UNITED STATES TAX COURT

T.C. Memo. 2011-156

UNITED STATES TAX COURT

RONALD V. AND DONNA-KAY SWANSON, Petitioners

.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No.

30714 08.

Filed July 5,

2011.

R dete mined tax deficiencies and accuracy-related

penalties pursuant to seå. 6662 (a) , I. R. C. , for Ps' 2001

through 2007 tax years. The determinations stem from R's

dete~rmination that ,P-H m de excess contributions to his Roth

individual retirement account (Roth IRA) . The parties

stipulated Ps' tax deficiencies for the 2001 through 2006

tax years and R conceded iall adjustments relating to the

2007 tax year, leaving only the accuracy-related penalties

for Ps' 2001 through 200d tax years in dispute.

Held: Ps' are liable fòr sec. 6662( ), I.R.C.,

accUral:y-related penalti s for their 2001 thiough 2006 tax

years .

Howard 'S. Fisher, for petitidners

MiclíaeÝ W. "Ian and Cindy

a -

o

res ondent

Smvåb JUL - 5 2011

- 2 MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge:

This case is before the Court on a petition

for redetermination of respondent's determination in a notice of

deficiency that petitioners owe tax deficiencies and section

6662(a) accuracy-related penalties for their 2001 through 2007

tax years.1

After concessions,? the sole issue left for decision

is whether petitioners are liable for section 6662(a) accuracyrelated penalties for their 2001 through 2006 tax years.

FINDINGS OF FACT

Some of the facts have'been stipulated, and the

stipulations, with the accompanying exhibits, are incorporate'd

herein by this reference.

At the time they filed their petition

with this Court, petitioners resided in Nevada.

Petitioners filed joint Federal income tax returns for all

relevant years.

This case stems from petitioner husband Ronald

V. Swanson's attempt to "turn ran IRA into a Roth IRA": (Roth

Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1986, as amended and in effect for

the years at issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

2The parties stipulated that petitioners are liable for

excise tax deficiencies of $61,277.78, $45,207.79, $58,564.58,

$63,774.17, $65,637.06, and $73,911.11 for their 2001; 2002,

2003, 2004, 2005, and 2006 tax years', respectively. The parties

further stipulated that petitioners have no excise or income tax

deficiency for their 2007 tax year and are not liable for the

accuracy-related penalty for their 2007 tax year.

restructure) 3

The Roth erestructure was designed and implemented

by A. Blair Stover, Jr.

(Mr. Stover) and his colleagues at- the

accounting firm of Grant Thornton, LLP (Grant: Thornton).e The

parties have stipúlatedethat in 2000 Mr. Swanson made -an excess

contribution intosa Roth indi idual,retirement account (Roth IRA)

of $1.61 million and that- as of December 31,- 2006,sit remains in

his account.

I.

Petitioners* Backgroundå

Petitioner wife, Donna-Kay Swanson, was a homemaker for all

tax years in issuesand 'rel·ied on her -husband to determine wheth'er

to engage in the Rotherestruc ure. iMr. Swanson attended college

at the Universit

of Michigan where he graduated with a degree in

mechanical engin ering and mathematics

After graduation, Mr.

Swanson began wo king for Hughes Aircraft '(Hughes)s .Mr. Swanson

worked for Hughes or one of its subsidiažies for his entire

36 -year - career .

While working .at Hughes; Mr. Swanson attended graduate

school at the University of California Los Angeles i(UCLA) where

3The basic tax characteristics of.a traditional IRA are ,(1)

deductible contrLbutions, (2) the accrual of ta -free earnings

(except with res>ect to sec. 511 unrelated business income), and

(3) the inclusiofof diètrib tions in gross income. See secs.

219 (a) , 408 (a) , (d) (1) , .(e) ; see also Taproot Admin. Servs . , Inc .

v. Commissioner, 133 T.C. 202, 206 (2009).

The basic tax

characteristics of a Roth IRA are (1) nondeductible

contkibutions, (2) the accrual of tax-free earnings, and (3) the

exclusion of qualified distributions from gross income. See sec.

408A (a) ,

(c) (1) ,

(d) (1) , and (2) (A) ; see also Taproot Admin.

Servs., Inc. v. Commissioner, supra at 206.

4 -

: he graduated with a 'degree -in Applied Mechanics .

Additionally,a

Mr. Swanson finished a 2-year extension course at UCLA, where he

received a certificatet in business management.

During his career, Mr. Swanson worked at? Hughes as a parttime- master' s fellow and then held positions in various- areas of

structural engineering.

Eventually, - he was promoted into

administrat ive management .

In approximately 1997 Mr. Swanson helped develop Hughes

Global Services, a 20-person company and eventual subsidiary of

Hughes .

Mr. Swanson was appointed president of Hughes Global e

Services, where he stayed until his retirement in October 2001.

As an employee of Hughes, Mr. Swanson was the beneficiary of,a

thrift and savings plan (Hughes TSP) to help with retirement.

II.

Introduction to the Roth Restructure

A. •

Initial Introduction

Mr. Swanson initially heard about the Roth restructure from

Fred Nardi (Mr . Nardi) , a f riend and coworker .

Mr . - Nardi told

Mr. Swansonathat on the basise of his discussions with other tax,

professionals, including his tax return preparer, Creal & Mather,

he understood they felt that the Roth restructure "was solid".

Mr. Nardi showed Mr. Swanson an unsigned opinion letter from

Grant Thornton (Nárdi letter) detailing the Roth restructure.

Mr . Swanson claimed he relied on the Nandi letter in deciding

whether to engage in the Roth restructure .

Apparently, the Nárdi

- 5 letter discussed Listed transactions, and because of this, Mr.

-

Swanson looked at the Internal Reirenue Service- (IRS) Web site.'

In addition to Mr . Nardi, Mr

Swanson -alsó talked with Jim

Patton (Mr. Pattol)' and Bob Mather (Mr.- Mathef) before contacting

Grant Thornton.

vir. Patton is"anninvestment. adviser who began

advising Mr.I Swanson in 2000 and is-'the 'only ihvestment adviser

Mr. Sûanson has ever consultedN Mr2 Patton was also of the

impression that the Roth restzucture ""was above 'boird" .

Mr . Mather wa s Mr . Nardi ' s tax preparer .

Ac chiding to - Mr .

Swanson, he contacted Mr . Mather, who had other" cliànts doing * *

Roth restructures and apparently did not see any~ problêms with

B.

* Inti-oduction to Mr. Stover

In 'approximately March 2OOÔ 'Mr. Stover metrMr. Swanson while

he was on vacat ion ih Las Vegas .

- Mr . Swansön' asked Mr . S tover

4A-listed -transaction is a transaction that -is the -same as,

or substantially similar to, one of the types of transactions

that -the IRS has -determined to be used-for tax avoidance and has

identified by no -..ice, .regulation, or other form of published

guidance as a listed transac6ion.

See »McGehee Family Clinic,

P.A. v. Commissioner, T.C. Memo. 2010-202 (citing sec.

6707A(c) (2) ;

sec.

1.6011-4,

Income Tax Regs.

(incorporating by

reference sec. 1.6011-4T(b) (i), Temporary Income Tax Regs., 65

Fed. Reg. 11207 (Mar. 2, 2000)); see also BLAK Invs. v.

Commissioner, 133 T.C. 431, 44'0-441 (2009)). «Sec. 6707A became

effective Oct. 23, 2004, and imposed penalties on those who

failed tö report a-reportable transaction"as required undér sec.

6011.

Sec . 6707 entitled o'Failure to 3Furnish IInformation

Regarding Tax Shalten" was effectiverthrough Oct. 22, 2004, and

imposed penalties on those who faïled*to register a 'tax shelter

under sec . 6111 (1) .

- -6 -

several questions, claiming his basic concern -was that het "did

not want to do anything illegal".

Mr. Stover explained the Roth

restructure in detail and told Mr. Swanson that the transaction

was not only legal but had been "court tested" .5

1 -

After deciding« to engage int the Roth restructure, Mr.

Swanson met with Mr. Stover on other occasions, again inquiring

at one or more of these meetings about the legality of the Roth

restructure and whether it was a listed transaction.

He also

visited 'the IRS Web site and cconcluded the Roth restructure was

not a listed transaction.

C.

Engagement Letter

On April 11, 2000, Mr. Swanson executed an engagement letter

with Grant Thornton.

The engagement letter contained a clause

providing that Grant «Thornton would represent and defend Mr.

Swanson or any, related entity at no additional cost in case of

audit by the IRS.

The engagement letter also contained an

indemnity clause providing that Grant- Thornton would.reimbùrse

and indemnify the Swansons and any related entity for any civi

negligence or fraud penalty assessed against them by Federal or

State tax authorities.

sMr . S tover told Mr . Swanson - that the Roth restruc ture had

been approved, in Swanson v. Commissioner, 106 T.C. 76, 78-81

(1996) . i s The names- are coincidental- -the taxpayer in Swanson v.

Commissioner, supra, has no connection with petitioners. Mr.

Swanson read the case and thought that it was very similar to

what Mr. Stover was proposing for him.

- 7 Petitioners paid - $120 , O00 for the Roth restructure, the

engagemente letter providing that the fee was&to be. split equally

between Grant- Thornton and, Nevada Corp: Assòciations (NCA) , a law

firm.

Mr.» Swanson assumed NCA was an "outside leg'al firm

providing services to Grant Thornton"r a

Mr. Swansoni did not ask for a formal opinion letter, när was

oneGever issued. - Mr

Swanson believed that since he and Mr.

Nardi were engaging in the saine, transaction

he did not need his

own opinion letter.

* Da a - Kruse Me nnillo and Individuals i Other iThan Mr . -Stover

In addition to Mr. -Stove4, ;Mr. Swanson had contact with"

other individuals at Grant- ThorntonoincludingiLùthèr IOliver; a

tax lawyer",1 and Ruth Donovan, at certifiëdopublic -accountant.

In -

September 20 015Mr . Stover ; alóng withe otheriindividualsi he worked

with, left Grant Thornton for Kruse Mennillo,iLLP (KruseMennillo) , another accounting firm.

Neither party prèsented

evidence explaining the reason behind'Mr.- Stover's abrupt move.

At the time Mr. Stover left Grant Thornton

Mr. -Swansonsbegan

using Kruse Mennillo instead òf Grant Thornton

Petitioners request. -that wes take udicial noticesof. a Feb.

21, 2008, Department of Justice Press Release and a Complaint for

Permanent Injunc -ion against Mr. Stover filed Feb. 21, 2008.

This Court shall grant petitioners' request and pas taken

judicial notice of the documents requested and United States v.

Stover,

731 F. Supp. 2d 887, 914-915

(W.D. Mo'. 2010) , holding

that Mr. "Stover had reason td know that various structures he 1 promoted lacked any legitimate business purgode and gi-anting

injunctive relie E against him. ~ The case fotu'sed on: "three

(continued. . . )

- 8 E.

Independent Advice and Knowledge

Despite the remarkable promised tax benefits of converting

taxable,IRA distributions to nontaxable Roth IIUt distributions,

Mr. Swanson did not ask anyone who was completely independent of

the Mr. Patton and Mr. Stover groups for an opinion on-the

viability of the Roth restructure.

Mr. Swanson knew that there

were contribution limits to Roth IRAs, specifically that in 2000

the contribution- limit was $2,000.

III. The Roth Restructure

..

- -

Before the years in issue and before petitioners engaged

GranteThornton; Mr. Swanson had opened a traditional IRA wi-th

Charles Schwab with an account-number ending in 6050 (Schwab

IRA).

Grant Thornton (specifically, Mr. Stover) and NCA, oversaw

all of the steps in the Roth restructure.

The Roth restructure

was implemented as follows:

•

March 20, 2000--A corporation, Sierra West Global Holdings

Inc. (Sierra West), was created by NCA.

It then joined

Northstar Acquisition and Investment Co., Inc. (Northstar)

also formed by NCA sometime in the first 6 months of 2000.

Sierra-West and Northstar shared the same registered agent

and registered office during all relevant periods. Mr.

Swanson served:asapresident, secretary, and treasurer of

both corporations during 2000 and 2001. At some point, a

James Hoeppner began serving as president and secretary of

Sierra West, but acted as Mr. Swanson's nominee when doing

( . . . cont inued)

multiple business entity structures sold and arranged by" Mr.

Stover. The third structure, referred to by the district court

as the Roth/S structure -"[skirted] the contribution limits

applicable to Roth IRAs." Id. at 900.

- 9

so. NEach corporation opened arbank account with can initial

deposit of $250 on May 4, 2000

•

April 25 , 20 30 - -On or aroundSApril 25 , 20 0 0 , Mr . Swanson

opened a Rota IRA accoun with First Union with an account

number endinfin 0381 (FU Roth IRA) .

•

April 28, 2030--On or around April 28 2000, Mr. Swanson

opened a Sel-f-Directed Tbaditional IRAsat the First Trust

Company.of Osaga with:an account number ending 0500 .(FNBO

IRA). On May 5, 2000, the FNBO IRA was funded via a.rollover

of $1,207,802.55 from the Hughes TSP.

On May 19, 2000, Mr.

Swansón dire±ted the-FNBC IRA to purchase 100 percent of the

stock of Siecra West for $1,207,7802.55. The purchase -price

was deposited intoe the Sierra West account on-May :C9, 2000.

•

May 1, 2000--On oraaround Mayal,s 2000, Mr. Swanson opened a

Self-Directed Roth IRA at -thexGeorge K. Baum Trust Company

with an accoant number ending in 8305 (Baum Roth IRA) which

was "funded -with ta $2,000icontribution-from a-personal

investment a::count :Mr . Sùansondmaintained at Charles Schwab

(CS Investment Account). j On May 2, 2000, Mr. Swansons

directed the Baum Roth IRA to purchase 100 percent of the

stock of Northstar for-$2,000. The" purchase price was a

deposited into-the Northàtar accountoon June 6,--2000.

•

May 16; 2000--Mr. Swansoá-deposited $150,000 into the

Northstar account from the CS Investment Account.

On May

22, 2000, Mr. Swanson ordered $1,087,802.55 transferred from

the "Sierra Wests account t o theGNorthstar account

On May

22, 2000, Mr. Swanson,ordered, $1 238,000-transferred from

the Northstar account to the Baum Roth IRA under the guise

of a dividend declaration."

7For 2000.ard 2001:Sierrá West filed Forms 1120, U.S.

Corporation-Income Tax Return, reporting zero gross receipts, it

had no employees and only nodinal expenses, and because it saw no

need did not maintain books and records.

For 2000 through 2007

Northstar filed Forms 1120 showing zero gross reáeipts, it had no

employees and only nominal e penses; and saw no-reason to

maintain books oc records. The claimed rintention was for Mr.

Swanson to eventaal-ly perform consulting services through

Northstar after ais retirement, but because"of health.reasons, he

never did.

AThe transfer was not a dividend because it did not come

from Northstar's earnings and profits

The- $1,238,000 can

(continued. . e )

- 10 -

•

"June.8, 2000--Mr. Swanson -wired.$250,000 into the Northstar

account from the CS Investment Accounty. On June 9, 2000,

Mr. Swanson ordered $252,000 transferred from the Northstar

account to the Baum Roth IRA.9

•

December 19, 2000--Mr. Swanson deposited $120,,000 into the

Northstar account from a brokerage account under tihe name

Muchestly, Inc . , that Mr . Swanson maintained at Charles

Schwab. On December 29, 2000, Mr.aSwanson ordered $120,000

transferred from -the Northstar account to the iBaum Roth

•

January 8, 20 01- -By January 8 , 2001, $1, 238,.0 00 , , $252, 000 ,

and $120/000, for a total of $1,610,000, had been

transferred into ,the Baum Roth IRA and from there had been

transferred to the FU Roth IRA and invested in various

mutuals funds . As , of eDecember 31, 20 01, the fair market

value -of the FU Roth IRA was , $1, O21, 296 . 28 .

•

December 2001--Merger documents were executed merging-Sierra

West into -Northstar,' with Northstar being the surviving

corporation.

•

December 2002--The fair market value of the FU Roth IRA as

of December 31,

2002, was $753,463.24.

As of December 31

2003, the fair market value was $976,078.04.

31,

•

As of December

20 04 , the f air market value was $1, 062, 90 2 . 7 9 .

May 2005--All securities held in the FU Roth -IRA were

.transferred to a Roth IRA Mr. Swanson opened with:H&R Block

Financial Advisors - (H&R Roth IRA) .

* ( . . . continued)

apparently be traced to (1) $197.45 from the initial $250 capital

contribution; (2) a $150,000 transfer from Mr. Swanson's brokerage account- on May 16, 2000;, and (3) a' $1,087,802.55

transfer from Sierra West on May 22, 2000 .

"The $252, 000 transfers was made via another purported June

8, 2000, dividend declaration; however, once again the transfer

was not a dividend because it did not come from Northstar' s

earnings and profits. The transfer may be traced tos (1) a.$2,000

initial Roth IRA contribution and (2) a $250, 000 transfer from

Mr. Swanson's brokerage account on June 8, 2000.

1°The $120, 000 transfer was yet again made as a purported

dividend but the transfer was also not a dividend because -it edid

not come from Northstar's earnings and profits.

· 11 -

•

December -200 5---By December 2005 all securities transferred

from the FU oth IRA to the H&R Roth IRA had been liquidated

and invested in annuities at "Lincoln National' Life Insurance

Co., also known as American Legacy (American Legacy

Annuity) . The fair' markét value of the H&R Roth IRA as of

December 31, 2005, was $1,093,951.07. The fair market value

of the H&R Roth IRA as of December 231, 2006, was

$1,231,851.75.

•

December 200 7--Mr. Swanson surrendered the American Legacy

Annuity and withdrew substantially all the funds from his

H&R Roth IRA.

IV.

Reporting the Roth Restructure

With the exception of 1 or 2 years, Mr. Swanson prepared his

and Mrs. Swanson' s joint tax returns for 1965 through 1998."

While Mr. Swanson had no formal study in taxation, he did "buy a

tax book each year to look at the highlights and see if there

[was] anything that was new that would affect" him.

As part of the fee Mr. Swanso

paid for the Roth

restructure, Grant Thornton began preparing the Swansons' tax

returns in 1999.

This was because Mr. Swanson indicated he

"wanted to make su.re that the people that had developed the [Roth

restructure]

* * * continually followed it and knew exactly what

they should be doing" .

Kruse Mennillo prepared the Swansons' tax

returns beginning in 2001.

9Dui-ings the period eMr .

anson prepared his own return, it

consisted of a Form 1040, U.S. Individual Income Tax Return;

Schedule A, Itemized Deductions; and Schedule D Capital Gains

and Losses.

"The tax returns included Federal income tax returns and

Federal excise tax retürn . Nobthstar' s 2000 tax return was

prepared'by Grair Thornton, and Northstar's 2001 through 2007 tax

(continued. . . )

- 412 In order to facilitate the preparation of therreturns, Mr.

Swanson swould provide the information and copies of pertinent

documents .asked for each year by either Grant Thornton or Kruse

Mennillo .

Individuals inc luding Mr . Stover , Mr . Oliver , and Ms .

Donovan presumably worked on the returns .

None of these

individuals testified.

When Mr. Swanson received the returns, he reviewed them to

make sure that all the information he had given was transcribed

properly, that the deductions that were taken were proper, and

that each of the corporate entities had a tax return.

t

Petitioners' tax returns showed excise tax on excess

contributions to a Roth IRA of $2, 000 for the 2000, 2001, 2002,

2003, and 2007 tax years; $3,500 for the 2004 tax year; and'$5000

for the 2005 and 2006 tax years.

V.

The Result of the Roth Restructure and Audit

As a result of the Roth restructure, Mr. Swanson made an

excess contribution of $1,610,000 into his Baum Roth IRA through

three different transfers occurring in 2000.

In 2004 Grant Thornton sent Mr. Swanson a letter regarding

the Roth restructure (Grant Thornton letter) stating that the Roth

restructure was potentially a listed transaction pursuant to IRS

" ( . . . continued)

returns were prepared by Kruse Menillo.

Sierra West's 2000 tax

return was prepared by Grant Thornton, sand its 2001 tax return

was prepared by Kruse Menillo. -Even though the tax returns were

prepared by different firms, they were prepared by the same team

of,people.

4 13 Notice 2004--8

2004-1 C.B. 333.

Notice 2004-8,séntitled "Abusive

Roth IRA Transactions",3 -states, in part, that taxpayers are using

transactions "to avoid- the limitations on contributions to Roth

IRAs" and- that- "these transactions, as well'as substantially

similar transaction" are listed t'ransactions.

The transactions

described ïn'Notice 2004-83 supra, ainvolve the taxpayer, a Roth or

IRA, -and a corporation substandially all the shares of which' are

owned or acquired by the Roth t];RA".

Mr. Swanson asserts that:he discussed the Grant Thorntons

letter-with tax ]:awyerà at Kruše Ménnillo',

including Mr. Stover,

and was tóld that his transaction was hot' covered by the notice, 7

he would not be penalized for nondisclosure",e and th'at it was up to

him whether hei disclosed'.

Mr. Swanson did not 'discuss the Grant

Thornton letter or attempt to c iscern whether he had engaged in a

listed transaction with anyone else.-

M .'-Swanson decided to -

disclose the transaction anyway "just to make sure * * * [he]

wasn't violating anything * * * [and because he wanted to take]

the safest route".

To disclose, Mr. Swanson attached a Form 8886,

Reportable Transaction Disclosure Statement, to Northstar's 2003,

2004, and 2006 tax returns."

"While Mr. Swanson explained that Form 8886 was used to

disclose his Roth restructure, this Court noteå that there was

little'explanation on,Form 8886.

Under th'e*Facts section of the

form, petitionere typed "TiiE TAXPAYER WAS FORMED TO PERFORM

SERVICES FOR MUL' IPLE BUSINESNES IN THE FIELD OF, CONSULTING.

THE

BUSINESS REASONS-FOR ITS EXISTENCE INCLUDE, BUT ARE NOT LIMITED TO: - ASŠET PROTECTION, SUCCESSION PLANNING, ANI) RETIREMENT

(continued...)

- 14 -

In 2006, the Swansons' returns were audited by the California*

Franchise. Tax Board.

According to Mr. Swanson, this' was the first

time that he suspected that the Roth restructure swas not -100

percent viable.

-Mr. Stover and his colleague, Marc Sommers

indicated to Mr . Swanson that their opinion was "that tihe audit

would not show any shortcoming. of taxes paid" .

concluded in 2007 with "no change".

The ,audit was

Mr. Swanson "felt that the

clearance by the California Tax Board was a further indication

that the structure was viablerand proper" .

The Swansons etimely filed Forms 1040, U.S. Individual sIncome

Tax Return, and Forms 5329, Additional Taxes on Qualified, Plans

(Including IRAs)- and Other Tax-Favored Accounts, for all years in

issue.

On October 6, 2008, respondent issued three notices of

defi-ciency collectively showing the following deficiencies and

section 6662 (a) accuracy-related- penalties :

(. . . continued)

PLANNING.

THIS PROTECTIVE DISCLOSURE IS BEING FILED BECAUSE IT

IS NOT CLEAR WHETHER THE GOVERNMENT WOULD VIEW THE TRANSACTION AS

SUBSTANTIALLY SIlvíILAR TO THOSE IDENTIFIED IN NOTICE 2004-8".

In

the Expected Tax Benefits section, Mr. Swanson typed "THE

POTENTIAL BENEFIT IF ANY COULD BE EITHER A TAX SAVINGS OR COST

DEPENDING ON THE TAXPAYERS RATE" .

.3

÷ 15 -

Penalty

Sec . 6662 (a)

Tax Yea

De iciency

2001

$96,495

$19i299.00

. 20 0 2

96, 111

19 , 222 . 20

20 03

96, O91

19, 218 . 2,0

2004

95,984

19,196.80

2005

95,879

19,175.80

2006

95,863

19,172.60

2007

614, 627

122, 925.40

The deficiencies for tax years 2001 through 2006 were excise

tax defidiencies tÅsed upon respondent's determination that Mr.

Swansori had malle an ezcess òon ribution of $1.61 million to his

Roth IRA in 2000 and a portion of tl e exaess cI>ntriliution remained

in the accounÊ through Decembei 31, 2006.

T1e deficiency

r 2007

was an income tax deficiency bÂsed upon respõndenti's 'determination

that Mr. Swanson had unreported income of $1,803,900 and a

computational adjÙtment of $3 1è8 t

Swansons timely pe tiitioneci thi

Court .

itemized dedúctions.

Thê

A tiia] was held on March

5," 2010, iii Los Ar.geles, California.

OPINION

I.

Burden òf Proc.f

We Ÿirst address the" Swansons' cont-ention that thë bu den of

proof has shifted to respondent.

They contend

hat

Where a petit ioner has introduced credible evidence relevant

to ascertain-ing-the petitioner's liability, the burden of

proof in court pròceedings shifts so that the Service has the

burden of proof with respect- to factual issues related ,to

income tax issties (Code Sèction 7491) . The Petitioner in

- 16 -

this case had introduced the requisite credible evidence, an

[sic] had maintained all of the required records, and

cooyerated during the audit process with the Service

Hende

in this proceeding the burden had shifted to the Respondent.

Petitioner has confused the burden of proof for pénalties,

see sec."7491(c), with the burden of proof for income tax

liability, see sec . 7491 (a) .

Pursuant to section 7491 (a) , the

burden of proof on factual issues that affect the taxpayer's

income and estate or gift tax liability (imposed by subtitles A

and B of title 26 United States Code) may shift to the

Commissioner in certain circumstances .

There is no underlying

income, estate, or gift tax liability at issue.

Accordingl ,

section 7491(a) is not applicable.

Under section 7491(c) , respondent bears the burden óf

production with respect to Mr. Swanson's liability for the section

6662 (a) accuracy-related penalty.

This means that respondent

"must come forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty."

Commissioner, 116 T . C. 438, 446 (2001) .

See Higbee v.

However, respondent does

not have the additional burden of producing evidence of reasonable

cause, good faith, substantial authority, or lack of willful

neglect, except as may be necessary t o rebut evidence introduced

by petitioners .

II.

See &

Analysis

Section 6662 (a) imposes an accuracy-related penalty of 20

percent on any únderpayment of tax that is attributable to causes

17 -

specified in ásubsection (b) .

Respondent asserts negligence or

disregard of the rules and regulations as the justification for

thé imposition of - the penalty .

See sec è 6662 (b) (1) .

spec if ically, respondent urges that Mr

More

Swansona was .negligent- in

failing -to report <his excess contributions Ito a Roth "IRA foi the

2001 through 2006 tax years.

"[N]egligence", sfor this burpos'e,a is "any failure-to make a

reasonable attempt toscomply ewith the provisions o

Internal Revenue dode] " . "

Sec . 6662 (c) .

* 2* *

[the

Under caselaw,

"'Negligence is a lack of due aare"ór failure to do what a e

reasonable -ánd.orc inarily prudent sperson wóuld:do under the

circumstiances.'"

Freytag v. Commissioner, 89 T.C. :849,2 887 (1987)

(quoting Marcel~l'o v. Cotñmissioner, 380 F.2d 49.9, 506 (5th Cir. 1967) , af f g : on tlkis is sue 43 T . C. 168

299),'affd.

(1991) .

904 F.2d 10114(5th Cir.

(1964 ) and T . C . Memo . 1964

1990), affd. 501 U.S.

868

"Negligence is "strongly indicated" a when 4 [a] taxpayer

fails to make a reasonable atitemp't -to ascertaina the correctness of

a deduction, cred t, or exclusion on a rettirn which·sould seem to

ae-reasonable and-prudent person to b'e 'too góod to be true' under

the circumstances

"

Hansen W. Commissioner, 471 F.3d 1021, 1029

(9th Cir. 2006), affg. T.C. Mehio. 2004-269; sec.al.6662-

3 (b) (1) (ii) , Indoge Tax Regs

"Disregard of the rules and regulations "includes any

careless, reckless, or intentional disregard of rules or

regulations . " S ac . 1. 6662-3 (b) (2) , Income Tax Regs .

- 18 -

In determining a taxpayer's liability for a -negligence

penalty, courts generally look both to whether the underlying

investment was legitimate and whether the taxpayer exercised -due care in the position taken on the return.

Sacks i Commissioner,

82 F.3d 918,, 920 (9th Cir. 1996) ;; affg. T.C. Memo. 1994-217.

When

an investment has such obviously suspect tax claims as to put a e

reasonable taxpayer under a duty of inquiry, a good faith

investigation of the underlying viability,- financia-l structure,

and economics of the investment is required. . Roberson v.

Commissioner, T.C. Memo. 1996-335, affd. without published opinion

142 F.3d 435 (6th Cir.. -1998); see also Mortensen ve Commissioner

440 F.3d 375,

3862387

(6th Cir. 2006), affg. T.C. Memo. 2004-279;

Pasternak v. Commissioner,

990 F.2d 893,

903

(6th C-i.r.

1993) ,

affg. Donahue v. Commissioner;i "T.C. Memo. 1991-181 (stating "A

reasonably prudent person would have asked a qualified tax adviser

if this windfall was not too good to be true".), affd.,without

published opinion 959 F.2d 234

(6th Cir. «1992) .

Petitioners' education and experience with business and

financial decisionmaking will -be considered. in determining whether

they were negligent in blindly accepting the advice of adviser

promoters who charged large fees.

Respondent has introduced

sufficient evidence that Mr. Swanson negligently fai-led to report

excess contributions to his Roth IRA and therefore has met his

- 19 -

burden öf production with regaids toothe section 6662(a) accuracyrelated penalty.

III. Reasonable Cause Exception

There is an exceptión to the section 6662 (a) penalty when a

taxpayer scan demor.str:ate:

(1) Reasonable cause forsthe

underpayments and (2) that the taxpayer, acted in góod faith with e

respect to the unierpayment :

Inc'ome - TaxaRegs .'

Sec a 6664 (c)9(1) ; sec . 1. 6664-4 (a) ,

GRegulations þromulgated under - section ~6664 (c)

provide that the teterminatión oforeasonable cause and good faith

"is made on a scase -by-case.basis, "taking into- account all

pertinent facts ar.d circutñstances."- Sec. 1.6664-4(b) (1*), Income

Tax Regs.

Mr . Swanso'n bears thel burden ofa proving that he meets thé

reasonable cause a.nd good faith exception.

He asserts that he

meets it because -he:- t(1) Investigated the Rothérestructure before

engaging in it;

(2) -read and relied on Swanson v. Commissioner,

106 T.C. 76 (1996) ; -(3) consulted dith numerous people including

accountants and tax attorneys; and (4) received a "no-change"

letter after hisdeturns were audited by athe State ofeCalifornia.

To begin,E we do 'not -deterniine whether Mr . Swanson' s alleged

reliance on the "no-change". letter .issued by the State of

California helps to establish ëeasonable caúse and, good faith.

Importantly, the : ssuestin this case are the accuracy-related

penalties for his 2001 through 2006 tax/years, the 2007 year

- 20 -

having already been conceded by, respondent dai full.

According to

Mr. Swanson's testimony, he received the "no-change" letter in

2007.

That means the "no-change" letter could not have had

anything to do with the justification for petitioners'.failure to

act properly with the tax years 2001 through 2005.

We-recognize a

that Mr..Swanson's 2006 tax return could have been:timely filed in

2007 after the receipt of the "no-change" letter.

But, Mr. y - e

Swanson never.provided any evidence as to exactly when in 2003.he

receiVed-the "noschange" letter-or filed the joint Federal income

tax return,and attached Form 5329.

Further, by failing to - a

introduce the "no-change" letter into evidence, Mr. Swanson÷has

failed-to-provide this Court with proof as to the exact issues, s

California audited and its reasons for concluding the audit with a

"no-change" letter.

. We now turn _the Swansons'- asserted reliance on $wanson v.

Commissioner, supra.

Mr. Swanson states athat the Swanson case

"approved the holding of 100% of the stock of a company by a

pension".

While the.Court in Swanson did implicitly approve the

holdihg of stock by an IRA, that was not the central issue in

Swanson.

Swanson v. Commissioner, supra at 87-90.-

Rather the

Court was called upon to determine whether the IRS was

substantially justified in its litigation position in-order to

determine whether the taxpayer was entitled to an award of

reasonable litigation costs.

21 -

We cannot fird that the Swansons' claimed reliance on the

Swanson decision

as reasonable.

-

The issue andefacts :of Swanson

are easily distin uishable from the transaction Mr. Swanson

engaged in.

Respcndent is not contending that an IRA cannot own

stock, rather that Mr. Swanson made excess contributions to his

Roth IRA.

«Importêntly,r there is no evidence sother than Mr.

Swanson' s testimory that he ever even read the case or personally

analyzed it as opposed to simply taking, Mr . Stover' s word for- awhat

it held.

See, e.ç'., Hansen-v

Conimissioner, ,47]l F.3d at 1032•

(noting that even though the taxpayer read _a previous decis-ion,

there was no evidence that :the taxpayer understood or relied ont i

the decision independently of what the promoter.told sthe taxpayer

the decision meant.) .

Next, we- turn to the Swansons' argument that they relied on

Mr. Stover and other professionals.

To support thirstargument

petitioners cite United States VCBoyle, 469 U.rS. 241a (1985) ;

Haywood Lumber & 19ining Co . #

Commis s i'oner ,' 178 e F . 2d 76 9 (2d Cir .

1950), modifying 12. T*.C. '735

( 949); Orient Inv. & Fin. Co.', Inc.

v. Commissioner, 266 .F.2de601· (D. C. -CiÝ.a 1948) ; i and3Hatfried, Inc .

v. Commissioner,

62 F.2d .628

(3d Cír. 21947) .

While good faith reliancegon professi'onal advice based on al-1

the facts may, in many cases, provide a basis for a reasonable

cause defenee, it is not absolute.

Freytag v. Coinmissioner, 89

- 22 T.C. at 888; LaPlante v. Commissioner, T.C. *Memo. 2009-226; ,sec.

1.6664-4(b)(1), Income Tax Regs.

[F]or a taxpayer to rely reasonably upon advice so- as possibly to negate a section 6662(a) accuracy-related penalty

determined by the.Commissioner, the taxpayer must prove

* * * that the taxpayer meets each requirement of the

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

professional who had sufficient expertise to justify

reliance, (2) the taxpayer provided necessary and accurate

information to the adviser, and (3) the taxpayer actually

relied in good faith on the adviser's judgment. * * *

Neonatology Associates, P.A. v. Commissioner, -115 T.C. 43, 99

(2000), affd.7299 F.3d 221 (3d Cir. 2002); see ,also Charlotte's

Office Boutique

Inc. v. Commissioner, 425 F.3d 1203, 1212 n-.8

(9the Cir. <2005)

(quoting with approval the above three-prong

test),

affg.

121 T.C.

89

,2

(2003).

The general rule in the Court of Appeals for.ther Ninth

Circuit, to which this case would be appealable absent a

stipulation to:thes contrary, is that "a taxpayer cannot negate the

negligence penalty through reliance on a transaction's promoters

or on other advisors who have a conflict of interest."

Hansen v.

Commissioner, supra at 1031; see also LaVerne v. Commissioner, 94

T.C.

637,

652-653

(1990), affd. without published opinion 956- F.2d

274

(9th Cir. 1992), affd. without published opinion-sub nom.

Cowles v. Commissioner,» 949 F.-2d 401 (10th Cir. s1991)::

"Courts

=

- "This Court has held that a promoter is "an adviser who

participated in structuring the transaction or is otherwise

related to, has an interest in, or profits from the transaction."

106 Ltd. v. Commissioner,

136 T.C.

67,

79

(2011); Tigers Eve

Trading, LLC v. Commissioner, T.C. Memo. 2009-121.

1

23 -

have repeatedly held that it ià unreasonable fo

a taxpayer to

rely on a -tax advisereactively binvolved .in planning the

transaction and tainted by an -inherent confliitct of interest"

Canal Corp. v7 Cotrmissioner,6135 T.-C. 199,7 t218' (20~10) .

At a mïnimum, Mr. Stover ånd his colleagueš- had- a conflict of

interest 'and were not independent . " E Mr . Stover set up the various

entities and coordinatedIthe deal "from starte to ifinish".

Ltd. v. Commissioner

Mr

136 T.C.*i67

80

106 e

(2011) .a"Grant Thornton and

Stover were-paid "a flat fée-for implementing"*"* * [the Roth

restructure] sand wouldn' t have been compenãàted eat àll if *. * *

[Mr . Swanson] dec ided .not to go through with it i "

Therefore, pet i'tieners canriot tárgue

See id .

hât thé^ir reltiance on Mr

Stover and his colleagues establishes reasonable cause and good

faith, TSee Hansen v. Commissioner," supra at -1027 (affirming Tax

Court holding when; taxpayers relièd solely on the organisation

promoting the transactiori and did not independently verify their

tax returns despite warnængs by t he IRS) ; see alsó "LaVerne v:

Commissioner, supra at 652

"Independence distinguishes the case at hand from those Mr.

Swanson attempts to rely on. In Haywood Lumber & Mining Co. v.

Commissioner, 17E F.2d 769

(2 i Cir-.. 1950), modifying 12 T.C. 735

(1949) , Orient Irdr.

Fin. Co

Inc. v. Commissioner, 166 F.2d

60'1 (D.C. Cir. 1948), and Hat-frï'ed, Inc. v. Commissioner, 162

F.2d 628 (3d Cir. 1947) , there is no evidence that the tax

advisers who the taxpayers rélied on in the cases were not

independent. Haywood Lumber

Mïning Co. v. Commissioner, supra

at 770-771; Oriertt Íny. & Fin. Co., Inc. v. Cominissioner, supra

at 602-603; Hatfried, Inc.sv. Columissioner, supra at 631-632.

- 24 While Mr. Swanson argues that he also relied on Mr. Nardi,

Mr. Patton, and Mr. Mather, there is no evidence, sother than Mr.Q

Swanson' s testimony,- that he talked with these three individuals

nor what they talked about and the - advice he received.

Neither

Mr . Nardi nor Mr . Pat ton is compe tent in, tax matters . y While .Mr .

Swanson testified -that Mr. Mather was a tax preparer, there is no evidence he is competent in complicated tax matters .

Mr. Swanson appears to believe that his own self-serving

testimony is enough to establish reasonable cause and good faith.

We disagree . . We have "found reliance to be unreasonable where a

taxpayer claimed to shave relied upon an independent. adviser

because the . adviser either . did not testify or testif ied too

vaguely to convince us that the taxpayer was reasonable in relying

on the adviser ' s advice" . , Swanson . v . Commis s ioner , T . C . Memo

2009-31; see also Heller v. 'Commissioner, T.C. Memo. 2008-232

(noting in upholding a penalty based on negligence that aside from

the taxpayer' s "self -serving testimony, there * * *

[was] no ,

evidence in the record as to the specific nature of * * *

[the

professional's] advice"), affd. 403 Fed. Appx. 152 (9th Cir.

2010) .

Petitioners' failure to introduce evidence "which,

if

Mr. Swanson also appears "to rely on individuals who slgr e

his individual and corporate tax returns such as Angela K. »

Parker, Kelly Murphy, Duanette Thompson, Ruth Donovan, and Kelly

Webb. There is no evidence -that Mr. or Mrs. Swanson ever spoke

with any of, these individuals or if, so, what was discussed.

In

any event,« they .also have conflicts of interest because they

worked with Mr. Stover on the Roth restructure and were employ es

of Grant Thornton and/or Kruse Mennillo.

25 --

true, would be favorable to * * * [them]

gives rise to the

presumption that if produced it would be unfgvorable."

Terminal Elevator Co . v.

af fd.

Commi sioner ,

162 -F.2d 513 , (10th Cir .

Wichita

6 T . C. . 1158, 71165

(1946) ,

1947) .

Petitioners must surely have realized that the deal was too

good to be true.

See LaVerne v. Commissioner, supra at 652-653.

Mr. Swansons is a successful businessman who knew that ,there ,were

contribution limits to Roth IRAs and who had bought a tax book

each year he prepared his own tax return.

His sophisticat-ion is

further evidenced in a memo and November 9, 2000, followup memo he

wrote to Mr'. Stover~ an

M . Do ovan where he listed the topics he

wanted to discuss witih them àÜa"June 30, 2000, meeting,

including

stock options, tax avoidance strategies, avoidance of California

taxes, and future deposits andirollovers of his Roth IRA.

IV.

Conclusion

Mr. Swanson had doubts, repeatedly asking whether the Roth

restructure was legal.

Yet, despite these doubts, he never asked

for a written opinion letter or sought the advice of an

independent adviser, even after receiving a letter from.Grant

Thornton warning, him that he may have engaged in a listed

transaction and-receiving notice that his returns, were being

audited by the State of California. *

Petitioners have failed to

isWe further not e that "M . wanson wâs made awaže of Notice

2004-8, which is entitled "AÑÙsive Roth IRA Transactions" and

described transactions design d "to avoid the limitations ori

(continued. . . )

- 26 establish that they meet the reasonable cause and good faith

exception to the 'section 6662 (a) accuracy-related penalty

Therefore, we sustain respondent' s imposition of section 6662 (a)

accuracy-related penalties for petitioners' 2001 through 2006 tax

years .

The Court has considered all of petitioner's contentions

arguments, requests, and statements.

To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the

oregoing,

Decision will be entered

under Rule 155.

" ( 2 . . continued)

contributions to Roth IRAs" . The notice stated that the

transactions described in the -notîce "as well as substantially

similar transactions" were listed transactions and required ,

disclosure. We find it notable that Mr. Swanson continued to e

rely on Mr. Stover and related tax advisers and did not seek

independent advice after being notifiéd not 'only of Notice 2004-8

but also that his returns were being audited by -the State of

California.

See Neely v. United States,

775 F.2d 1092, 1095 (9th

Cir. 1985) ("Reasonable inquiry as to the legality of the -tax

plan is required, including the procurement of independent legal

advice when it is common knowledge that the -plan is

questiionable . " ) .