T .C . .Memo . 200 9

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UNITED STATES TAX

20 3

COUR T

FOXWORTHY, INC ., ET AL .,1 Petitioners v .

COMMISSIONER OF INTERNAL REVENUE, Responden t

Docket Nos . 20725-03, . 160-04,

18969-04, 601-05,

14612-05, 21699-05,

24533-06 .

William E . Frantz

and

Filed September 9, 2009 .

Donald B . DeLoach , for petitioners Ron

H . Bell and Tricia S . Bell .

Robert H . Hishon , for petitioner Foxworthy, Inc .

Stephen R . Takeuchi , for respondent .

'Cases of the following petitioners have been consolidated

herewith for trial, briefing and opinion : Foxworthy, Inc .,

docket Nos . 18969-04 and 14612-05, Ron H . Bell and Tricia S .

Bell, docket Nos . 160-04, 601-05, 21699-05, and 24533-06 . All

are hereinafter collectively referred to as the instant case .

- 2 MEMORANDUM FINDINGS OF FACT AND OPINIO N

WELLS,

Judge :

Respondent determined deficiencies an d

penalties with respect to petitioners' Federal income tax a s

follows :

Foxworthv, Inc . (Docket No . 20725-03 )

Year

Deficiency

1999

$2,508,226

Penalty Under I .R .C .

Sec . 6662(a )

$501,645 .2 0

Foxworthy, Inc . (Docket No . 18969-04 )

Year

Deficiency

2000

$3,086,277

Penalty Under I .R .C .

Sec . 6662(a )

$617,255 .40

Foxworthy, Inc . (Docket No . 14612-05 )

Year

Deficiency

2001

$653,801

Penalty Under I .R .C .

Sec . 6663(a)

$490,350 .75

Ron H . Bell and Tricia S . Bell (Docket No 160-04 )

Year

Deficiency

Penalties Under I .R .C .

Sec . 6663(a) Sec . 6662(a )

1999

$4,520,032

$3,390,024

$904,006 .40

Ron H . Bell and Tricia S . Bell (Docket No . 601-05 )

Year

Deficiency

Penalties Under I .R .C .

Sec . 6663(a) Sec . 6662(a)

2000 $4,489,883 $3,367,412 .25 $897,976 .6 0

Ron H . Bell and Tricia S . Bell (Docket No . 21699-05 )

Year

Deficiency

Penalties Under I .R .C .

Sec . 6663(a) Sec . 6662(a )

2001 $1,108,334 $831,250 .50

. $221,666 .80

- 3 Ron H . Bell and Tricia S . Bell (Docket No . 24533-06 )

Year

Deficiency

Addition to

Tax Under I .R .C .

Penalties Under I .R .C .

Sec . 6662(a) Secl . 6663(a) Sec . 6651(a)(1)

1996 $548,028 $109,605 .60 $411,021 $130,756 .50

1997 . 1,747,365 : 349,473 .00 1, 10,445 ----1998 1,180,512 236,102 . 40 885 ,384

After concessions by the parties and settlement of several

issues, the issues . remaining for decision are : (1) Whether

petitioners Ron H . Bell and Tricia 5 . .138112 are liable for the

section 66633 fraud penalty 'for the years in issue ; (2) whether ,

on account of fraud, the period of ;lim1tations remains open for

the years in issue ; (3) whether certain "offshore employee

leasing transactions" (OEL transactions) that petitioner Ron H .

Bell entered into during the . years in ~ssue lacked economi c

substance ; (4) whether petitioner Ron [-I . Bell constructivel y

received the money transferred as partlof the OEL transactions ;

( 5) whether petitioner Foxworthy , ., Inc . (Foxworthy )~,

was Ron H .

Bell ' s alter ego ; ( 6) whether Foxworth is entitled to deduction s

claimed regarding certain real property on Northside Drive, in

Atlanta ,

Georgia ; ( 7) whether petitioners Ron H . Bell and Tricia

S . Bell are entitled to certain deductions claimed for expenses

related to Bell Capital . Management , Inc .,

an Scorporation owned

2Tricia S . Bell is also referred to herein as Patricia D .

.Small ( her maiden name) .

'Unless otherwise indicated , all, section references are to

the Internal Revenue Code ( Code ), and fall Rule references are to

the Tax Court Rules of Practice and Procedure .

4 by petitioner Ron H . Bell ; (8) whether petitioners Ron H . Bell

and Tricia S . Bell are entitled to a certain nonbusiness bad debt

deduction ; (9) whether petitioner Ron H . Bell must recognize gain

on interest and dividends on certain investment accounts ; (10)

whether petitioner Ron H . Bell must recognize capital gains on

the liquidation of certain stock ; (11) whether Bell Capital

Management, Inc ., was entitled to an employee business expens e

deduction for certain fines paid to the Securities and, Exchange

Commission (SEC) ; (12) whether petitioners are liable for the

section 6662(a) negligence penalty for the years in issue ; .(13)

whether petitioners Ron H . Bell and Tricia S . Bell are . liable for

the section 6651(a)(1) addition to tax for the years in issue ;

and (14) whether petitioners have shown sufficient grounds to

supplement the record .

FINDINGS OF FAC T

Some of the facts and certain exhibits have been stipulate d

by the parties . The parties' stipulations are incorporated i n

this opinion and are so found . The parties have stipulated that

the venue for appeal of the instant case is the U .S . Court of

Appeals for the Eleventh Circuit .

Petitioner Ron H . Bell (Mr . Bell) graduated from Vanderbilt

University in 1968 and received a degree in .electrical

engineering . During 1970 Mr . Bell graduated from Emory

University and received a master's of business administration .

During the years in issue Mr . Bell was a chartered financial

analyst of the CFA Institute as well as a chartered investment

counselor of the Investment Counselor Association of-America .

After graduating from Emory, Mr . Bell worked for Asset

Management in Atlanta, Georgia, for 1 year specializing in

investment research . Subsequently, Mr . Bell worked for National

Service Industries, Inc ., for 12 years ,in various positions . At

National Service Industries, Mr . Bell developed a risk control

process of managing investments . The,objective of the risk

control process was to protect investor nts from participating in

periods of significant decline while allowing them to produce

attractive returns .

During 1984 Mr . Bell incorporated Bell Capital Management,

Inc . (BCM) . During May 1988 Mr . Bell elected to treat BCM as an

S corporation . From Mr . Bell's incorpioration of BCM in 1984 an d

throughout the years in issue, Mr . Bel 1 owned 100 percent of BCM

and was its sole director . At BCM Mr .

Bell made the risk contro l

process he developed at National Servi ce Industries available to

individual clients and their financia l planners .

During 1991 through 2001 Mr . Bell s duties as BCM's employee

included the supervision and directio

of business operations ,

providing services to clients as a fin ancial planner, investmen t

counselor, and wealth manager, and in related capacities .

Fro m

1987 through 2001, investment decisions on behalf of BCM clients

6 were made by BCM's investment committee . The investment

committee comprised Mr . Bell, Thomas C . Comsudes (Mr . Comsudes),

and Mark S . Palmer (Mr . Palmer) . Mr . Comsudes and Mr . Palmer

began contributing as decision makers after each had worked at

BCM for several years .

During 1984 Mr . Comsudes graduated from Stetson University

and received a bachelor's degree in business administration . Mr .

Comsudes . worked for Fidelity Investments for approximately 6

months after graduating from Stetson University . During June

1985 Mr . Comsudes met Mr . Bell and began working at BCM . When

Mr . domsudes started working for BCM, he handled administrative

functions and placed buy and sell orders . As the years went by,

Mr .- Comsudes assumed more responsibility and handled some of the

investment research .

During 1984 Mr . Palmer graduated from the University of

Georgia and received a BBA degree in finance . During 1987 Mr .

Palmer received a master's in business administration from

Georgia State University . Mr . Palmer is also a chartere d

!!financial analyst and a CFA'Institute member .

'Mr . Palmer, lik e

Comsudes, handled administrative duties when he joined BC M

and later worked his way up to investment research .

During 1996 BCM moved to new offices in Atlanta t o

accommodate the growth it experienced . At the time ofithe move,

BCM had five employees . Shortly afterlthe move, BCM hired thre e

additional workers . By 2003 BCM had 20 employees .

end of 1999 business had improved and BiCM managed the portfolios

of 2,283 clients with an aggregate market value of $531,531,263 .

BCM received quarterly fees as compensation for investmen t

services . Clients paid the fees either by writing checks eac h

quarter or by having the fees deducted

from their accounts .

From 1991 through 1995 BCM paid M : . Bell wages of $761,978 ,

$978,772, $691,006, $589,760, and $630 ,760, respectively . During

19966through 2001, the taxable years i n issue ,

Mr . .Bell reporte d

on his Federal income tax returns wages of $75,000, $75,000 ,

$75,000, $75,000, $75,000, and $37,50 0

respectively . For 199 6

through 2000 Mr . Bell reported on his

Federal income tax return s

wages received from Nationwide Executi'Ive Staff Leasing (NESL) ,

and for 2001 Mr . Bell reported on hi s Federal income tax retur n

wages received from International Leas ing Services (ILS) .

Petitioner Tricia S . Bell (Mrs . Bell) received a degree from

Kings Business School . For over 10 years Mrs . Bell worked as a

paralegal for a law firm in North Carolina . During 1972 Mrs .

Bell moved to Atlanta . Mrs . Bell worded as a paralegal for a n

Atlanta law firm for over 10 years .

- 8 During either 1979 or 1980 Mrs . Bell became interested in

interior plant design as a hobby . During the early 1980s Mrs .

Bell stopped working as a paralegal and opened her own'interior

plant design business under the name "Plantlease" . Plantlease

bought, sold, and maintained interior plants for offices an d

office buildings .

After Plantlease's business declined, Mrs . Bell, sometime

around 2000, sold Plantlease . Thereafter Mrs . Bell became a 50percent owner of Kaleidoscope, a lawn maintenance company .

Belinda Cochran owned the other 50 percent of Kaleidoscope and

was responsible for its day-to-day operations .

During the years in issue Mr . and Mrs . Bell (hereinafter,

sometimes, the Bells) were cash method taxpayers .

Deductions Claimed by BCM and by the Bell s

During the taxable years in issue BCM claimed deduction s

related to its business and reported the deductions on'its Form s

1120S, U .S . Income Tax Return for an S Corporation . The ne t

income of BCM was then reported on the Bells' Schedule E,

Supplemental Income and Loss, for the respective years .

For the following taxable years BCM deducted the following

amounts paid for the services of Mr . Bell : $800,000 for 1996,

$1,220,000 for 1997, $2,225,000 for 1998, $2,430,000 for 1999,

$1,880,000 for 2000, and $425,000 for 2001 . Responden t

disallowed all those amounts . '

In addition to the money BCM paid Mr . Bell, it claimed

several other expenses . . Respondent determined that BCM

.overstated its deductions by $1,228,088, $1,702,817, $2,678,033,

$3,195,463, $1,966,457, and $651,470 fpr 1996, 1997, 1998, 1999 ,

2000, and 2001, respectively . For 199 9 and 2000 BCM claime d

$3,740 and $1,400, respectively, for contract labor performed b y

Sharon Mamrose Womble, an artist . Mrs

Bell hired Ms . Womble t o

paint the outside and inside of the wi ne cellar of the Bells'

residence at 4371 Northside Drive (Nor thside) . Mr . Bell approved

the expense'as a business expense fo r

BCM .

From taxable years 1996 through 1 999, BCM claimed deduction s

of $400,000, $400,000, $250,000, and $1250,000, respectively, o n

its Forms

1120S as expenses paid to Mycroft, Ltd . (.Mycroft), an

alleged Irish corporation owned by John Fitzgerald . The payments

to Mycroft were allegedly for advertising and marketing BCM t o

potential European clients, business development, seminar

• I

expenses, travel, professional fees, and printing .

In addition to the professional fees deducted as part of th e

OEL transactions, see

infra pp . 14-22 ,

$57,129 .52, $441,992 .36, $288,302 .81,

BCM claimed deductions o f

$2,54,856,

$5,212, an d

4These amounts represented payments as part of the OEL

transactions described below .

- 10 $46,881 for professional fees on its Federal income tax returns

for taxable years 1996 through 2001, respectively . Respondent

disallowed all of the deductions . On its returns, BCM claimed

deductions of $56,178, $12,346, and $20,500 for busines s

it development for taxable years 1996 through 1998, respectively .

,Respondent disallowed the entire amount of each deduction . BCM

also claimed deductions of $33,458, $69,205, $140,709, $33,639,

and $107,774 .for travel and lodging for taxable years 1996, 1998,

1999, 2000, and 2001, respectively . Respondent disallowed all of

those deductions . BCM claimed a deduction of $49,258 for

advertising expenses paid to Mycroft for taxable year 1996 . BCM

claimed deductions of $5,000, $26,042, $11,203, $4,388, $3,297,

and $13,921 for legal,fees paid to Reiserer & Agee, LLP, for

taxable years 1996 through 2001, respectively . BCM claimed

deductions of $87,624, $55,200, $82,046, and $17,650 fo r

,,marketing for taxable years 1996, 1998, 1999, and 2000 ;

respectively . BCM claimed a deduction of $30,505, $9,632,

$33,626, and $2,685 for office supplies for taxable years 1996,

1999, 2000, and 2001, respectively . BCM claimed a deduction of

$105,762 paid to Mycroft for taxable year 1996 and a deduction of

$7,318 for taxable year 1998 paid to various organizations for

seminars . BCM claimed deductions of $3,174, $2,437, .$1,305 ,

$1,000, and $1,881 for utilities for taxable years 1996, 1997 ,

1998, 2000, and 2001, respectively . BCM claimed deductions of

- 11 $83,249 .91 and $16,745 .42 for employee business expenses fo r

taxable years 1999 and 2000, respectively . •BCM claime d

deductions of $24 , 640, $49 ,280, and $36, 960 for rent paid t o

Foxworthy for taxable years 1999 through 2001, respectively . BCM

claimed deductions of $12,401 .10, $1,802 .18, and $3,046 .04 fo r

meals and entertainment for taxable years 1999 through 2001 ,

respectively . BCM claimed a deduction of $153,541 for contrac t

labor for taxable year 1999 . BCM claimed deductions of $1,692,

and $1,997 for taxes and licenses paid to Cherokee County an d

Dekalb County for taxable years 2000 a nd 2001, respectively . BC M

claimed deductions of $1,200 and $4,50',0 paid to Georgia Stat e

University for continuing education of Kelli Bells for taxable

years 2000 and 2001, respectively . BCM claimed deductions of

$2,317 and $2,078 .20 for insurance for taxable years 2000 and

2001, respectively . BCM claimed a deduction of $15,540 for a ne w

telephone system6 for taxable year 200 1 . BCM claimed a deductio n

of $1,774 .70 for dues and subscriptions for taxable year 2001 .

BCM claimed a deduction of $3,785 .52 for repairs and maintenanc e

for taxable year 2001 . Respondent-disallowed all of BCM' s

claimed deductions listed above .

5Kelli Bell is the daughter of petitioners Ron H . Bell and

Tricia S . Bell .

6Respondent determined that the deduction for the new

telephone system should have been capitalized, not deducted .

- 12

On September 30, 1998, the SEC fined BCM, Mr . Bell, Mr .

Comsudes, and Mr . Palmer because they were in violation of

section 203(e), (f), and (k) of the investment Advisers Act of

1940 . BCM was fined $15,000, and the three individuals were each

fined $10,000 . BCM paid the entire $45,000 in 1999 because it

considered itself the beneficiary of the work of Mr . Bell, Mr .

Comsudes, and Mr . Palmer . BCM deducted the entire $45,000 as an

employee business expense for taxable year 1999 . Respondent

disallowed the entire $45,000 deduction .

Mr . and Mrs . Bell claimed charitable contribution deduction s

of $161,604,

$192,377, $87,572, $139,653,

and $69,386 ,

respectively, for taxable years 1996, 1997, 1998, 1999,1 and 2000 .

Respondent disallowed those deductions in the following amounts :

$155,001 for 1996, $171,103 for 1997, $77,253 for 1998, $139,653

for 1999, and $62,915 for 2000 . The disallowed deductions are

contributions to the Bell Family Foundation for Hope, Inc .

(foundation), an entity organized under section 501(c)(3) .

During 1996 the Bells contributed to the foundation 27, .000 share s

of Northeast Investors Trust, a mutual fund, owned by the Bells

through their partnership R&P Partnership . At the time of the

contribution the shares were worth $11 .12 each, a total o f

$300,240 . During 1996 the Bells also contributed $2,250 to Youth

Cultural, $115 to Braves Foundation, and $1,000 to the GorhamMcBane Library . In addition, the Bells claimed a charitable

13 contribution deduction of $3,238 as 50

percent of th e

contributions from Mr . Bell's Schedule K-1, Shareholder's Share

of Income, Credits, Deductions, etc .

uring 1997 the Bells

contributed to the foundation another

8,000 . shares of Northeas t

Investors Trust, again owned by the Bells through the R&P

Partnership . At the time of the contribution, the shares were

worth $11 .24 each, a total of $202,3201 . During 1997 the Bell s

also contributed $334 to Georgia S-tate University, $15 to Georgi a

Tech, $251 to Auburn University, $8,7010 to the Unity Nort h

Church, and $470 to Goodwill ." In addition, the Bells claimed

charitable contribution deduction of

contributions

$ 12,444 as 50 percent of th e

from Mr . Bell's Schedule K-1 . Of the $87,57 2

claimed by the Bells as a charitable contribution deduction for

1998, $77 ;253 was a carryover from the' previous year . Of th e

$139,653 claimed by the Bells as a cha ritable contributio n

deduction for 1999, $119,934 was a carlryover . Of the $69,386 th e

Bells claimed as a charitable contribution deduction for 2000 ,

$62,915 was a carryover .' Respondent disallowed the charitable

contribution deductions to the foundation because Mr . Bel l

controls the foundation and because respondent disputes that th e

shares were transferred .

'In addition to the carryover amounts claimed in 1998, 1999,

and 2000, the Bells claimed charitable contributions of $10,319

in 1998, $19,719 in 1999, and $6,471 in 2000 .

- 14 Offshore Employee Leasing Transactio n

During 1996 Mr . Bell's client Larry Calhoon (Mr . Calhoon)

asked Mr . Bell whether he was interested in learning about an

employee leasing deferred compensation plan . Mr . Bell indicated

that he was . Mr . Calhoon- sent Mr . Bell employee leasing`

information written on Kenneth Reiserer' .s (Mr . Reiserer)

letterhead . Mr . Calhoon received a fee from Mr . Reiserer for

referring Mr . Bell to him .

Mr . Bell contacted Mr . Reiserer about employee leasing o n

several occasions . Additionally, beginning in 1997 Mr . Bell

.attended seminars that featured Mr . Reiserer as a speaker . Mr ;

Reiserer sent Mr . Bell a 14-page document explaining "The Foreign

;Deferred Compensation Program" . After discussion with Mr .

Reiserer, Mr . Bell decided to participate in the OEL transactions

set up by Mr . Reiserer . The OEL transactions were to start on

December 1, 1996, and were to be carried out in accordance with

an undated "Contract For Personnel Services" (contract) ;, signe d

by Mr .

Reiserer as president of NESL and Mr . Comsudes as vice

president of BCM .

the contract to Mr .

returned to Mr .

On November 5, 1997 ,

Mr . Reiserer forwarded

Bell to be finalized .

Bell on December

The contract was

4, 1997 .

As part of the OEL transactions, on December 19, 1996, BCM

wired $800,000 to NESL ,

a domestic leasing company owned and

operated by Mr . . Reiserer .

During 2001 Mr . Reiserer changed the

- 15 name of NESL to ILS .8 On its Form 1120S for its 1996 taxabl e

year, BCM listed the $800,000 wired to NESL as a deduction fo r

professional fees . Mr . Bell did not report any wages from BCM

for taxable year 1996 . Mr . Bell alleges that during Decembe r

1996 he was an employee of NESL and r e ceived wages of $75,000 .

On December 23, 1996, after deduc ting from the $800,000 a

management fee of $24,000 and a consulting fee to Mr . Calhoon of

$8,000,

NESL wired

$767,950 to Montraiin Services, Ltd .

(Montrain) . Montrain is an Irish corporation that allegedly wa s

Mr . Bell's employer and leased Mr . Bell's services toNESL, which

in turn leased Mr . Bell's services toBCM . In the "Foreign

Deferred Compensation Program"9 document given to Mr . Bell, Mr .

Reiserer wrote that "to avoid United States taxation, the Iris h

corporation [Montrain] cannot be deemed to be engaged in busines s

in the United States ."

That same day,

Montrain wired back t o

NESL $77,480 to cover expenses of paying an alleged salary of

$75,000 to Mr . Bell along with other related expenses .

Additionally, Montrain returned to NESL $3,300, and $645,905 .6 7

was deposited in an account under the name "Ruritania" . On Marc h

8Mr . Bell was not able to produce' a copy of a personnel

services contract between BCM and ILS'.

9The "Foreign Deferred Compensation Program" document was

written by Mr . Reiserer to Mr . Bell . The document explains the

foreign deferred compensation planning program, and contains Mr .

Reiserer's legal analysis of the program and how the program of

GEL transactions would work for Mr . Bell .

- 16 7, 1997, the balance of $652,000 in the Ruritania account was

invested with Davis, Weaver & Mendel .10 Thomas Weaver" .manage d

the $652,000 in an account with Rydex Investments .

During December 1997 BCM made three wire transfers to NESL

totaling $1,220,000, . one on December 2 for $1 million and two on

December 16 for $35,00 .0 and $185,000, respectively . On its Form

1120S for its 1997 taxable year BCM listed the transfers a s

professional fees . As of December 8, 1997, $899,980,000 of the

$1 million transferred to NESL was deposited in a Charles Schwab

(Schwab) account for. RHB Corp .12 By December 24, 1997, another

$122,980 was deposited into the RHB Corp . Schwab account . The

balance of the money transferred was paid to NESL and Montrain

for fees .

In a letter dated July 17, 1997, Mr . Bell expressed hi s

displeasure over the cost of doing business with Montrain . Mr .

Bell believed that he could replicate the services of Montrain at

a lower cost .

Mr . Bell was unhappy with the 7-day delay in having money

transferred to the RHB Corp . Schwab account . Mr . Bell ;; indicate d

1°Davis, Weaver & Mendel was an investment management firm

based in Atlanta .

"Thomas Weaver, a friend of Mr . Bell, was the majority

owner and president of Davis, Weaver & Mendel .

12RHB Corp . is a Nevis-based corporation Mr . Bell ,

incorporated . RHB Corp .'s original name was Rossendale

Investments . Nevis is an island in the Caribbean Sea .

17 that he was losing money because interest was not accruing to his

benefit during the delay .

Mr . Bell expressed his unhappiness t o

James Jantos (Mr . Jantos), an associat e at Mr . Reiserer's la w

firm . Consequently, Mr . Jantos contacted Judy Lovel113 (Ms .

Lovell) and requested an accounting of the money transferred t o

the RHB Corp . account .

On October 7, 1997, Mr . Comsudes opened a corporate stoc k

brokerage account in Foxworthy's name

at Schwab . Mr . Bell

brought Mr . Comsudes the documents tolsign in order to open th e

Foxworthy Schwab account . On October 9,,1997, Mr . Comsude s

opened a bank account at SunTrust Bank in Foxworthy's name .

During either May or June 1999, Mr . Comsudes opened a second

corporate stock brokerage account with Schwab in Foxworthy's

name . . Mr . Bell brought Mr . Comsudes the documents to sign t o

open the second .Foxworthy Schwab 'account .

Mr . Bell had three Nevis companies incorporated : Ballyclar e

Holding, Inc . (Ballyclare), Helston Services, Inc . (Helston), an d

Rossendale Investments (Rossendale) .

Mr . Bell later requeste d

that Rossendale change its name to RHB Corp . . The Elfin Trust

(Elfin), chosen by Mr . Bell, administered Ballyc.lare . Mr . . Bell's

contacts at Elfin were Ms . Lovell, Robert Kerriege, and Joh n

"Judy Lovell was one of Mr . Bell ;'s contacts at the Elfin

Trust, which was chosen by Mr . Bell to administer Ballyclare

Holding, Inc ., a Nevis corporation used by Mr . Bell as part of

the OEL transactions .

18 Robbiliard . One of the reasons Ballyclare needed a third-party

administrator is that Ballyclare had no employees .

During May 1998 Mr . Bell's contacts at Elfin were•concerned

that there was an unwanted link between Mr . Bell and RHB Corp .

Consequently, Mr . Bell asked that Mr . Weaver manage the funds in

the RHB Corp . Schwab account through Tahosa Valley Investments .

Bell . recommended that Ballyclare, Helston, an d

Rossendale each set up accounts with Charles Schwab . A fourth

account in Mr . Reiserer's name was also set up with Schwab . The

four accounts were opened at the Cobb County, Georgia, Schwab

branch, the office closest to BCM's headquarters . Mr . Bell

provided limited power of attorney forms for the Schwab accounts .

The forms were signed using a signature stamp of William

Zarrett19 (Mr . Zarrett) . Mr . Bell did not have permission to use

Mr . Zarrett's signature stamp on the limited power of attorney

forms, and Mr . Zarrett never conducted business on behalf of

Ballyclare, Helston, or Rossendale or its later name RHB Corp .

Mr . Reiserer directed Ms . Lovell to have Elfin acquire 100

percent of the voting common stock of the three Nevis

corporations . Furthermore, Mr . Reiserer indicated to Ms . Lovell

that each Nevis corporation needed minutes created and tha t

"Mr . Zarrett is Mr . Bell's personal friend . The two met in

1968 at Emory, University . Mr . Zarrett was the trustee of th e

"Mycroft Trust, set up for Kelli Bell . Mr . Zarrett also had

limited power of attorney over Ballyclare and Helston . At the

time of trial, Mr . Zarrett was a retired banker .

- 19 statements from the Schwab accounts w e re to be confidentiall y

provided to Mr . Bell .

The investment income on the Helston, Ballyclare, an d

Rossendale/RHB Corp .

Account

1997

Helston $8,445 .10

Ballyclare 7,469 .19

Rossendale/RHB 37,031 .00

Schwab accounts is as follows :

1998

1999

2000

200 1

$168,287 .61 $126963 .85 $96,235 .40 $141,916 .4 2

Of the $126,963 .85 of income in the Rossendale/RHB Corp . Schwab

account during 1999, $18,166 .50 consisted of dividend income ; the

rest of the income from all the accounts is interest income . Mr .

Bell did not report any of the incomejfrom•the Helston ,

Ballyclare, and Rossendale/RHB Corp . Schwab accounts on his ta x

returns for the respective taxable years .

On June 3,

1998 , BCM wired '$250,000 to NESL . On July 20 ,

1998, BCM wired $500,000 to NESL . Additionally, on that day, Mr .

Bell sent a note to Mr . Reiserer requesting that the $500,000 BC M

wired to NESL be transferred quickly to RHB Corp .'s Schwa b

account because of the potential for lost interest in the event

of a delay in the transfer . On October 26, 1998, BCM wired an

additional $500,000 to NESL . BCM wired $800,000 to NESL o n

December 17, 1998, and $175,000 on December 24, 1998 . As in

previous years, BCM claimed .a deduction for the transfers on its

Form 1120S for taxable year 1998 as "professional fees" . By

January 6, 1999, the money BCM transferred to NESL was deposited

20 in RHB Corp .'s Schwab account, less fees to Montrain . During

1998 $550,000 was transferred from the RHB Corp . Schwab account

as a loan to Mr . Bell's church, the Unity Church . Mr . Bell

requested that Ms . Lovell provide Internet access to the account

and give him the password to the account in order to keep track

of the RHB Corp . Schwab account .

On September 20, 1999, BCM wired $1,200,000 to NESL . On

December 20, 1999, BCM wired $1,230,000 to NESL . As in previous

,;years, BCM claimed a deduction for the transfers on its For m

1120S for taxable .year 1999 as "professional fees" . By January

5, 2000, the transferred money, less the fees of NESL and

Montrain, was wired from the Royal Bank of Scotland to

Foxworthy's SunTrust Bank account . Mr . Bell was unsatisfied with

the fees charged to implement the OEL transactions ., Mr . Reiserer

wrote .a note to Mr . Bell highlighting the significant tax savings

of the OEL transactions and told Mr . Bell he was trying too hard

for "perfection" .

On August 29, 2000, BCM wired $800, .000 to NESL . On December

21, 2000, BCM wired $1,080,000 to NESL . As in previous years,

BCM claimed a deduction for the wire transfers on its Form 1120S

for taxable year 2000 as "professional fees" . On August 31 ,

2000, the $800,000, less fees, a net of $767,900, was wired

offshore . On December 21, 2000, the $1,080,000 less fees, for

.net of $955,700, was wired offshore .

On March 22, 2001, BCM wired $375',000 to NESL . On Decembe r

18, 2001, BCM wired $50,000 to•ISL .15 BCM claimed a deduction on

its Form 1120S for taxable year 2001 for the wire transfers'a s

"professional fees" . On March 23, 20011, NESL wired $319,300

offshore to Fitzwilliam .International Resource Services Limite d

(Fitzwilliam) .16 On June 22, 2001, Fitzwilliam transferred

$260,000 of the $319,300 to an account in the name of Mr . Bell's

trust . Fitzwilliam set up the trust for'Mr .'Bell with Elfin as '

the trustee . Mr . Bell wanted to know why only $260,000 had been

transferred to the trust . Mr . Reiserer informed Mr . Bell tha t

Mr . Bell had not accounted for the $37, 500 wages to Mr . Bell . On

December 28, 2001 ,

ISL wired $ 47,800 offshore .

On December 31 ,

2001, $44,000 of the $47,800 was transferred to Mr . Bell's trus t

account .

During the years in issue Mr . Bell's duties at BCM did no t

change . . Also during the years in issue, BCM provided Mr . and

Mrs . Bell with health insurance . Additionally, BCM, not NESL,

ISL, Montrain, Pixley, or Fitzwilliam paid Mr . Bell's employee

expenses . Furthermore ., during the `years in issue BCM filed with

the SEC forms listing Mr . Bell as president and as its contac t

"Sometime before'this transfer, NESL changed its name t o

ISL .

'6In 1999 Pixley Services (Pixley) took the place of

.Montrain as Mr . Bell's alleged offshore employer . In 2001

Fitzwilliam took the place of Pixley as Mr . Bell's alleged

offshore employer .

22 person . During the years in issue, Mr . Bell did not receive

guidance from NESL, ISL, Montrain, Pixley, or Fitzwilliam but

performed his duties as he himself determined .

Foxworthy

Mr . Reiserer incorporated Foxworthy on August 12, 1996, in

Nevada . . Foxworthy's initial officers were Mr . Reiserer as .

president and Sonia M . . Agee (Ms . Agee) as secretary and

treasurer . Mr . Reiserer was an attorney in Bellevue ,

'Washington .l' Ms . Agee was an associate at Mr . Reiserer's law

firm . As of August 13, 1.997, Foxworthy had no assets . Mr . Bell

suggested that Foxworthy use a Reno, Nevada, address he

previously had obtained . as a result of identity theft he had

experienced . . The Reno address is a mail forwarding service, with

mail forwarded to BCM in Atlanta, Georgia . Petitioners . allege

that Foxworthy is owned by Ruritania, Ltd . (Ruritania) .=,„

Petitioners further allege that Ruritania is a corporation formed

under the laws of Jersey, Channel Islands . On March 18,, 1998,

Foxworthy issued Ruritania a stock certificate for 2,500

shares .

Mr . Bell requested that Mr . Comsudes, as president of Foxworthy,

sign the certificate .

Northside

During 1997 Mrs . Bell inquired about a house at 4371

Northside Drive, Atlanta, Georgia (Northside) . Mrs . Bell toure d

"Mr . Reiserer died during July 2004 .

- 23 Northside on multiple occasions .duringC1997 when Sam Forema n

owned Norths•ide . Mr . Bell spoke to Jill Elliott regarding the

purchase of Northside . On or about October 15, 1997 ; Northside

was purchased from Mr . Foreman in the name of 'Foxworthy . Mr . and

.Mrs . Bell, not Foxworthy, selected Nor,thside . After purchasing

Northside, Mr . and Mrs . Bell asked Larry Graham (Mr . Graham) to

work at Northside to manage and care for the property . Mrs . Bel l

worked with an interior designer to select furnishings for

Northside . During 1997, shortly after it was purchased, Mr . an d

Mrs . Bell moved into Northside . -Although an alleged leas e

agreement between Foxworthy and Mr . and Mrs . Bell was not signed

until, November 1, .200)1, the Bells used Northside as their primary

residence during the workweek from the time they moved into the

residence during 1997 .

Before Foxworthy closed on Northside, Mr . Reiserer suggested

that someone in Atlanta should be the president of Foxworthy . .

Mr . Bell asked Mr . Comsudes to be the president, and, o n

September 30, 1997, Mr . Comsudes became president of Foxworthy .

Mr . Comsudes never met Mr . Reiserer and did not know who

Foxworthy's shareholders were . Furthermore, Mr . Comsudes had n o

day-to-day activities as president of Foxworthy . Mr . Comsudes ,

in his words, "looked to" Mr . Bell and Mr . Reiserer in hi s

dealings with Foxworthy .

- 24 Foxworthy purchased Northside using a $2,110,000 wire

transfer that took place on October 14, 1997 . The money was

transferred from Schwab accounts in the name of Helstor and

Ballyclare . Helston and Ballyclare obtained the funds from a

Schwab account'in the name of Mr . Reiserer . The Reiserer Schwab

account obtained the .funds from an August 19, 1997, liquidation

of stock .18 The Reiserer account received the stock on August

15, 1997 from a transfer from four Schwab accounts in the names

of (1) R&P Partnership, Ron H . Bell TTEE, (2) Hoyt Bell Revocable

Trust, Ron H . Bell TTEE, (3) Roberta L . Bell Revocable Trusty an d

1`(4) Kelli Bell . R&P Partnership is owned by Mr . and Mrs . Bell .

The proceeds from the liquidation of stock transferred from R&P

Partnership Schwab account were transferred to Rossendale's

(later known as RHB Corp .) Schwab account . The proceeds of the

liquidation of stock transferred to the Rossendale Schwab account

totaled $2,225,181 .96 . The gain on the liquidation of stock in

the Reiserer account during 1997 was $329,363 .38 . Mr . Bel l

;;authorized all the transfers of stock . The $2,225,181 .96

transferred to the Rossendale Schwab account was part of an asse t

"Mr . Reiserer expected that the Reiserer Schwab account

would have income from the liquidation of stock . Mr . Reiserer

contacted Mr . Bell about two ways to report the income . Mr . Bell

instructed Mr . Reiserer that he preferred Mr . Reiserer to report

the income and to pay the tax from the residual amount in the

.Reiserer Schwab account .

- 25 exchange to RHB Corp . in return for an alleged private annuity

for the benefit of Mr . Bell .

The transfers through which Foxworthy acquired funds for its

purchase of Northside were structured as loans from Ballyclare

and Helston to Foxworthy . Mr . Bell later suggested changing the

structure of the purported loans . Mr . Bell's plan was to have

Ballyclare lend money to Helston, which then lent money t o

Foxworthy.' Mr . Bell and Mr . Reiserer collaborated on th e

preparation of the mortgages and notes used to buy Northside .

Mr . and Mrs . Bell procured homeowners insurance on Northside

in Mrs . Bell's maiden name, Patricia D . .Small . The homeowners

policy listed Foxworthy as an additional insured . The Bell s

explained to the insurance company that Foxworthy was added as an

additional Iinsured because Foxworthy / was their company for ta x

purposes and it owned the house . Had ;Foxworthy been the only

insured on the Northside policy, the policy .would have been more

expensive . Additionally, Northside was insured for personal use ,

not business use .

On September 8, 1998,

Foxworthy filed a Form 1120, U .S .

Corporation Income Tax Return, for its 1997 taxable year . Mr . .

Comsudes signed the Form 1120 at Mr . Bell's request . Before

filing the tax return, on March 13, 1998, Foxworthy filed a Form

7004, Application for Automatic Extension of Time To File

Corporation Income Tax Return . Larry :Graham's name appears to be

26 signed on the signature line on the Form 7004 . However, Mr .

Graham did not in fact sign the Form 7004 .

On .October 27, 1997, Foxworthy purported to enter into a

lease with BCM for the third floor of Northside . Mr . Bell

purported to negotiate the terms of the lease on behalf of BCM,

and Mr . Reiserer purported to negotiate the terms on behalf o f

Foxworthy . Mr . Graham' s name appears on the signature line a s

Foxworthy's representative ; however, he did not sign the leas e

and was never an officer or authorized to sign on behalf of

Foxworthy .

On April 1, 1998, Mr . Bell, on behalf of BCM, and Mr .

Graham, on behalf of the Whitehall Inn, purportedly entered an

agreement between BCM and the Whitehall Inn whereby the Whitehall

Inn would provide accommodations at Northside to individuals

doing business with BCM . As in the case of other documents

bearing his name, Mr . Graham did not sign this agreement and wa s

,not aware of it . Mr . Comsudes was not familiar with the

Whitehall Inn and was not familiar with an agreement between the

Whitehall Inn and BCM . The Whitehall Inn is an assumed name for

Foxworthy .

From 1997 through 2001 BCM paid Foxworthy for allegedly

renting Northside . Additionally, the Whitehall Inn prepared

invoices to BCM for guests who allegedly stayed at Northside .

However, no guests actually stayed at Northside . . Linda Sagaert

- 27 (Ms . Sagaert) prepared the invoices at !the request of Mr . Bell .

Mr . Bell also gave Ms . Sagaert the information needed to prepare

the invoices .

From 1997 through 2001 Northside was legally zoned as a

single-family residential property and therefore not permitted to

be used as a hotel . When BCM entertained guests from out of

town, the guests usually stayed at the Waverly Inn . No guest s

stayed at Northside .

Mr . and Mrs . Bell lived at Norths ide, allegedly as tenant s

of Foxworthy . At the beginning of 199,7 Foxworthy .had no assets .

At the end of the year Foxworthy had $ 1 177,983 in cash, $3,036 in

trade notes and receivables,,$1,511,064 in buildings and other

"depreciable" assets, and $600,00,0 inland . The buildings and

other "depreciable" assets and land related to Northside .

During taxable year 1997Foxworthy reported a net operating

loss of $19,004 . The net operating loss is the result of an

excess of deductions for repair and maintenance, taxes and

licenses, depreciation, and other items, over the income reported

for rent, dividends, and interest . The income Foxworthy earned

and the deductions it claimed for taxable year 1997 were related

to Northside .

During taxable year 1998 Foxworthy reported a net operating

loss of $82,,304 . The loss is the result of a $19,904 carryover

- 28 loss from 1997, increased .by the excess of deductions for repair

and maintenance, taxes and licenses, depreciation, an d

other items, over the income reported for rent, dividends, an d

interest .

.For taxable year 1997 through taxable year 2001

claimed deductions for depreciation ,

expenses ,

and lawn maintenance ,

Additionally ,

insurance expenses , utility

all related to Northside .

for taxable year 1999 through taxable year 2001

Foxworthy claimed deductions

North'side .

Foxworth y

for maid services performed at

For taxable year 2000 through taxable year!2001

Foxworthy claimed deductions for janitorial and cleaning expenses

relating to Northside .

Foxworthy also claimed deductions for

payments to Mr .

Graham .

Mr . Graham worked at Northside for the

previous owners ,

and Mrs . Bell hired him to stay after the Bells

moved into Northside .

, payments . to Mr .

Foxworthy claimed the deductions for th e

Graham as business expenses .

Northside suffered water damage . Consequently , during June

1999 the Bells submitted an insurance claim .

On June 22, 1999,

Chubb insurance issued a check from Great Northern Insurance Co .

(Great Northern )

damage .

to Patricia D . Small of $ 1,059 . 02 for the water

On July 16 ,

1999 ,

Chubb issued a second check from Great

Northern to Patricia D . Small of $18,061 to compensate for water

damage to the floors and phone system at Northside . Mrs . Bell

deposited the check for $18, .061 into her personal bank account .

- 29 During January 2001 Mr . Bell became interested in purchasing

a 1958 Rolls Royce . Mr . Bell visited the owner in Augusta,

Georgia, and drove the car back to Atlanta . On January 21, 2001,

Mr . Bell placed the title of the Rolls Royce in Foxworthy 's name .

The insurance application for the Rolls Royce lists Mr . Bell as

the insured and Foxworthy as an additional insured . Mr . Bell an d

Mrs . Bell are listed as the two drivers .

Tax Deed Busines s

During the summer of 1998 Mr . Bell began reading about tax

deeds . After consulting with Lynn Featherly and D .J . Adams, who

both had experience in the tax deed business, Mr . Bell decided to

invest in the tax deed business . Mr . ;Bell contracted with Ms .

Featherly and Mr . Adams to perform research and develop a ,

business plan to be used by BCM . Mr . Bell recommended that

Foxworthy invest in the tax deed business because he felt it was

lucrative .

Foxworthy needed capital in order to become engaged in the

tax deed business . Mr . Bell arranged a series of loans to

Foxworthy to fund the tax deed business . The loans came from

Shirley Hearle, who was Mr . Bell's first cousin, Investment

Partnership 00, which was a partnership in which Mr . Bell was the

general partner, and four customers of Mr . Bell . Additionally,

Foxworthy received loans from the foundation, Ms . Sageart, and

Mr . Palmer . Furthermore, loans are alleged to have' come from the

30 three Nevis corporations, RHB Corp ., Ballyclare, and Helston .

Mr . Bell orchestrated all of the loans to Foxworthy . Most of the

money for the tax deed business came from Mr . Bell's OEL

transactions, chiefly in the name of RHB Corp . By December 31,

1999, Foxworthy had borrowed $4,729,990 from RHB Corp . . B y

;;December 31, 2001, the amount of the loan had increased to

$8,839,965 .

During 2000 Mr . Bell asked Charles L . Wilson III (Mr . .

Wilson) to become president of Foxworthy, replacing Mr . Comsudes .

One of the reasons Mr . Bell replaced Mr . Comsudes was that he

wanted no connections between Foxworthy and the RHB Trust in

order that the loans from the RHB .Corp . to'Foxworthy would be

viewed as arm's-length transactions . During 1999 Mr . Wilson

became an employee of BCM and continued to receive a salary from

BCM during .2000 and 2001 . Mr . Wilson does not have a colleg e

degree, and before he worked for BCM, his work experience was as

a store designer and events coordinator . At BCM Mr . Wilson

initially oversaw the computer system and was .a special project s

.manager earning an annual salary of approximately $30,000 .

After becoming Foxworthy's president during 2000,,Mr . Wilso n

oversaw the tax deed business . Mr . Wilson looked to Mr . Bell an d

Mr . Reiserer in dealings on behalf of Foxworthy ; and when h e

started working for BCM, he reported to Mr . Bell .

- 31 -

.During May 1999 Foxworthy opened'a brokerage account at

SunTrust Equitable Securities .(SunTrust Equitable) . Mr . Bell,

Mr . Comsudes, and Mr . Reiserer were the three signatories on the .

account . Mr . Bell was listed as a consultant . Mark Kallis, an

account representative at SunTrUst Equitable who handled the

Foxworthy account, took instructions only from Mr . Bell and neve r

from Mr . Comsudes or Mr . Reiserer .

During December 1999 Mr . Bell thought that it might be wis e

to restructure the tax deed business using RHB Corp . as th e

primary entity as opposed to Foxworthy ; . In a note to Mr .

Reiserer, Mr . Bell wrote that because Foxworthy was a domestic

entity and subject to taxes, RHB Corp . might be better suited for

the tax deed business because it was a foreign entity .

During the months that followed, Mr . Bell continued to seek

avenues to limit Foxworthy's taxable income for taxable year

2 .000 . . During January 2000 Mr . Bell proposed to Mr . Reiserer to

increase the interest Foxworthy paid on the loan from RHB Corp .

Mr . Bell followed up during February . ; During February 2000 Mr .

Bell wrote to Mr . Reiserer that Foxworthy . could pay its debt in

October 2000 but that it would want to re-borrow at a higher

interest rate in order to shift-more profits out of Foxworthy .

Mr . Bell noted that doing so would be costly and that he wanted

to keep the options open .

- 32 On March 15, 2000, Mr . Bell sought more funding for'the tax

deed business . In a note to Mr . Reiserer, Mr . Bell indicated

that a bank was willing to extend a line of credit of $10 million

to purchase tax deeds . The bank intended to fund 75 percent of

the purchase of each deed . In the note to Mr . Reiserer, Mr . Bel l

wrote that he would have to fund the remaining 25 percent .

Bad Debt Deductio n

Mr . Bell claimed as .a flowthrough item from R&P Partnership

a nonbusiness bad debt deduction of $91,350 for taxable year 2000

and $11,936 in legal fees associated with collecting a debt for

taxable year 2000 . On June 1, 1997, R&P Partnership allegedly

lent $31,350 to Steinberg & Associates, . Inc . (Steinberg), with an

interest rate of 18 percent and a maturity date of 1 year . R&P

Partnership was one of nine alleged creditors on the loan, which

totaled $449,350 . On September 12, 1997, R&P Partnership

allegedly lent Steinberg $60,000 with an interest rate of 18

percent and a maturity date of 1 year . R&P Partnership extended

the maturity date of the second note by 1 year to September 12,

1999 . Both promissory notes are undated and have only th e

.signature of the alleged debtor, not that of any notary or

witness . R&P Partnership alleges that it never received a

payment from Steinberg on either loan and that Steinberg

defaulted on both . During 2000 Steinberg filed for bankruptcy .

33 and listed R&P Partnership as a secured and unsecured creditor -in

relation to the two notes .

Investigation

The Internal Revenue Service (IRS) began investigating Mr .

Reiserer and NESL in' regard to promoting abusive transactions,

pursuant to sections 6700 'and 6701 . As a result of the

investigation, the IRS identified Mr .'Bell as . a client of Mr .

Reiserer . The IRS initiated the investigation of Mr . Bell from

its office in Daytona Beach, Florida,

;because Mr . .Bell used

Daytona Beach address as his home address on his income tax

returns . Mr . Bell declined the offer of the revenue agent to

move the investigation to Atlanta . The Daytona Beach address on

the income tax returns for taxable years 1999 and 2000 was that

of a mail forwarding company . By using property records, the

revenue agent discovered Mr . Bell owned a condominium in Dayton a

Beach . When the revenue agent went to the condominium, the

person who answered the door did not know anyone by the name of

Ron H . Bell .

OPINION

I .

Fraud Penalt y

We begin with our consideration of the issue of fraud

because, absent fraud, the period of limitations may no longer be

open for respondent's assessment of deficiencies in the income

tax of the Bells for taxable years 1996, 1997, and 1998 . See

- 34 ., ;sec . 6501(c)(1) ; see, e .g .,

Langworthy v . Commissioner ,,, T .C .

Memo . 1998-218 .

In the case of the filing of a false or fraudulent return .

with intent to evade tax, the tax may be assessed at any time .

Sec . 6501(c)(1) . If the return is fraudulent in any respect, it

deprives the taxpayer of the bar of the statute of limitations

for that year .

Lowy v .-Commission er, 288 .F .2d 517, 520 (2d Cir .

1961), affg . T .C . Memo . 1960-32 . "Thus where fraud is,alleged

and proven, respondent is free to determine a deficiency wit h

respect to all items for the particular taxable year without

regard to the period of limitations ."

Colestock v . Commissioner ,

102 T .C . 380, 385 (1994) . Moreover, if a joint return was filed,

proof of the fraudulent intent as to one spouse lifts the bar of

the statute of limitations as to both spouses .

Vannaman v .

Commissioner , 54 T .C . 1011, 1018 (1970) . However, the ;!

Commissioner must show fraud clearly and convincingly as to both

taxpayers on a joint return for each of them to be liable for the

fraud penalty .

Balot v . Commissioner , T .C . Memo . 2001-73 .

The fraud penalty is a civil sanction provided primarily as

a safeguard for the protection of the revenue and to reimburse

the Government for the heavy expense of investigation and the

loss resulting from a taxpayer's fraud . See Helvering v .

Mitchell , 303 U .S . 391, 401 (1938) . Fraud is intentional

wrongdoing on the part of the taxpayer with the specific purpose

- 35 to evade a tax believed to be owing . See McGee v . Commissioner ,

61 T .C . 249, 256 (1973), affd .' 519 F .2d 1121 (5th Cir . 1975) .

The Commissioner has the burden of proving fraud by clea r

and convincing evidence . Sec . 7454(a) ; Rule 142(b) . The

Commissioner's burden of proof under section 6501(c)(1) is the

same as that imposed by section 6663 . See Pennybaker v .

Commissioner , T .C . Memo . 1994-303 . To satisfy the burden of

proof, the Commissioner must show : (1) An underpayment exists ;

and (2) the taxpayer intended to evade taxes known to be owing by

conduct intended to conceal, mislead, or otherwise prevent the

collection of taxes . . See Parks v . . Commissioner , 94 T .C . 654,

660-661 (1990) . The Commissioner must, meet this burden through

affirmative evidence because fraud is never presumed .

Petzoldt

v . Commissioner , 92 T .C . 661, 699 (1989) ; see also Beaver v .

Commissioner , 55 T .C . 85, 92 (1970) . Once the Commissioner has

established by•clear and convincing evidence that any portion of

an underpayment is attributable to fraud, the entire underpayment

shall be treated as attributable to fraud, except with respect t o

any portion of the underpayment which the taxpayer establishes

(by a preponderance of the evidence) is not attributable to

fraud . Sec . 6663(b) .

Underpaymen t

An "underpayment" is generally defined (insofar as relevant

to the instant case) as the amount by which the tax imposed by

- 36 the Code exceeds the amount shown as the tax by the taxpayer on

his return . . See sec . 6664(a) . Respondent contends that the

evidence clearly and convincingly .'shows that the OEL transactions

lacked economic substance and that the money transferred by BCM

to NESL, and later ILS, as part of those transactions was income

to Mr . Bell, in the form of wages from BCM, which he failed t o

report on his returns . Respondent contends that the wages were

compensation for Mr . Bell's personal services . Respondent also

relies on the doctrine of constructive receipt of the fund s

because Mr . Bell had. unfettered control over the funds .

Furthermore, respondent argues that Foxworthy should be

disregarded as Mr . Bell's alter ego because it did not have a

legitimate business purpose and was used as a way for Mr . Bell to

claim deductions for his personal expenses and later to, operate

the tax deed business . Additionally, respondent argues ; that-the

Bells fraudulently understated their income by overstatp,ing

deductions .

1 .

Economic Substance of the OEL Transaction s

Mr . Bell argues that the OEL transactions in which he

engaged beginning in 1996 were pursuant to a valid nonqualifie d

"deferred compensation plan" and not done solely to avoid income

tax . • Respondent argues that the OEL transactions lack economic

substance and-therefore should be disregarded and that the

payments from BCM to NESL, and later to ILS, for Mr . Bell's

- 37 services constituted wages to Mr . Bell,at the time BCM made the

payments .- We agree with, respondent .

Income is taxed to the person who earns it and enjoys the

benefit of it when paid . See Helverin'g v . Horst , 311 U .S . 112,

119 (1940) ;

Corliss v . Bowers , 281 U .S, . 376, 378 (1930) ; cf .

Commissioner v . P .G . Lake, Inc . , 356 U .S . 260, 267 (1958) ;

Colony Trust Co . v . Commissioner,

Old

279 U .S . 716, 729 (1929) .

Moreover, the taxpayer who earns income may not avoid taxation

through anticipatory arrangements no matter how clever .or subtle .

Lucas v . Earl , 281 U .S . 111, 115 (1930) .

The economic substance of a transaction, rather than its

form, controls for Federal income tax purposes .

Gregory v .

Helvering , 293 U .S . 465 (1935) . We conclude that the OEL

transactions lacked economic substance and, despite petitioners'

contentions, were not made pursuant to a valid nonqualified

deferred compensation plan .

Mr . Bell argues that throughout the course of the OEL

transactions from 1996 through 2001 he properly deferred over $7

million of income . Moreover, Mr . Bell argues that the benefits

were subject to a substantial risk of, forfeiture . Mr . Bell

argues that the money was sent offshore, ultimately to RHB Corp .,

where he did not-have control over the money ;' instead he only

recommended investments to Elfin . Furthermore, Mr . Bell argues

that the OEL transactions have economic substance because the

38 payees of the money, NESL and ISL, were legitimate businesses

that leased Mr . Bell's services to BCM . According to Mr . Bell,

the OEL transactions . offered, him greater retirement savings over

his previous Salary Reduction Simplified Employee Pension Plan

(SARSEP) and to disallow the OEL plan respondent would,be

condemning retirement planning .

The December 1996 BCM transfer of, $800,000 to NESL, was .

BCM's first transfer to NESL and the only such transfer made in

1996 . Mr . Bell reported only $75,000 . of income for that year,

even though the alleged arrangement among Montrain, NESL, and BCM

did not purport to take effect until December 1, 1996 . From 1996

through 2000 Mr . Bell continued to report only $75,000 of wages

annually . For 2001 Mr . Bell reported $37,500 in wages ; ; the OEL

transactions were terminated that year . Mr . Bell alleges that . he

became an employee of Montrain, an Irish corporation, that

Montrain leased his services to NESL, and that NESL, in turn,

leased his services to BCM . During the years in issue Mr . Bell

continued to perform the same services for BCM as he had in th e

I\;

.past . Mr . Bell did not take instructions or orders from anyone

at Montrain or NESL . The documents that purport to establish Mr .

Bell's employment with Montrain were not completed until November

1997, nearly a-year after the purported deferred compensatio n

plan was alleged to .have taken effect and BCM's transfer of the

$800,000 .

- 39 Aside .from a few days' delay in processing the transactions

from entity to entity, Mr . Bell at all times effectively had

control of and access to,the funds transferred and used the funds

at his discretion . The initial $800,000 transfer, less fees, was

managed by Mr . Weaver in an account with Rydex Investments . The

money in the Rydex Investments account was later transferred to

the Rossendale/RHB Corp . Schwab account, which Mr . Bell

controlled . We conclude that respondent has shown by clear and

convincing evidence that, from the beginning, the money BCM

transferred as part of the OEL transactions was set aside for Mr .

Bell's use and was not part of any valid deferred compensation

plan . Indeed, atone point, .Mr . Bell complained to Mr . Reiserer

of the interest he was losing as a result .of the delay, and Mr .

Reiserer reminded him of the immense tax savings . Mr . Reiserer's

response did not satisfy Mr . Bell, and he continued to complain .

Mr . Bell argues that the OEL transactions offered him a

deferred compensation . plan that was payable to him at age 75 .

Furthermore, Mr;.. Bell argues that the Montrain, and later Pixley

and Fitzwilliam, plans were discretionary and subject to the

exclusive discretion of those entities as his employer . Mr .

Bell's argument is not persuasive . Mr . Bell, by using the Rydex

Investments account and later the Schwab accounts of the Nevis

corporations, effectively had access to the funds a few day s

after BCM transferred the money .

- 40 The money transferred in the OEL transactions was ;. ultimately

used in various ways . The Bells' Northside residence, ;;.selected

by the Bells, was :purchased in the name of Foxworthy using funds

from Helston's and Ballyclare's Schwab accounts . Mr . Bell, in

collaboration with Mr . Reiserer, set up three Nevis corporations

along with corresponding brokerage accounts at Schwab . The . thre e

Schwab accounts were set up at the Cobb County, Georgia, branch,

the closest bank branch to BCM's office . Additionally, Mr . Bell

used the signature stamp . of . Mr . Zarrett without his permission in

order to obtain power of attorney over the funds . During the

course of the OEL transactions, Mr . Bell primarily used RHB Corp .

as the repository for the money transferred from BCM .

Mr . Bell, in collaboration with Mr . Reiserer, set up the

purchase of Northside using the appearance of loans from

Ballyclare and Helston to Foxworthy of .$1,080,000 and $1,222,060,

respectively . Foxworthy purchased Northside from Sam Foreman in

October 1997, using a $2,110,000 wire transfer from a Schwab

account in Foxworthy's name . The money in the Schwab account,

however, came from Ballyclare and Helston . The money from

Ballyclare and Helston came from the Schwab account in Mr .

Reiserer's .name . The source of the funds in the Reise,rer account

came from liquidating, stock received pursuant to journal entry

transfers from four other Schwab accounts in the names of R&P

- 41 Partnership, Ron H . Bell TTEE ; Hoyt Bell Revocable Trust, Ron H

Bell TTEE ; Roberta L . Bell Revocable Trust ; and Kelli Bell . .

Before purchasing Northside, Foxworthy had no assets .

Foxworthy's address in Reno was a mail forwarding service that

forwarded mail to BCM in Atlanta . Mr . and Mrs . Bell discovered

Northside and visited the property

before Mr . Bell instructe d

Foxworthy to purchase it . Although Foxworthy was the entit y

.that, in name, purchased Northside, the homeowners-insurance

policy listed Mrs . Bell's maiden name, Patricia Small, for the

insured . Foxworthy was listed only as an additional insured .

After Northside was purchased, Mr . and Mrs . Bell moved in .

From the time Mr . Bell established the RHB Corp . Schwab

account, he used the account as the main repository of the money

transferred as part of the OEL transactions . Mr . Bell authorized

Mr . Weaver to act under a power of attorney in order to cover u p

a direct link between the RHB Corp . Schwab account and himself .

However, Mr . Bell maintained access to the account . Mr . Bell

used the RHB Corp . account several times to fund the tax dee d

business that he began in 1999 . After a few days offshore, the

money transferred as part of the OEL transactions reverted to Mr .

Bell's control .

Additionally, Mr . Bell's control and use of the funds

transferred offshore is shown by his $550,000 loan to the church

- 42 he attended, the Unity Church . The funds came from the RHB Corp .

Schwab account .

2 .

Constructive Receipt of Funds Used in OEL

Transaction s

Mr . Bell argues that the OEL transactions were part of a

deferred compensation plan . Mr . . Bell's argument fails because,

in addition to the reasons already cited, the alleged plan

violates the doctrine of constructive receipt . Section 1 .451-2,

Income Tax Regs ., provides in pertinent part :

(a) General rule .--Income although not actually

reduced to a taxpayer's possession is constructively

received by him in the taxable year during which it is

credited to his account, set apart for him, . or

otherwise made available so that he may draw upon it at

any time, or so that he could have drawn upon it during

the taxable year if notice of intention to withdraw had

been given . However, income is not constructively

received if the taxpayer's control of its receipt is

subject to substantial limitations or restrictions .

The constructive receipt doctrine requires a taxpayer who is

on the cash method of accounting to recognize income when

.the

taxpayer has an unqualified, vested right to receive immediat e

payment of income . See

Palmer v . Commissioner , T .C . Memo . 2000-

228 . Under the constructive receipt doctrine, a taxpayer may not

deliberately turn his back on income otherwise available . See

Martin v . Commissioner , 96 T .C . 814, 823 (1991) .

A few days after BCM transferred money to NESL, and later to

ISL, the money was wired offshore . After a brief delay in

processing the transactions, Mr . Bell requested that the money be

- 43 placed in the various Schwab accounts . All of the Schwab

accounts were controlled by Mr . Bell directly, or through Mr .

Weaver, who held a power of attorney on the RHB Corp . Schwab

account . Additionally, Mr . Bell had access to the money in the

accounts as demonstrated by loans to his church and to Foxwor\thy

for the tax deed business . The agreement that Mr . Bell claims to

have entered into with Montrain, and later Pixley an d

Fitzwilliam, to defer his

compensation until age 75 i s

ineffective to prevent constructive receipt of the money because

Mr . Bell had access . to and control over the money"shortly after

BCM transferred it . Consequently, we conclude that the record

clearly shows that all of the money BCM transferred as part of

the OEL transactions was constructively received by Mr . Bell in

the years it was transferred, and it is therefore includable in

Mr . Bell's income for those years .

Disregard of Foxworthy as Mr . Bell's Alter Ego

Respondent argues that the Court should disregard Foxworthy

and treat it as Mr . Bell's alter ego . In

Moline Props ., Inc . v .

Commissioner , 319 U .S . 436, 438-439 (1943), the Supreme Court

stated :

The doctrine of corporate entity fills a useful

purpose in business -life . Whether the purpose be to

gain an advantage under the law of the state o f

incorporation or to avoid or to comply with the demands

of creditors or to serve the creator's personal or

undisclosed convenience, so long as that purpose is the

equivalent of business activity or is followed by the

- 44 carrying on of business * * *, the corporation remains

a separate taxable entity . * * * [Fn . refs . omitted . ]

Despite the general rule, however, the corporate form will b e

disregarded when it is determined that the corporation is a sham .

Id .

at 439 .

Mr . Reiserer formed Foxworthy as a Nevada corporation .on

August 12, 1996, but until it purchased Northside during 1997 it

had no assets, no liabilities, and no employees and had not

issued any stock . When the Bells decided to purchase Northside,

Mr . Reiserer suggested to Mr . Bell that he use Foxworthy to hold

title to .Northside . The mailing address used for Foxworthy was a

mail forwarding service in Reno that Mr . Bell contends he

previously had set up because of identity theft issues .

At the time of Foxworthy's formation, Mr . Reiserer was its

president, and Ms . Agee, Mr . Reiserer's law firm associate, was

its secretary and treasurer . Because Foxworthy's main asset as

of the end of 1997, Northside, was in Atlanta, it needed, for

convenience, a local individual to sign documents . Mr . Bell

suggested Mr . Comsudes, his employee at BCM . Mr . Comsudes neve r

met Mr . Reiserer and was unaware of the identity of Foxworthy's

shareholders . Mr . Bell simply instructed Mr . Comsudes to sign

the documents . While he was president . of Foxworthy, Mr . Comsudes

had no day-to-day duties and followed Mr . Bell's instructions .

Although it was not originally formed for Mr . Bell, once Mr .

Bell decided to use Foxworthy to purchase Northside, the recor d

45 clearly shows that°Foxworthy's`separateness as a corporation

became a sham that was executed by Mr . Bell as eyewash for his

scheme-to fraudulently underpay his taxes . By interjecting

Foxworthy between-himself and Northside, Mr . Bell implemented•a

scheme to deduct his personal living expenses .

When'the corporate form did not suit Mr . Bell, he simply .

ignored it, as illustrated by the holding of the homeowners

insurance covering Northside in .his wife's maiden name because

the rate was less than .if. it had been in Foxworthy's name .

Additionally, Mr . Bell purported to negotiate a fictitious lease

between BCM and Foxworthy that was allegedly to be used for

office space . We conclude that the lease transaction with

Northside, however, was just a device for BCM to claim additional

deductions, in this instance related to the Bells' personal

residence .- Indeed, . Mr . Graham, whose name appears on the

signature line of the lease-on behalf of Foxworthy, testified

that he did not- sign it . Mr . Graham was not authorized to sign

for Foxworthy . Northside had always been zoned as residential

property ; and since the Bells moved in shortly after purchasing

it, they have lived in Northside .

Mr . Bell devised another alleged lease between :BCM and "The

Whitehall Inn", which Mr . Bell testified was an assumed name for

Foxworthy . We conclude that the lease agreement for the

Whitehall Inn, like the one purportedly signed .by Mr . Graham, was

- 46 j;

also a sham . Mr . Comsudes was,unaware~of the lease agreement

and

the existence of the Whitehall .Inn-. The Whitehall Inn lease

agreement is purportedly signed'by Mr . Graham, whose name appears

on the signature line of the lease, but he did not sign it . The

leases were additional instances of Mr . . Bell's use of Foxworthy,

and its apparent assumed name, the Whitehall Inn, to suit his

needs . Ms . Sagaert prepared invoices for rent payments that

purported to reflect guests staying,at Northside, but no guests

ever stayed at Northside . . To the contrary, Mr . Bell told out-oftown guests doing business with BCM to stay at the Waverly Inn

and had Ms . Sagaert prepare false invoices to cover. up ► these,

facts .

During 1998 Mr . Bell . became interested in the tax, ; deed

1 business . Mr . Bell felt that the tax deed business was lucrative

and decided to use Foxworthy to invest in the business, durin g

1999 . Mr . Bell, despite not being a board-member, officer, or =

employee of .Foxworthy, made all of the significant decision s

regarding the tax deed business . In order, to fund thie^tax dee d

:,business, Mr . .Bell arranged a series of alleged loans with

various parties, including the three Nevis corporations . By the

end of 2001, Mr . Bell-had invested nearly $9 million from the OEL

transactions in the tax deed business .

Mr . Bell is a skilled businessman, and he turned the tax

indeed business into a profitable venture . Mr .-Bell proposed t o

- 47 alter the terms of a loan by having Foxworthy repay the loan from

RHB Corp .-by October 2000,--only to re-borrow the money at a

higher : interest rate so .that Foxworthy could reduce its income .

The October 2000 refinancing transaction further demonstrates th e

}control that Mr . Bell exerted over Foxworthy, despite having n o

formal role with the corporation . On May 27, 1999, Mr . Bell

opened a brokerage account at SunTrust°Equitable unde r

Foxworthy's name . In addition to Mr . Bell, Mr . Reiserer and Mr .

Comsudes had-signature authority over the account . Mr . Kallis,

the account representative at SunTrust Equitable, took direction

only from Mr . Bell, who identified himself to Mr . Kallis as

consultant .

During .2000 Mr .-Bell replaced Mr . .Comsudes as president-o f

Foxworthy with Mr . Wilson . -Before working for BCM, Kr .Wilson's

experience was-in special events planning . At BCM Mr . Wilson

earned a salary of $30,000 . overseeing computer systems and

special projects . As president of Foxworthy, Mr . Wilson deferred

to Mr . Bell and Mr . Reiserer, although he did consult with Mr .

Bell . Mr . Wilson never had contact with Foxworthy's alleged

owner, Ruritania .

During March 2000 Mr . Bell indicated to Mr . Reiserer that a

bank was willing to extend a $10 million line of credit for

Foxworthy to purchase tax deeds . Mr . Bell told Mr . Reiserer tha t

although the bank would finance 75 percent of the money,' Mr . Bell

himself would have to finance the remaining 25 percent

. Foxw rthy's tax de busines , despite its uc es , was Mr .

Bell's alter ego, .as he made all the crucial decisions ; appointed

and replaced its officers, funded the business primarily throug h

his OEL transactions money, and acted as its representative with

banks .

The record clearly-and convincingly demonstrates,` and we so

conclude, that Foxworthy was Mr . Bell's alter ego in all

respects, used to avoid taxation and not for any .legitimat e

business reasons, and is further evidence of Mr . Bell's

fraudulent understatement of income .- We therefore conclude that

Foxworthy, as Mr . Bell's alter ego, should be disregarded . As a

result of the disregard of Foxworthy, its .gross income(of

$7,400,759 .91, $9,627,935, and $2,421,527,for 1999 through 2001,

respectively, is gross income to Mr . Bell . Additionally,

Foxworthy's claimed deductions19 in relation to Northside and the

tax deed business, if not otherwise disallowed, are allowable as

deductions to Mr . and Mrs . Bell .2 1

19We decide below that, as Mr . Bell's alter ego, Foxworthy

is not liable for any amounts determined by respondent'in the

notices of deficiency in issue .

20The Bells are not entitled to deductions for their living

expenses including the costs of'maintaining Northside,"their

personal residence, except for real estate taxes, allowable

pursuant to sec . 164(a) .(1) .' We discuss such income and

deductions below . See infra p . 57 .

49 4 .

Overstatement of Deduction s

It is well settled that a fraudulent understatement•of

income can result from an overstatement of deductions.. .

Drobny v .

Commissioner , 86 T .C . 1326,, 1349 (1986) .

BCM claimed deductions-for a significant number of expenses

that Mr . Bell contends are ordinary and necessary business

expenses, including rent to Foxworthy . Mr . Bell, as the sole

owner of BCM, reported BCM's gross income on his income tax

returns as part of Schedule E . The record clearly establishes

that the deductions for the payments to Foxworthy for rent are

overstated and evidence of fraudulent underpayment of taxes

because the payments in fact disguised personal expenses of-the

Bells . The rent was allegedly for Northside, Mr . and Mrs . Bell's

personal residence .. Petitioners contend that BCM needed"more

office space because it had outgrown its then-current office .

However, during 1996 BCM moved to new office space . The record

clearly shows that BCM did not need to rent office space from

Foxworthy and that the rent payments toFoxworthy were merely a

device to disguise . personal expenses .

The record also clearly shows that other claimed deductions

of BCM were overstated : Accordingly, we conclude that, in

addition to the rent expenses claimed as deductions, . the other

claimed deductions for expenses of BCM were improper and were

50 disguised personal expenses for the purpose of overstating

deductions and fraudulently, underpaying taxes .

During the years in issue, Mr . Bell should have reported but

did not report as income any of the money transferred as part of

the OEL transactions . Moreover, Mr . Bell overstated his

deductions . Consequently, we hold that the record clearly and

convincingly establishes that Mr . Bell underpaid his income tax

for each of the years in issue .

Fraudulent Inten t

The Commissioner must prove that a portion of the

underpayment for each taxable year at issue was due to fraud .

Sec . 7454(a) ; see also Profl . Servs . v . Commissioner , 79 T .C .

888, 930 (1982) . The existence of fraud is a question of fact to

be resolved from the entire record . See Gajewski v .

Commissioner , 67 T .C . 181, 199 (1976), affd . without published

opinion 578 F .2d 1383 (8th Cir . 1978) . Because direct proof of a

taxpayer's intent is rarely available, fraud may be proven by

circumstantial evidence, and reasonable inferences may be drawn

from the relevant facts . See

492, 499 .(1943) ;

(1982), affd . 748

Spies v . United States , 317 U .S .

Stephenson v . Commissioner , 79 T .C . 995, 1006

F .2d 331 (6th Cir . 1984) . A taxpayer's entire

course of conduct can be indicative of fraud . See Stone v .

Commissioner , 56 T .C . 213, 223-224 (1971) ;

Otsuki v .

Commissioner , 53 T .C . 96, 105-106 (1969) . The following badges

51 of fraud have been used .-to prove fraud : .' (1) Understating income,

(2) maintaining inadequate records, (3) implausible or

inconsistent explanations of behavior, (4) concealment of income

or assets, (5) failing to cooperate with tax authorities, (6)

engaging in-illegal activities, (7) an intent to mislead which

may be inferred from a pattern of conduct, (8) lack of

credibility of the taxpayer's testimony, (9) filing false

documents, (10) failing to file tax returns, and (11) dealing in

cash .

Bradford v . Commissioner , 796 F .2d 303, 307 (9th Cir .

1986), affg . T .C . Memo . 1984-601 . No single factor is

necessarily sufficient to establish fraud . A combination of

factors may constitute persuasive evidence of fraud .

1 .

Understating Incom e

As we have found .above, Mr . Bell clearly understated his

taxable income in each of the taxable years in issue . Mr . Bell

should .have reported .but did not report as wages the money BCM

transferred as part of the OEL transactions for 6 consecutive

years . Additionally, both Mr . Bell's alter ego Foxworthy and BCM

claimed improper deductions for Mr . Bell's disguised living

expenses, including maintenance of his personal residence . Th e

disallowed deductions and omitted gross income establish a n

understatement of Mr . Bell's taxable income for 6 consecutiv e

years, a badge of fraud . See Hicks Co . v . Commissioner , 56 T .C .

982, 1019 (1971), affd . 470 F .2d 87 (1st Cir . 1972) .

- 52 2.

Implausible or Inconsistent Explanations of

Behavio r

Mr . Bell was very successful in business and had developed

BCM into a firm managing 1,100 portfolios worth $280 million in

aggregate market value by the end of 1995 . From 1991 through

1995 Mr . Bell earned an average of $730,455 in annual wages . from

BCM . Pursuant to the OEL transactions, Mr . Bell claimed that h e

earned only $75,000 each year, excluding 2001 . According to Mr .

Bell, the money BCM transferred as part of the transactions, a

sum, in excess of $7 million, was nonqualified deferred ,

compensation, subject to the control of Mr . Bell's alleged new

employer, Montrain, and to a substantial risk of forfeiture until

he reached the age of 75 . Mr . Bell's argument is flatly

contradicted by the record--as we found above, he exerted control

over the money at every turn . ,

Concealment of Income or Asset s

From the moment Mr . Bell entered into the OEL transactions,

we conclude that his goal was to find a way to conceal the money

being transferred . The web of organizations and third parties

Mr . Bell and Mr . Reiserer conspired to devise clearly was an

elaborate scheme designed solely for the purpose of avoiding

taxation . In addition to forming corporations allegedly located

in Nevis, Mr . Bell used his alter ego Foxworthy to, repatriate the

money allegedly transferred to those entities . Foxworthy,

allegedly owned by Ruritania, a foreign entity, was used to

53 purchase Northside, the property in which Mr . and Mrs . Bell lived

in Atlanta, a scheme clearly designed to give Foxworthy an avenue

to deduct personal living expenses of the Bells . When Foxworthy

purchased Northside, the Bells used Mrs . Bell's maiden name on

the homeowners insurance in order to obtain a lower rate and to

conceal their true ownership of Northside . Additionally, Mr .

Bell insured his Rolls Royce under his name but claimed it was a

Foxworthy asset . Once Mr . Bell became involved in the tax deed

business and it became successful, he renegotiated alleged loans

between organizations he controlled in order to lessen

Foxworthy's tax burden .

Mr . Bell was aware that his involvement in many of the

transactions in issue would appear "troublesome", so he

frequently used third parties both with and without their

permission in his attempt to . conceal a link between himself and

the funds and assets . Mr . Comsudes, Mr . Bell's employee at BCM,

became the president of Foxworthy because Mr . Bell needed an

individual in Atlanta to use as a figurehead on paper while Mr .

Bell maintained control . Mr . Comsudes signed whatever document s

Bell put in front of him . Later, Mr . Bell replaced Mr .

Comsudes with Mr . Wilson . Mr . Wilson admittedly had more

involvement with the activities of Foxworthy than did Mr .

Comsudes, but Mr . Bell still maintained control . Mr . Bell aske d

Mr . Graham to stay on at -Northside and help maintain the home

- 54 after Foxworthy .purchased it . Mr . Bell used Mr . Graham's name

without his knowledge as a signatory on lease documents . Mr .

Graham did not sign any lease and was not authorized to do so,

yet his name appears as Foxworthy's representative on two allege d

leases . Additionally, Mr . Graham's name appears without his

permission on Foxworthy's request for an extension to file its

1997 income tax return . Furthermore, Mr . Bell used Mr . Zarrett's

signature stamp without his permission . The-record clearly

establishes that by the use of third party names Mr . Bell

attempted to conceal the true nature of the Northside purchase

and subsequent lease agreements .

4 .

An Intent To Mislea d

Mr . Bell's behavior, described above, in relation to the

concealment of income and assets, also indicates an intent to

mislead . Additionally, when the IRS began investigating Mr .

Bell, he insisted on having the investigation take place in

Daytona Beach, Florida, rather than Atlanta ., The Bells used a

Florida address on their income tax return . When the IRS agent

attempted to reach Mr . Bell in Florida, she discovered that the

address used on the return was a mailbox address . Additionally,

Mr . Bell owns residential property in Florida . When the IRS

agent visited the property, the person who answered the door did

not know anyone by-the name of Ron H . Bell . Despite his presence

in Atlanta, Mr . Bell insisted that the investigation be located

55 in Florida . We conclude that by means of such actions Mr . .Bell

attempted to mislead the IRS .

5 .

Filing False Document s

As previously mentioned, on March 1.3, 1998, Foxworthy filed

a Form 7004 for taxable year 1997 . The Form 7004 contains Mr .'

Graham's signature .on the •signature line ; however, Mr . Graham did

not sign it .

In sum, we conclude that, on the basis of the extensive

record, respondent has proved by clear and convincing evidence

that Mr . Bell . fraudulently underpaid his Federal income taxes for

the years ' in, issue . As to Foxworthy, respondent concedes the

determinations made with respect to Foxworthy in the event tha t

.we decide that .Foxworthy was Mr . Bell's alter ego . As we have

decided above that Foxworthy was Mr . Bell's alter ego, . we need

not consider the determinations made in the notice of deficiency

sent to Foxworthy . On the basis of respondent's concession, we

hold that Foxworthy is not liable for those determinations .

As to the fraud penalty determined against Mrs . Bell, we

conclude that respondent has failed to clearly and convincingly

establish any fraudulent intent by Mrs . Bell . See Katz v .

Commissioner , 90 T .C . 1130, 1144 (1988) (a finding of fraud base d

upon circumstance that creates only suspicion will not be

- 56, sustained) . Consequently, we hold that Mrs . Bell is not liabl e

for the fraud penalty .21

II .

Period of Limitation s

The Bells argue that respondent

cannot assess the ;;tax

deficiencies respondent determined against them for taxable years

1 ;996 through 199 .because

the statutory periods of limitation s

11 have expired .

In the case of a false or fraudulent return with the intent

to . evade tax, the tax may be assessed at any time . See sec .

6501(c)(1) . A fraudulent return deprives the taxpayer, and the

taxpayers' . spouse in the case of a joint return, of th e

:'protection of the bar of the statutory period of limitations for

that .year . See Badaracco v . Commissioner , 464 U .S . 386, 396

(1984 .) ;

Lowy v . Commissioner , 288 F .2d at 520,;

Vannaman v .

; . Commissioner , .54 T .C . at .1018 ; :see also Coles toc k

Commissioner , 102

T .C .

at 385 .

We have decided above that Mr . Bell filed fraudulent income

tax returns for all of the taxable years-in issue . Consequently,

the period of . limitations on' assessment for each taxable year i n

issue remains open as to the Bells .

2'We note that Mrs . Bell has not raised any defenses

pursuant to sec. . 6015(b), (c), or (f) .

57 III .

The . Deficiencies Determined Against the Bell s

Deductions are•-a matter , of, legislative grace, and taxpayers

generally bear the burden ;°of showing that they are entitled to

any deductions claimed on their returns . Rule-142(a) ;

Colonial Ice Co . v . Helvering,

New

292 U .S .. 435, .'440 (1934) .

A taxpayer is required to maintain records that are

sufficient to enable the` Commissioner to determine the correct

tax liability . See .sec . 6001 ; sec . 1 .6001-1(a), Income Tax Regs .

In addition, the taxpayer bears the burden of substantiating the

amount and purpose of the item for the claimed deduction . See

Hradesky v . Commissioner ; 65 T .C . 87, 90 (1975), affd . per curiam

540 F .2d 821 (5th Cir . 1976) .

Burden of Proo f

The Bells argue-that respondent bears the burden of proof

under section 7491(a)(1) with respect to the deficiencies in

issue . In pertinent part, Rule 142(a)(1) provides, as a general

rule : "The burden of .proof shall be upon the petitioner" . In

certain circumstances, however ; if the taxpayer introduces

credible evidence with-respect .-to any factual issue relevant to

ascertaining the proper tax liability,° section 7491 places the

burden of proof on the Commissioner . See sec . 7491(a)(1) ; Rule

142(a)(2) . Credible evidence is evidence that, after critical

analysis, a court would find . constituted a sufficient basis for a

decision on the issue in favor of the taxpayer if .no contrary

- 58 evidence were submitted .

;168 (2004) ;

Baker v . Commissioner , 122 T?C . 143 ,

Bernardo v . . Commissioner , T .C . Memo . 2004-199, n .6 .

The Bells' contention that respondent has the burden o f

proof lacks merit because,- for the reasons discussed throughout

the instant opinion, . aside from'certain of the claimed charitable

contribution deductions discussed below,22 .the Bells have not

introduced credible evidence with respect to the .deficiencies'in

issue . Consequently, the burden of proof remains on the Bells, a

burden that, because of the absence of credible evidence, they

cannot sustain . See Bernardo v . Commissioner ,

supra n7 ; se e

it also Rendall v . Commissioner , 535 F .3d ..1221•,1225 (10th Cir .

2008) (citing Bernardo v . Commissioner ,

supra),

affg . T .C . Memo .

2006-174 .

Additionally, section 7491(a) requires that the taxpaye r

cooperate with reasonable requests by the Commissioner fo r

"witnesses, . information, documents, meetings, and interviews" .

Sec . 7491(a)(2)(B) . Aside from the disallowed charitable

contribution deductions, the Bells failed to comply with the

substantiation and record-keeping requirements necessary to shift

the burden of proof to respondent . Consequently, for th e

22As to the disallowed charitable contribution deductions,

ewe decide below, on the evidence in the record, that the Bell s

are entitled to some of the claimed deductions . Therefore, as to

those deductions that we sustain on the basis of the record, we

need not determine where the burden of proof lies .

59 , foregoing additional reasons, we hold that the Bells bear the

burden of proof as to the deficiencies in issue .

OEL Transactions, Foxworthy Deductions, and BCM

Deduction s

As discussed above with respect to respondent's fraud

determinations, respondent determined a series of adjustments to

the Bells' income taxes . Most of the Bells' contentions

regarding respondent's deficiency determinations are addressed

above in our discussion of the fraud penalties and do not bear

repeating here, except that we conclude on the record that the

Bells have failed, except for the charitable contribution

deductions discussed below, to prove that respondent's deficienc y

determinations are incorrect . Accordingly, we uphol d

respondent's determinations with respect to the unreported income

from the OEL transactions, Foxworthy's overstated deductions with

respect to Northside, the Bells' unreported income with respect

to Foxworthy's gross income, and the disallowed BCM flowthrough

deductions .

We found above that Foxworthy is Mr . Bell's alter ego . Most

of Foxworthy's deductions, except the real estate ad valorem

taxes paid with respect to Northside ;are otherwise personal t o

the Bells and therefore are not deductible by the Bells . As to

those real estate ad valorem taxes, we hold that they are

properly allowable deductions by the Bells pursuant to section

164(a)(1) . As to the interest deductions Foxworthy claimed for

60 payments on the alleged loans by Helston and Ballyclare, however,

those deductions are not proper because we conclude, on the basis

of the record, that the loans are a sham . The remaining disputed

deductions are addressed below .

BCM's Bad Debt Deductions Flowing Through to the Bells

Respondent determined that the Bells are not entitled to

their claimed deductions with respect to two alleged Steinberg

loans . The Bells claimed a capital loss of $103,286 for taxable

year .2000 . The loss consists of $91,350 of unsecured notes and

$11,936 in legal fees associated with collecting the alleged

debts . Respondent contends that the Bells have failed to

establish that the debts existed, that the R&P Partnership had

bases in the alleged debts, that the alleged debts are of the

type that qualifies for a deduction, that the alleged debts were

paid, or that the alleged debts, if they were in fact debts, went

bad during a .year in issue .

Section 166(d)(1)(B) provides that, where any nonbusiness

debt becomes worthless within the taxable year, the loss

resulting therefrom shall be considered a loss from the sale-or

exchange, during the taxable year, of a capital asset held for

not more than 1 year . Whether a debt is worthless is a factual

question on which the taxpayer bears the burden of proof .

Estate

of Mann v . United States , 731 F .2d 267, 275 (5th Cir . 1984) .

61 The Bells have failed to meet their burden of proof because

they have-not demonstrated that the alleged Steinberg loans were

valid debts and that those alleged debts became worthless . The

promissory notes that-the Bells submitted as evidence are not

dated and are signed only by the alleged debtor Steinberg, with

no witness or any notary seal . Furthermore, the Bells allege

that in addition to R&P Partnership there were eight creditors of

Steinberg . However, there is no evidence to verify this

allegation . We conclude that Mr . Bell's testimony'lacks

credibility and is insufficient to establish the debt and its

worthlessness without further corroboration . The Court need not

accept at face value a witness's testimony that is selfinterested or otherwise questionable . See Archer v .

Commissioner , 227 F .2d 270, 273 (Sth Cir . 1955), affg . a

Memorandum Opinion of-this Court dated Feb . 18, 1954 ;

Weiss v .

Commissioner , 221 F .2d 152, 156 (8th Cir . 1955), affg . T .C . Memo .

1954-51 ;

Schroeder v . Commissioner , T .C . Memo . 1986-467 . We

conclude that the Bells have failed to carry their burden to

prove the bad debts were bona fide debts and became worthless

during a year in issue . We therefore uphold respondent's

determinations disallowing the $103,286 in capital losses with

respect to the alleged loans

62 D.

Investment Account Incom e

The Schwab accounts of Helston, Ballyclare and .

Rossendale/RHB Corp . earned investment income which the Bells

failed to report . The money in those accounts came from the OEL

transactions, which we have held to be income to Mr . Bell . Mr .

Bell formed the three corporations in Nevis and set up Schwab

accounts in Georgia, in the branch closest to BCM's office . All

three entities lacked a legitimate business interest .

Rossendale/RHB Corp . was the primary recipient of the funds from

the OEL transactions . The funds were then used to finance the

tax deed business . Helston and Ballyclare were used to lend

money for Foxworthy to purchase Northside . Mr . Bell formed the

three foreign entities because they were not subject to taxation

in the United States, and Mr . Bell used them as a mechanism to

repatriate the OEL funds . Section 61 provides that gross income

means all income from whatever source derived, including interest

and dividends . All of the income in the three accounts, asid e

from the principal amounts deposited, consists of interest o r

dividends . Additionally, we note that Mr . Bell stressed to Mr .

Reiserer that the speed at which the offshore money was

repatriated was unacceptable because he was losing interest .

Accordingly, we hold that the Bells have failed to prove that

they are not liable for $8,445 .10 in interest income from

Helston's Schwab account in 1997,

$7,469 .19 in interest income

- 63 from Ballyclare's Schwab account in 1997, and $37,031,

$168,287 .61, $126,963 .85, $96,235 .40, and $141,916 .42 in 1997

through 2001, respectively, from Rossendale/RHB Corp .'s Schwab

account . As found above, for 1999, $18,166 .50 of the income in

the Rossendale/RHB Corp . account was dividend income .

Capital Gains on Liquidation of Stoc k

Respondent'argues that the Bells must recognize $329,363 .38

as gain on the sale of stock because the shares in the R&P

Partnership were owned by Mr . Bell . Mr . Bell authorized the

shares in the R&P . Partnership to be transferred to the Schwab

account in Mr . Reiserer's name . Once in the Reiserer account,

the shares were liquidated for $2,-225,181 .96, with Mr . Bell

authorizing the proceeds to be transferred to Rossendale's Schwab

account . The Bells argue that .the liquidated shares from the

Reiserer account were not Mr . Bell's and that he was merely a

trustee of his father's and mother's trust accounts . The Bells

further argue that . respondent has not provided an explanation for

the calculation of the gain . Mr . Bell testified that R&P

Partnership was another name for himself and his wife . The

shares that came from the R&P Partnership and were transferred,

first to the Reiserer account and later as liquidation proceeds

to the Rossendale account, were .owned by the Bells . The shares

in the Hoyt Bell account, Roberta Bell account, and Kelli Bell

account : were eventually-transferred to Helston and Ballyclare and

- 64 used to purchase Northside . The shares in those accounts were

not transferred to Rossendale as part of an alleged private

annuity transaction . We conclude that the Bells have failed to

establish that such a private annuity . transaction in fact

existed .

As to the Bells' argument regarding respondent's failure to

explain the calculation of the gain, it is the Bells who bear the

burden of proving that respondent's deficiency determinations are

incorrect . . On the issue of the capital gains on the liquidation

of stock, the Bells have not met their burden of proof .

Consequently, we conclude that the Bells are liable for the

capital gain on the liquidation of stock of $329,363 .38 because

the shares were owned by Mr . Bell and sold for a gain .

SEC Fin e

The Bells concede that the $15,000 fine against BCM was not

properly deducted in 1999 as an employee business expense . The

Bells argue that the remaining $30,000 was proper because,

although .the fines were the personal obligation of Mr .iBell, Mr .

Comsudes, and Mr . Palmer, respectively, BCM was the beneficiary

of the work done by the three individuals . Pursuant to section

162(f), no deduction shall be allowed for any fine or similar

ji.

penalty paid to a government f .or the violation of any law . BCM

paid the $30,000 to satisfy the SEC fines levied for violation of

the Investment Advisers Act of 1940, a Federal law, arguing tha t

- 65 it was the beneficiary of the work done by Mr . Bell, Mr .

Comsudes, and Mr . Palmer . The SEC order states that Mr . Bell,

Mr . Comsudes, and Mr . Palmer aided and abetted BCM in committing

violations . Therefore, we hold that BCM was not entitled to

deduct $30,000 paid in fines to the SEC on behalf of Mr . Bell,

Mr . Comsudes, and Mr . Palmer .

Charitable Contribution Deduction s

The Bells claimed on their returns charitable contribution

deductions of $161,604, $192,377, $87,572, $139,653, and $69,386,

respectively for taxable years 1996, 1997, 1998, 1999, and 2000 .

Respondent disallowed the charitable contribution deductions in

the following amounts : $155,001 for 1996, $171,103 for 1997,

$77,253 for 1998, $139,653 for 1999, and $62,915 for 2000 . The

contributions in 1996 and 1997 included the contribution to the

foundation of shares of Northeast Investments Trust valued at'

$300,240 for 1996 and $202,320 for 1997 . Respondent disallowed

the charitable contribution deductions because Mr . Bell controls

the foundation and . has not demonstrated the transfer of shares

took place .

Section 170(a)(1) provides that a taxpayer may deduct "any

charitable contribution * * *-payment of which is made within th e

23Mr . Bell does not argue that the payments of the fines

imposed on him, on Mr . Comsudes, and on Mr . Palmer were

deductible to BCM as wages . Accordingly, we need not reach that

issue .

- 66 taxable year . A charitable contribution shall be allowable as a

deduction only if verified under . regulations prescribed by the

Secretary . "

Petitioners have provided statements from R&P Partnership's

Schwab account that substantiate the transfer of the shares of

Northeast Investments Trust to the foundation . The statement's

show the shares leaving the R&P Partnership account and the

foundation's statements show the shares in the account, alon g

,,with the value of the .shares . IRS Revenue Agent Wilcoxon

,testified that despite receiving substantiation from the Bells

regarding the contributions to the foundation, she disallowed the

deductions because .Mr . Bell controlled . the charity . However,

respondent has not cited any authority in support of his

contention that merely having control over the foundation

disqualifies the Bells from claiming the charitable contribution

deductions for the contribution of the shares of Northeast

Investors Trust to the foundation . Although the foundation is a

private foundation controlled by the Bells, control alone is not

sufficient to defeat the deduction to the Bells .29 Control in

the context of private foundations generally is an issue i n

,determining whether a private .foundation is liable for excise

taxes because of self-dealing . See sec . 4941 . Respondent ,

24The foundation files Forms 990-PF, Return of Private

Foundation, and the Bells do not dispute the foundation's status

as a private foundation .

- 67 however, does not contend that there was any self-dealing on the

part of the foundation or any other violation of the restrictions

or requirements'of private foundations, and the record shows

none . See secs . 4940-4945 . Furthermore, respondent does not

challenge the tax-exempt status of the foundation .

For the years 1999 and 2000, the Bells claimed total

charitable contribution deductions of $650,592 . However, at

trial the Bells substantiated charitable contributions of only

$567,886, leaving $82,706 of unsubstantiated contributions .

Consequently, we hold that the Bells are entitled to a total

charitable contribution deduction of $567,886 .

BCM Deduction s

Mr . Bell, as the sole owner of BCM, reported its income on

his Schedule E for each of the years in issue . BCM claimed'

deductions on its income tax returns for various expenses .

Respondent determined that BCM overstated its deductions by

$1,228,088, $1,702,817, $2,678,033, $3,195,463, $1,966,457, and

$651,470 for 1996, 1997, 1998, 1999, 2000, and 2001,

respectively . BCM claimed deductions of $800,000, $1,220,000 ,

$2,225,000, $2,430,000, $1,880,000, and $425,000 for the services

of Mr . .Bell in 1996', 1997, 1998, 1999, 2000, and 2001,

respectively . The foregoing deductions are proper deductions b y

BCM as wages paid to Mr . Bell pursuant to section 162(a)(1 )

we have previously determined above ,

however , that salary .is>

- 68 taxable to Mr . Bell . ., Aside from the . wages paid to1Mr .Bell, the

Bells have failed to substantiate that the deductions BCM claimed

are legitimate deductions .' Excepting Mr- . Bell's self-servin g

testimony, which we do not find credible on the basis of th e

record, the Bells have , not . called witnesses or submitted

documents that,corroborate the claimed deductions . See Archer v .

Commissioner , 227 F .2d at 273 ;

156 ;

Weiss v . Commissioner , 221 F .2d a t

Schroeder v . Commissioner , T .C . Memo ."1986-467 .

Accordingly, we hold that, except for the wages paid to Mr . Bell,

BCM is not entitled to the disputed deductions disallowed in the

notices of-deficiency ., Consequently, we sustain respondent's

determinations increasing the Bells' income by those amounts .

IV .

Negligence Penalt y

As to the Bells, respondent concedes the accuracy-related

penalty pursuant to section 6662 in the event the Court upholds

the fraud penalty against Mr . Bell . As we .have held above, .Mr .

Bell is . liable for the section 6663 penalty ; consequently, on th e

basis of respondent's concession, we hold that neither of th e

Bells -is liable for the section,6662 penalty . Mrs . Bell is not

liable for the accuracy-related penalty imposed by section

6662(a) because the underpayments are due to fraud by Mr . Bell .

i See sec . . 6662(b) ;

Zaban v . Commissioner , T .C . Memo . 1997-479 ;

Aflalo v . Commissioner , T .C . Memo . 1994-596 ;

Commissioner , T .C . Memo .'1991-448 .

Minter v . '

- 69,V .

Section 6651(a)(1) Addition to Ta x

Respondent determined that the Bells are liable for an

addition to tax under section 6651(a)(1) for 1996 . Section

6651(a)(1) imposes an addition to .tax for failure to file a

return'by the date prescribed (determined with regard to any

extension of time for filing) unless the taxpayer can establis h

that such failure is due to reasonable cause and not due to

willful neglect . Once the Commissioner carries his burden-of

production, the taxpayer has the burden of proving that the

addition to tax is improper . Rule 142(a) ;

United States v .

Boyle , 469 U .S . 241, 245 (198-5) . Section 7491(c) provides that

the Commissioner will bear the burden of production with respect

to the liability of any individual for additions to tax and

penalties . "The Commissioner's burden of production under

section 7491(c) is to produce evidence that it is appropriate to

impose .the relevant penalty, addition to tax, or additional

amount" .

Swain v . Commissioner , 118 T .C .

358, 363 (2002) ; see

also Higbee v . Commissioner , 116 T .C . 438, 446 (2001) .

Respondent has met his burden of production .

Respondent received the Bells' joint income tax return for

1996 on August 27, 1997 . Petitioners have not shown that they

requested an extension . Furthermore, the Bells' return preparer

indicated that her records did not reflect that any request by

the Bells for an extension had been approved . The Bells have

70 shown no reasonable cause as to the' late filing . ' Consequently,

we conclude that the Bells are liable for the section 6651(a)(1 )

addition to tax for 1996 .

VI .

Petitioners' Motions To Supplement the Recor d

Petitioners filed motions in each docket to supplement the

record seeking leave to submit as evidence a letter dated July

22, 2008, from the IRS on the status,of the investigation of Mr .

Reiserer . Reopening the record for the submission of additional

evidence lies, within the' discretion of the Court .

Corp . v . Hazeltine Research, Inc .,

Zenith Radio

401 U .S . 321, 331 (1971) . We

will not grant a motion to reopen the record unless, among other

requirements, the evidence relied on is not merely cumulative or

impeaching, the evidence is material to the issues involved, and

the evidence probably would change some aspect of the outcome o f

,,the case .

. Butler v . Commissioner , 114 T .C . 276, 287 (2000)

Petitioners argue that it is in the interest of justice to grant

their motions . However, petitioners do not articulate why it is

in the interest of justice or how the evidence would change any

aspect of the outcome of the instant case . We hold tha t

reopening the record is not warranted . Therefore, petitioners'

motions .will be denied .

In reaching all of our holdings herein, we have considered

all of the arguments made by the parties, and, to the extent not

71 mentioned above ,

we conclude they are without merit, irrelevant

or unnecessary to reach .

To reflect the foregoing,

An appropriate order wil l

be issued .

Decisions will be entered

for petitioner in docket Nos .

20725-03, 18969-04, and

14612-05 .

Decisions will be entered

under Rule 155 in docket Nos .

160-04, 601-05, 21699-05, and

24533-06 .

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.