03(2), 2013-43 I.R.B. at 400-403. No single factor is determinative. Id.
at 400.
B.
Whether Ms. Fausett Is Eligible for Relief Under Section 6015
1.
Section 6015(c) Relief
Respondent contends that Ms. Fausett is not entitled to relief under section
6015(c) because (1) she had actual knowledge of the unreported income at issue,
s_ee sec. 6015(c)(3)(C); (2) she and Mr. Durland transferred assets to each other as
part of a fraudulent scheme of theirs, see sec. 6015(c)(3)(A)(ii); sec. 1.6015-1(d),
Income Tax Regs.; and (3) she has not proven that the amounts giving rise to the
- 90 [*90] deficiencies are not allocable to her, see sec. 6015(c)(1), (d). Because we
find that Ms. Fausett had actual knowledge of the unreported income at issue and
that she did not sign the returns under duress, she is not eligible for section
6015(c) relief.
a.
Actual Knowledge
i.
1999
We sustained respondent's determination that Mr. Durland had received in
1999 but did not report on petitioners' 1999 return wage income of $55,000. See
supra part III.D.1. In September 2000, before petitioners filed their 1999 return,
Ms. Fausett stated to the FBI that Mr. Durland had told her that Mr. Gibbons had
told him that they could report Mr. Durland's salary as a "loan" on the books. Ms.
Fausett was also aware that Mr. Durland received a salary of $10,000 per month
from one of Mr. Harris' businesses. Although Mr. Durland cashed the salary
checks at Ferguson Check Cashing and the checks all bear dates that are before the
date on which Mr. Durland and Ms. Fausett married, Ms. Fausett stated to the FBI
that she "know[s] for a fact that * * * [Mr. Durland] received [a] salary from T.J.
Oil & Gas * * * up through at least August of 1999". Accordingly, respondent has
met his burden of proving that Ms. Fausett had actual knowledge that Mr. Durland
received $55,000 in unreported wages in 1999.
- 91 [*91] We also sustained respondent's determination that Mr. Durland had
received unreported diverted corporate income of $435,000 from Gulfport Oil &
Gas in 1999, which Mr. Durland had classified as loans to avoid paying taxes. M
supra part III.D.2. When Ms. Fausett signed the 1999 return she knew that Mr.
Durland had no intention of repaying the purported loans. Ms. Fausett also knew
that Mr. Durland received the unreported diverted corporate income as purported
loans to avoid paying taxes. Accordingly, respondent has met his burden of
proving that Ms. Fausett had actual knowledge that Mr. Durland received diverted
corporate income of $435,000 in 1999.
ii.
2000
We sustained respondent's determination that Mr. Durland had received
wage income of $5,000 from T.J. Oil & Gas in 2000 that he did not report on
petitioners' 2000 tax return. See supra part III.E.1. Ms. Fausett was aware that
Mr. Durland received a salary of $10,000 per month from one of Mr. Harris'
businesses. In September 2000 Ms. Fausett stated to the FBI that Mr. Durland had
classified his salary as loans to avoid paying taxes. Accordingly, respondent has
met his burden of proving that Ms. Fausett had actual knowledge that Mr. Durland
received $5,000 in unreported wages from T.J. Oil & Gas in 2000.
- 92 [*92] We sustained respondent's determination that Mr. Durland had received
wage income of $122,500 from Gulfport Oil & Gas in 2000 that he did not report
on petitioners' 2000 tax return. M supra part III.E.2. Ms. Fausett stated to the
FBI that, on May 10, 2000, Mr. Durland had testified in court that he had not
received a salary since March 15, 2000, and that she "know[s] for a fact he was
still getting salary." Even with this knowledge, Ms. Fausett signed the 2000 return
that reported only $25,000 of wages.2° Ms. Fausett therefore knew that the amount
of wages reported for the 2000 taxable year was incorrect. Respondent has met his
burden of proving that Ms. Fausett had actual knowledge that Mr. Durland
received unreported wages of $122,500 from Gulfport Oil & Gas in 2000.
We sustained respondent's determination that Mr. Durland had received but
did not report on petitioners' 2000 return diverted corporate income of $555,922
from Gulfport Oil & Gas. M supra part III.E.3. The diverted corporate income
was from the sale of ARXA stock and production checks from Eagle Energy.
Before February 2000 Ms. Fausett regularly received the production checks from
Eagle Energy. After February 2000 Mr. Durland received and cashed the
production checks. On May 15, 2000, Mr. Durland told Ms. Fausett that he had
29The reported wages were from ARXA. Mr. Durland and Ms. Fausett
reported no wages from T.J. Oil & Gas or Gulfport Oil & Gas.
- 93 [*93] been receiving the production checks. When Mr. Durland and Ms. Fausett
incorporated Boleyn Energy in October 2000, Mr. Durland told Ms. Fausett that
he had deposited into the Boleyn Merrill Lynch account the funds from the
production checks he had previously cashed. After October 2000 petitioners
assigned Ms. Fausett's interest in the Matagorda lease to Boleyn Energy. Ms.
Fausett and Mr. Durland subsequently purchased the Prytania Street house in April
2001 with funds from the production checks that had been deposited in the Boleyn
Merrill Lynch account. Petitioners did not file their 2000 return until October 17,
2001. Ms. Fausett therefore knew that Mr. Durland had received diverted
corporate income in the form of production checks from Eagle Energy that
petitioners did not report on their 2000 return.
Ms. Fausett also stated to the FBI in September 2000 that Gulfport Oil &
Gas was selling ARXA stock to investors, and Ms. Fausett witnessed promissory
notes for some stock purchases. Ms. Fausett told the FBI that Gulfport Oil & Gas
was receiving the funds from the sales but that Mr. Durland would subsequently
receive 39% of the income to correspond with his interest in Gulfport Oil & Gas.
Respondent has therefore met his burden of proving that Ms. Fausett had actual
knowledge that Mr. Durland had received diverted corporate income from the sale
of ARXA stock during 2000 that petitioners did not report on their 2000 return.
-94[*94]
iii.
2001
We sustained respondent's determination that Mr. Durland had received
wage income of $45,000 from Gulfport Oil & Gas in 2001 that he did not report
on petitioners' 2001 return. See supra part III.F. Although Mr. Durland and Ms.
Fausett lived apart during most of the relevant part of2001, Ms. Fausett knew that
Mr. Durland received a salary of $10,000 a month from one of Mr. Harris'
businesses. Mr. Durland moved in with Ms. Fausett in November 2001 after
resigning from Gulfport Oil & Gas in September. Even with the knowledge that
Mr. Durland had worked for Gulfport Oil & Gas until September 2001, Ms.
Fausett signed petitioners' 2001 tax return reporting no wages. Accordingly,
respondent has met his burden of proving that Ms. Fausett had actual knowledge
that Mr. Durland had received $45,000 in unreported wages from Gulfport Oil &
Gas in 2001.
b.
Duress Exception
Respondent has satisfied his burden of proving that Ms. Fausett had actual
knowledge of the items giving rise to the deficiencies during the 1999-2001
taxable years. M supra part V.B.1.a. Ms. Fausett asserts that she signed the
1999-2001 joint tax returns under duress and that she should be relieved ofjoint
and several liability for the deficiencies as a result. We therefore consider
- 95 [*95] whether Ms. Fausett qualifies for the duress exception under section
6015(c)(3)(C).
During trial Ms. Fausett testified generally that Mr. Durland physically and
psychologically abused her throughout the years at issue. Additionally, the record
reflects that Ms. Fausett was unable to obtain records of her income and expenses
for the 1999 return, which she claims led her to sign the joint return. We will
address whether the abuse or the inability to obtain records constitutes duress for
the purpose of section 6015(c)(3)(C).
For the Court to find duress for the purpose of section 6015(c)(3)(C), Ms.
Fausett must substantiate, or at least provide detailed and credible testimony of
physical or psychological abuse. See Pullins v. Commissioner, 136 T.C. at 454;
Nihiser v. Commissioner, slip op. at 24-25. Even if the Court were to find Ms.
Fausett's testimony credible, which it does not, see supra part I.A, Ms. Fausett
never substantiated or testified with specificity regarding her alleged abuse. Ms.
Fausett testified about generic threats and three alleged instances of physical
abuse, but her testimony was not substantiated by any third party³° and no police
report was filed. Ms. Fausett also never proved she signed any returns because of
3°Ms. Fausett testified that there were witnesses to instances of physical
abuse, but none of those alleged witnesses testified at trial.
- 96 [*96] fear of retaliation. M sec. 1.6015-3(c)(2)(v), Income Tax Regs. Therefore,
Ms. Fausett has not met her burden of proving that she signed the returns under
duress due to physical or psychological abuse. See sec. 6015(c)(3)(C).
Ms. Fausett also contends that because Mr. Durland refused to provide her
with records she was forced to file jointly. Before Ms. Fausett and Mr. Durland
filed their joint return on October 16, 2000, Ms. Fausett had requested documents
from Mr. Durland presumably to file her own individual return. Duress under
section 6015 requires evidence of physical or psychological abuse, and because of
that abuse, a fear that the nonrequesting spouse will retaliate if the requesting
spouse does not sign the return. See sec. 1.6015-3(c)(2)(v), Income Tax Regs.
The refusal to provide records is not duress as contemplated by section 6015. Ms.
Fausett did not sign the joint 1999 return under duress but rather, as indicated in
her statements to the FBI in September 2000, she signed the return because she
was concerned about late filing penalties and interest if she was to file
individually. Although Ms. Fausett attempted to obtain financial records, she
never sought the advice of a tax professional to assist her with filing an individual
1999 return. Moreover, it is unclear what records Ms. Fausett needed to file her
return because she had been receiving the production checks from the Matagorda
leases until February 2000. The record does not reflect that Ms. Fausett paid
- 97 [*97] expenses with respect to the Matagorda leases, and in fact liens were filed in
June 2000 for unpaid operating expenses. Furthermore, Ms. Fausett did not prove
that she signed the returns for the years at issues because of fear of retaliation.3¹
Ms. Fausett is therefore not entitled to section 6015(c) relief.
2.
Section 6015(b) Relief
Section 6015(b)(1)(C) provides that an individual requesting section
6015(b) relief must not know or have reason to know that an understatement
existed. The actual knowledge requirement under section 6015(c)(3)(C) is
narrower than the knew-or-should-have-known standard under section
6015(b)(1)(C). See Cheshire v. Commissioner, 115 T.C. at 195. Because Ms.
Fausett had actual knowledge, see supra part V.B.1.a, of the items giving rise to
the deficiency, she is ineligible for section 6015(b) relief, see Alt v.
Commissioner, 119 T.C. 306, 313 (2002) (requiring a taxpayer to satisfy all
section 6015(b) requirements to qualify for relief under that subsection), M, 101
F. App'x 34 (6th Cir. 2004).
3¹Ms. Fausett may have feared that Mr. Durland would proceed with the
divorce proceeding in Mississippi if she did not sign the 1999 return. The abuse
exception of sec. 6015(c)(3)(A) requires that the requesting spouse prove that she
was a victim of domestic abuse and because of that abuse, she signed the return
out of fear of retaliation. See sec. 1.6015-3(c)(2)(v), Income Tax Regs. Although
a divorce proceeding may give rise to mental anguish, the Court does not find that
it rises to the level of domestic abuse in these cases.
- 98 [*98]
3.
Section 6015(f) Relief
Although this Court is not bound by the factors in Rev. Proc. 2013-34,
supra, we generally consider those guidelines. See Pullins v. Commissioner, 136
T.C. at 438-439. We first consider whether Ms. Fausett satisfies the threshold
conditions of Rev. Proc. 2013-34, sec. 4.01, for equitable relief under section
6015(f). We next consider whether equity entitles Ms. Fausett to section 6015(f)
relief.
As a threshold condition for section 6015(f) relief, the requesting spouse
must not knowingly participate in the filing of a fraudulent joint return. Rev. Proc.
2013-34, sec. 4.01(6). Although Ms. Fausett is not liable for the fraud penalties,
we have determined that the tax returns were fraudulent and that Mr. Durland is
liable for civil fraud penalties. See supra part IV.B.3. Ms. Fausett signed these
returns while knowing that income had been omitted from them. See supra part
V.B.l.a. Accordingly, Ms. Fausett does not satisfy this threshold condition for
equitable relief under section 6015(f).
Even if Ms. Fausett had not knowingly participated in the filing of a
fraudulent joint return, she would not be eligible for relief because Mr. Durland
and Ms. Fausett transferred assets between them as part of a fraudulent scheme.
Another threshold condition of Rev. Proc. 2013-34, sec. 4.01(4), is that "no assets
- 99 [*99] were transferred between the spouses as part of a fraudulent scheme by the
spouses." The disqualifying transfer in this case relates to the May 2001 purchase
of the Prytania Street house. In purchasing the house Mr. Durland and Ms. Fausett
used funds from an account owned by Boleyn Energy. The Prytania Street house
was titled in Ms. Fausett's name. The funds in the Boleyn Energy account were-at least in part-- amounts paid to Mr. Durland, Ms. Fausett, or Boleyn Energy
under the Matagorda lease, and Ms. Fausett and Mr. Durland each owned half of
Boleyn Energy's stock. By May 2001 Ms. Fausett knew that the purpose of the
well assignments was to defraud ARXA and Gulfport Oil & Gas' creditors and the
IRS. She also must have known that Mr. Durland insisted on having the Prytania
Street house titled only in her name because he wanted to place his assets (i.e., his
portion of the funds in the Boleyn account that he owned) beyond the reach of his
creditors, including creditors of ARXA and Gulfport Oil & Gas and the IRS.
Nevertheless, she agreed to this arrangement. Mr. Durland therefore transferred
assets under his control to Ms. Fausett as part of a fraudulent scheme.
Subsequent events support our conclusion that Mr. Durland transferred
assets to Ms. Fausett as part of a fraudulent scheme. Specifically, Ms. Fausett
later transferred the Prytania Street house to Trinity Art. She then caused Trinity
Art to transfer the house back to her so that she could obtain a loan on the Prytania
- 100 [*100] Street house and then transferred the house back to Trinity Art. We infer
from these transfers that Mr. Durland and Ms. Fausett no longer thought that
having the Prytania Street house titled in Ms. Fausett's name was sufficient to
protect the assets from Mr. Durland's creditors. Although Ms. Fausett testified
that Mr. Durland had told her to transfer the house to Trinity Art because she was
selling art and antiques from the house, we do not find Ms. Fausett's testimony in
this regard to be credible. Mr. Durland also placed other assets, such as the
Matagorda lease, as well as income that he earned, in Ms. Fausett's name,
ostensibly to hide the assets and income from creditors throughout the years at
issue. Ms. Fausett is therefore disqualified from equitable relief under section
6015(f).32 See id.
Assuming arguendo that Ms. Fausett satisfied the threshold conditions for
section 6015(f) relief, equities do not weigh in her favor. Although Ms. Fausett
was not married to Mr. Durland when she requested section 6015 relief and
although she was in compliance with her tax obligations for years after the years at
issue,33 Ms. Fausett had actual knowledge of the understatements for the years at
32A requesting spouse also is not eligible for sec. 6015(c) relief when assets
were transferred as part of a fraudulent scheme. Sec. 6015(c)(3)(A)(ii).
33Respondent concedes that both of these factors favor granting relief to Ms.
(continued...)
- 101 [*101] issue. See supra part V.B.1.a. Moreover, Ms. Fausett never proved with
any credible evidence that she would suffer economic hardship if relief was not
granted. Additionally petitioners' divorce decree states that the tax liabilities for
the years at issue are each party's responsibility.34 Ms. Fausett received significant
benefits from the understatements of tax including an investment account in her
name, expensive jewelry, homes, and a luxury car. Ms. Fausett testified that she
was in poor mental health and attended counseling during the years at issue, but
Ms. Fausett never introduced any credible evidence to corroborate her claims.
Accordingly, the Court is not convinced that equities weigh in Ms. Fausett's favor.
Ms. Fausett contends that this Court should grant equitable relief even if
equities do not weigh in her favor because of Mr. Durland's physical and
psychological abuse. Rev. Proc. 2013-34, sec. 3.01, 2013-43 I.R.B. at 398, gives
greater deference to the presence of abuse than previous guidelines and recognizes
that when abuse is present, it may affect the analysis and possibly negate the
presence of other unfavorable factors. We have already considered whether Ms.
33(...continued)
Fausett.
34Rev. Proc. 2013-34, sec. 4.03(2)(d), 2013-43 I.R.B. at 402, states that the
legal obligation factor is neutral when the tax liabilities are each party's
responsibility.
- 102 [*102] Fausett had proven abuse for purposes of the duress exception under
section 6015(c)(3)(C), and we have found that the alleged abuse was not
substantiated. See supra part V.B.l.b. The record simply does not support a
finding that Ms. Fausett was abused such that the abuse would negate the factors
that weigh against granting her section 6015(f) relief. Her evidence was
uncorroborated and unmoving and her actions during the years at issue were not
consistent with her testimony at trial. Accordingly, we conclude that Ms. Fausett
is not entitled to relief from joint and several liability under any subsection of
section 6015.
VI.
Conclusion
We have considered the parties' remaining arguments, and to the extent not
discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Decisions will be entered under
Rule 155.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.