UNITED STATES TAX COURT

SYM

T.C. Memo. 2016-31

UNITED STATES TAX COURT

BRIAN M. POLOWNIAK, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 20589-11, 20606-11.

Filed February 25, 2016.

Harry Charles, for petitioner.

Blaine C. Holiday and Wesley J. Wong, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARIS, Judge: On June 9, 2011, respondent issued to petitioner a notice of

deficiency for 2004 determining a total deficiency in Federal income and excise

tax of $249,263.62, additions to tax under section 6651(a)(1)¹ and (2) of

¹All section references are to the Internal Revenue Code (Code) in effect for

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

(continued...)

SERVED Feb 25 2016

-2[*2] $20,228.76 and $22,476.41, respectively, and an enhanced accuracy-related

penalty under section 6662A of $63,918.33.

Also on June 9, 2011, respondent issued to petitioner a notice of deficiency

for 2005 determining a total deficiency in Federal income and excise tax of

$150,869, additions to tax under section 6651(a)(1) and (2) of $29,395.26 and

$32,661.41, respectively, and an enhanced accuracy-related penalty under section

6662A of $6,136.83. Petitioner seeks redetermination of the deficiencies,

penalties, and additions to tax for 2004 and 2005.

In his answering brief respondent concedes that petitioner is entitled to a

deduction for an additional $15,800 in travel expenses previously disallowed for

2004. Respondent also concedes that petitioner is not liable for an enhanced

accuracy-related penalty under section 6662A for 2005. The remaining issues for

decision are:

(1) whether petitioner is liable for excise tax on excess contributions to a

Roth IRA under section 4973 for 2004 and 2005;

(2) whether petitioner's wholly owned subchapter S corporation, Solution

Strategies, Inc. (Strategies), had additional gross receipts of $680,000 for 2004;

¹(...continued)

Practice and Procedure, unless otherwise indicated.

-3[*3] (3) whether Strategies is entitled to business expense deductions for meals

and entertainment expenses of $2,199 and $4,739 for 2004 and 2005, respectively,

and travel expenses of $53,707 for 2005;

(4) whether petitioner is liable for additions to tax under section 6651(a)(1)

for failure to file Forms 5329, Additional Taxes on Qualified Plans (Including

IRAs) and Other Tax-Favored Accounts, for 2004 and 2005;

(5) whether petitioner is liable for additions to tax under section 6651(a)(2)

for failure to timely pay the above-stated liabilities for 2004 and 2005; and

(6) whether petitioner is liable for an enhanced accuracy-related penalty

under section 6662A for an understatement attributable to a listed transaction for

2004.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of

facts, the supplemental stipulation of facts, the second supplemental stipulation of

facts, and the exhibits received in evidence are incorporated herein by this

reference. Petitioner resided in Michigan when his petitions were filed.

I. Background

Petitioner has an advanced degree in business and over 35 years of sales and

marketing experience with Fortune 500 companies. Petitioner has worked at

-4[*4] Proctor & Gamble and Johnson & Johnson and previously was the North

American president of Kimberly Services. From 1981 to 2001 he was an

independent contractor providing consulting services to Miller Heiman (MH), a

company that trains sales professionals.

In 1997 while still contracting with MH, petitioner formed Strategies to

consult in areas of business strategy development that included global growth

focus, sales strategy, and global customer development. Strategies offered several

of the services petitioner had previously provided to MH customers. Strategies

was incorporated in the State of Missouri and elected to be a subchapter S

corporation. Petitioner was the sole shareholder, officer, and director of

Strategies. Throughout Strategies' existence petitioner was the only person who

provided consulting services on the company's behalf.

In 2001 Delphi Automotive Systems (Delphi), a global automotive parts

supplier, awarded a $680,000 contract to Strategies for petitioner's consulting

services. Petitioner traveled extensively for Delphi, with multiple business trips to

Europe, Asia, and South America in service of this contract.

II. Roth IRA Formation

In 2001 petitioner's financial adviser suggested that petitioner meet with an

attorney who promoted the use of Roth IRAs and privately owned Roth IRA

-5[*5] corporations (PIRAC). In a PIRAC arrangement, an individual's new Roth

IRA would purchase the stock of a new corporation. In most arrangements, the

PIRAC would then engage in transactions with the individual's preexisting

business, which was typically a pass-through entity such as Strategies, a wholly

owned S corporation.

Petitioner decided to participate in one of these PIRAC arrangements, and

as a result petitioner's then attorney incorporated Bevco Investments, Inc. (Bevco)

on December 10, 2001. Bevco adopted a taxable year ending January 312 and

named petitioner as its registered agent. From its incorporation to its dissolution

in 2006 petitioner, in addition to being its registered agent, served as Bevco's sole

officer, director, and employee.

On December 28, 2001, petitioner formed a new Roth IRA at First Regional

Bank's Trust Administrative Services Corp. (TASC). Petitioner made an initial

contribution of $2,000 to his Roth IRA. To facilitate the PIRAC arrangement

petitioner directed his Roth IRA to purchase 98% of Bevco's stock in March 2002.

2Bevco as a C corporation chose a January 31 taxable yearend versus a

calendar yearend. A fiscal yearend corporation reports on Form 1120, U.S.

Corporation Income Tax Return, reflecting the first month of its taxable year.

Bevco used the form corresponding with its taxable year beginning (i.e., tax year

beginning February 1, 2002, and ending January 31, 2003, was reported on Form

1120 for calendar year 2002).

-6[*6] This stock was the entirety of the class A voting stock Bevco issued. The

remaining 2% of stock was class B nonvoting stock and was subscribed to

petitioner's administrative assistant, an independent contractor who had provided

services to Strategies since its organization in 1997.

Around the same time, petitioner's then wife also formed a new Roth IRA at

TASC. Her initial contribution was $655, and shortly after formation she directed

her Roth IRA to invest the funds in Bevco. Following that investment, petitioner

transferred 6% ownership of Bevco's class A stock from his Roth IRA to his then

wife's Roth IRA and was given a retroactive effective date for the purchase.

Petitioner's administrative assistant's 2% ownership interest did not change.

Following the setup and purchase of Bevco by the Roth IRAs, petitioner's

wholly owned S corporation, Strategies, and Bevco entered into a subcontracting

agreement for petitioner's consulting services. This agreement was given a

retroactive effective date of January 2, 2002, with an original term of 12 months.

The agreement provided that Strategies would pay Bevco 75% of the revenue it

received from its anticipated 2002 consulting contract with Delphi. In exchange

for this payment Bevco was expected to provide certain specified services for

Strategies which would be provided personally by petitioner. These services were

enumerated as follows: (1) propose worldwide structure changes for six divisions

-7[*7] of Delphi; (2) create business planning models to include forecasting and

pricing models: (3) hire and appoint sales leadership positions; and (4) build

business strategies for Delphi to implement with worldwide customers. This was

the only contract ever executed between Bevco and Strategies. Delphi was never

informed of this subcontracting agreement. Before Strategies made payments

under the contract, petitioner's accountant suggested that research be reviewed to

verify the propriety of disclosing excess contributions made to petitioner's Roth

IRA to "capitalize" Bevco, but no Form 5329 was filed.

On May 16, 2002, Strategies made its first payment to Bevco of $400,000.

Later in 2002 an additional $100,000 was transferred from Strategies to Bevco

which was recorded on Bevco's books as a loan from Strategies. Throughout its

existence Bevco's only source of revenue was deposits made to it by Strategies

and returns on the investments made within Bevco's accounts.3 Bevco never had

an address, email account, or phone number assigned to it, and petitioner's

administrative assistant, who was given 2% of Bevco's stock, never worked on

behalf of Bevco.

3Additional deposits to and withdrawals from Bevco's checking account

were identified in financial statements as petitioner's inheritance, U.S. Dept. of

Ag. payments, Bevco's investment account deposits, and miscellaneous loans to

and from petitioner.

-8[*8] At the end of 2002 Delphi awarded another contract to Strategies and

petitioner. In December 2002 petitioner's consultants suggested electing the

accrual method of accounting for Bevco and eliminating the Strategies subcontract

with Bevco for 2003. The parties thought that an election under Rev. Proc. 71-21,

1971-2 C.B. 549, would allow Bevco to defer its revenue until it was earned.

Because Bevco's fiscal yearend was January 31, any payments received before

January 31, 2003, would not be reported until the 2003 fiscal yearend of January

31, 2004. Attached to Bevco's 2002 Form 1120 was an election under Rev. Proc.

71-21, supra, to defer prepaid income until it was earned. The election was signed

by petitioner as president of Bevco and attached to a return received by the

Internal Revenue Service (IRS) on April 15, 2003. On January 13, 2003,

Strategies transferred $680,000 (the entire Delphi contract payment) into Bevco's

checking account. The following year, on January 7, 2004, Strategies transferred

an additional $680,000 (the entire Delphi contract payment) into Bevco's checking

account. Delphi expected petitioner to personally perform the consulting services,

and Strategies did not inform Delphi that any of the services under the contracts

would be performed by an independent contractor or by any other employee of

Strategies.

-9[*9] At some point in 2003 Bevco, at petitioner's direction, purchased

petitioner's administrative assistant's 2% interest in the company (all class B

nonvoting stock) for $20,000. On July 19, 2004, petitioner filed a petition for

divorce from his then wife. As part of petitioner's divorce settlement, he was

awarded all of his wife's Roth IRA's shares in Bevco under the separation

agreement filed on December 2, 2005. At the end of2005 petitioner's Roth IRA

owned 100% of Bevco.

TASC filed Forms 5498, IRA Contribution Information, for petitioner's

Roth IRA for 2003, 2004, and 2005 showing the value of petitioner's Roth IRA

equaling petitioner's initial contribution of $2,000. Following petitioner's

divorce, the Form 5498 for 2006 reflected a value of $2,665--the combined value

of petitioner's $2,000 initial contribution and his wife's initial $665 contribution

to her Roth IRA, which was subsequently invested in Bevco. Bevco's purchase of

all of the class B nonvoting stock for $20,000 was not reflected in the value of

petitioner's Roth IRA. The termination of Bevco on August 24, 2006,4 had no

effect on the relationship between petitioner and Delphi. Petitioner continued to

4Bevco Investments, Inc. Retirement Trust, wholly funded by Bevco, was

also terminated, and it distributed its entire balance of $484,124 to petitioner, its

sole participant. The distribution was reported on a Form 1099-R, Distributions

From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance

Contracts, etc., for 2006.

- 10 [*10] perform all of the remaining services that Strategies was obligated to

provide to Delphi.

III. Bevco's Tax Reporting

Bevco was incorporated on December 10, 2001. For its first full year of tax

reporting on a 2002 Form 1120 for a year beginning February 1, 2002, and ending

January 31, 2003, Bevco reported gross receipts of $782,390 and total assets of

$43,785. On a 2003 Form 1120 for a year beginning February 1, 2003, and ending

January 31, 2004, Bevco reported gross receipts of $719,537 and total assets of

$610,934. On a 2004 Form 1120 for a year beginning February 1, 2004, and

ending January 31, 2005, Bevco reported gross receipts of $680,000 and total

assets of $242,919.5

Petitioner's Forms 1040, U.S. Individual Income Tax Return, filed during

the same income tax years as Bevco's returns did not report any additional tax on

IRAs or other qualified plans, nor did they include Forms 5329 disclosing excess

contributions.

5Respondent issued a notice of deficiency to Bevco for 2004 for its tax year

ending January 31, 2005. Bevco did not file a petition with this Court contesting

the notice of deficiency, and the deficiency was subsequently assessed.

- 11 [*11] IV. Strategies' Tax Reporting

During the years at issue Strategies filed a 2004 Form 1120S, U.S. Income

Tax Return for an S Corporation, on which it did not report any income it received

from the Delphi contract or any gross receipts. It reported total deductions of

$273,749, including travel expenses of $139,323, meals and entertainment

expenses of $11,898, and a small amount of cancellation of indebtedness income,

for a net loss of $271,853. As sole shareholder, petitioner reported Strategies' net

loss of $271,853 on a Schedule E, Supplemental Income and Loss, attached to his

2004 Form 1040.

For 2005 Strategies filed a Form 1120X, Amended U.S. Corporation

Income Tax Return, reporting $616,190 in gross receipts and total deductions of

$526,491, including travel expenses of $274,830 and meals and entertainment

expenses of $24,250, for a net profit of $116,595. Petitioner reported Strategies'

income of $116,595 on a Schedule E attached to his 2005 Form 1040.

V. Notices of Deficiency

On June 9, 2011, respondent issued a notice of deficiency to petitioner for

2004.6 Respondent determined that Strategies had failed to report income it

6The notice of deficiency for 2004 was issued for the joint tax return of

petitioner and his ex-wife. His ex-wife requested relief from joint and several

(continued...)

- 12 [*12] received from Delphi for its 2004 annual consulting contract of $680,000.

Respondent also disallowed $2,199 of Strategies' reported deductions for meals

and entertainment expenses. Respondent did, however, determine that petitioner

was entitled to deduct an additional $73,453 in travel expenses. These

adjustments led to an increase in petitioner's Schedule E income of $608,746 for

2004.

In addition to income tax determinations, respondent determined in the

notice that petitioner was liable for excise tax under section 4973 for excess

contributions to his Roth IRA. Section 4973 provides for a 6% excise tax on the

total amount of excess contributions remaining in a Roth IRA on a yearly basis, so

respondent included in the deficiency the cumulative excess contributions from

petitioner's previous tax year 2003 as well as 2004. The notice of deficiency used

the gross receipts reported on Bevco's Form 1120 to measure the excess

contribution amount and then determined that petitioner was liable for $89,905 in

excise tax under section 4973 on the following amounts: (1) Bevco's gross

receipts of $782,390 for its taxable year ending January 31, 2003, reported on its

2002 Form 1120 and (2) Bevco's current fiscal year gross receipts of $719,537 for

6(...continued)

liability under sec. 6015(b), (c), and (f) before the notice of deficiency for 2004

was issued, but the IRS' determination was not reflected in the notice.

- 13 [*13] its taxable year ending January 31, 2004, reported on its 2003 Form 1120

but (3) less the allowable Roth IRA contribution amount for 2004.

On June 9, 2011, respondent also issued a notice of deficiency to petitioner

for 2005. Respondent disallowed deductions for Strategies' reported travel

expenses of $53,707 and meals and entertainment expenses of $4,739. These

adjustments led to an increase in petitioner's Schedule E income of $58,446 for

2005.

Respondent also determined that petitioner was liable for excise tax under

section 4973. Because section 4973 provides for a 6% excise tax on the total

amount of excess contributions remaining in a Roth IRA on a yearly basis,

respondent included the cumulative excess contributions from petitioner's

previous tax years 2003 and 2004 as well as 2005. The notice of deficiency again

used the gross receipts reported on Bevco's Form 1120 to measure the excess

contribution amount and then determined that petitioner was liable for $130,646 in

excise tax under section 4973 on the following amounts: (1) Bevco's gross

receipts of $782,390 for its taxable year ending January 31, 2003, reported on its

2002 Form 1120; (2) Bevco's gross receipts of $719,537 for its taxable year

ending January 31, 2004, reported on its 2003 Form 1120; and (3) Bevco's gross

receipts of $680,000 for its taxable year ending January 31, 2005, reported on its

- 14 [*14] 2004 Form 1120; but (4) less the allowable Roth IRA contribution amount

for 2005.

In addition, respondent determined in both notices of deficiency that

petitioner failed to file Form 5329 to report the excess contributions either to a

Roth IRA or prior year excess contributions in his Roth IRA. Respondent

determined that petitioner failed to file Form 5329 either as an attachment to his

income tax return or separately and was, therefore, liable for additions to tax under

section 6651(a)(1) for failure to timely file and section 6651(a)(2) for failure to

timely pay. Respondent also determined petitioner failed to attach to his income

tax return any Forms 8886, Reportable Transaction Disclosure Statement, and

determined enhanced accuracy-related penalties under section 6662A for

understatements attributable to listed transactions.

Petitioner timely filed the petitions in these consolidated cases.

OPINION

I. Burden of proof

Generally, the Commissioner's determinations in a notice of deficiency are

presumed correct, and the taxpayer bears the burden of proving that the

determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). In certain circumstances section 7491 may shift the burden of proof

- 15 [*15] on factual issues that affect the taxpayer's tax liability "for any tax imposed

by subtitle A or B" to the Commissioner. Sec. 7491(a). However, section 7491(a)

is inapplicable to excise tax liabilities, which are imposed under subtitle D of the

Code. See Paschall v. Commissioner, 137 T.C. 8, 17 (2011); Repetto v.

Commissioner, T.C. Memo. 2012-168.

To shift the burden of proof with respect to income tax deficiencies, a

taxpayer must introduce credible evidence regarding relevant factual issues and

have: (1) complied with all relevant substantiation requirements; (2) complied

with all relevant record keeping requirements; and (3) cooperated with reasonable

requests by the Commissioner for meetings, interviews, witnesses, documents, and

information. Sec. 7491(a)(1) and (2). Credible evidence is evidence that, after

critical analysis, the Court would find sufficient upon which to base a decision on

the issue if no contrary evidence were submitted. Higbee v. Commissioner, 116

T.C. 438, 442 (2001).

Petitioner has not alleged at any point that the burden of proof should shift

to respondent in these cases. Furthermore, petitioner has failed to show that he

has substantiated each item at issue and produced all required records with respect

to these issues. Additionally, section 7491 is inapplicable to the excise tax

liability respondent determined under section 4973. Accordingly, petitioner bears

- 16 [*16] the burden of proof with respect to both the income and excise tax

deficiencies at issue in these cases. See Paschall v. Commissioner, 137 T.C. at 17.

II. Excess contributions to Roth IRAs

A. Roth IRAs and Section 4973

Congress authorized the Roth IRA, a type of individual retirement account,

with the enactment of section 408A in the Taxpayer Relief Act of 1997, Pub. L.

No. 105-34, sec. 301, 111 Stat. at 824. The distinguishing feature of a Roth IRA

is the timing of the tax benefit; the contributions to a Roth IRA are not tax

deductible, but all earnings accumulate tax free and all qualified distributions from

such an account are also tax free. See sec. 408A(a), (c)(1), (d)(1); Taproot Admin.

Servs., Inc. v. Commissioner, 133 T.C. 202, 206 (2009), afCd, 679 F.3d 1109 (9th

Cir. 2012). Roth IRAs are designed to ensure that the taxpayer includes in income

the amounts the taxpayer contributes to the retirement account.

Because of the significant tax benefits provided by Roth IRAs and the

potential for abuse, Congress enacted certain restrictions with respect to their

implementation. See sec. 408A. A taxpayer's total annual contribution to a Roth

IRA is effectively limited by section 408A(c)(2) and (3). Section 408A(c)(2) sets

a maximum contribution limit based on the maximum allowable deduction for

traditional IRA contributions under section 219, and section 408A(c)(3) provides

- 17 [*17] that the maximum annual contribution limit is phased out according to a

taxpayer's modified adjusted gross income (AGI).7

Although the Code does not prohibit contributions above the amount

allowed by section 408A (subject to its internal limitations), section 4973 imposes

for each taxable year an excise tax of 6% for excess contributions computed on the

lesser of (1) the amount of the excess contribution, and (2) the value of the

account as of the end of the taxable year. See sec. 4973(a). The tax applies each

year until the excess contributions are eliminated from the taxpayer's Roth IRA.

S_e_e Paschall v. Commissioner, 137 T.C. at 18. Section 4973(f) defines an excess

contribution to a Roth IRA as the excess of the amount contributed over the

amount allowable as a contribution.

B. Notice 2004-8, 2004-1 C.B. 333

On December 31, 2003, the IRS issued Notice 2004-8, 2004-1 C.B. 333,

titled Abusive Roth IRA Transactions. In that notice the IRS addressed taxpayers'

attempts to avoid limitations on contributions to Roth IRAs. It states that the

7For 2003, 2004, and 2005 the contribution limits for a Roth IRA under sec.

408A(c)(2) were $3,000, $3,000, and $4,000, respectively. See also sec.

219(b)(5)(A). Taxpayers aged 50 or older before the close of the taxable year

were entitled to an additional catch-up contribution of $500 in 2003, 2004, and

2005. See sec. 219(b)(5)(B). For 2004 and 2005 contributions by joint filers were

phased out completely at a modified AGI of $160,000.

- 18 [*18] transactions generally involve (1) an individual who owns a preexisting

business, (2) a Roth IRA maintained for that individual, and (3) a corporation of

which substantially all the shares are owned or acquired by the Roth IRA (Roth

IRA corporation). The notice describes typical fact patterns to include

arrangements between the Roth IRA corporation and the individual or his

preexisting business "that * * * [have] the effect of transferring value to the Roth

IRA corporation comparable to a contribution to the Roth IRA." M.

Notice 2004-8, supra, also states that the IRS will challenge the purported

tax benefits resulting from such transactions. R It states that in addition to any

other possible tax consequences, the amount treated as a contribution is subject to

the excise tax under section 4973. Id. The notice identifies these transactions, as

well as substantially similar transactions, as listed transactions for the purposes of

section 1.6011-4(b)(2), Income Tax Regs. R, 2004-1 C.B. at 334.

C. Substance Over Form

Generally, the substance and not the form of a transaction determines its tax

consequences. Gregory v. Helvering, 293 U.S. 465, 469-470 (1935); Lazarus v.

Commissioner, 58 T.C. 854, 864 (1972), M, 513 F.2d 824 (9th Cir. 1975).

Where a series of transactions, taken as a whole, shows either that the transactions

are shams or that the transactions have no "purpose, substance, or utility apart

- 19 [*19] from their anticipated tax consequences", the transactions are not recognized

for Federal tax purposes. Goldstein v. Commissioner, 364 F.2d 734, 740 (2d Cir.

1966),

44 T.C. 284 (1965); see also Commissioner v. Court Holding Co., 324

U.S. 331 (1945).

The parties agree that a Roth IRA may own an interest in an entity that may

be recognized as a legitimate business entity for Federal tax purposes. However,

in these cases the preponderance of credible evidence compels a finding that the

resulting transfers from Strategies of the Delphi payments to Bevco were nothing

more than a mechanism for transferring value to the Roth IRA. The subcontract

agreement did not change the services provided to Delphi, and petitioner

continued to do all of the work as he had done before the contract was put in place

and after the payments were made to Bevco. Accordingly, for the reasons laid out

in greater detail below, the Court finds that the amounts transferred from

Strategies to Bevco constituted excess contributions to petitioner's Roth IRA.

1. Repetto v. Commissioner, T.C. Memo. 2012-168

In Repetto, the Court used the substance over form doctrine to reach a

similar holding. Repetto also dealt with an abusive Roth IRA transaction similar

to that described in Notice 2004-8, supra. In Repetto, the taxpayers also opened

Roth IRAs with a $1,500 contribution to each Roth IRA and then directed those

- 20 [*20] Roth IRAs to purchase 98% of the shares of two newly organized

corporations. The taxpayers' preexisting S corporation then contracted with one

of the Roth IRA corporations to provide services in exchange for cash payments."

The taxpayers were the sole employees and directors of the new corporation

owned by the Roth IRA and performed these purported services for the S

corporation on the Roth IRA corporation's behalf.

The Court held that, in substance, the service agreement between the Roth

IRA corporation and the preexisting S corporation was nothing more than a

mechanism for transferring value to the Roth IRA. The Court found that the

services performed by the Roth IRA corporation were services that had been

previously performed by the preexisting S corporation, that there was an absence

of normal business dealings between the preexisting S corporation and the Roth

IRA corporation, and that payments made by the preexisting S corporation to the

Roth IRA corporation lacked substance. Accordingly, the Court held that the

payments from the preexisting S corporation to the Roth IRA corporation were

essentially contributions to the taxpayers' Roth IRAs and that the taxpayers

consequently were liable for excise tax under section 4973.

8The taxpayers also created an additional service contract to facilitate

payments between the two new corporations owned by their respective Roth IRAs.

That portion of the case is not relevant to the discussion of these cases.

- 21 [*21] Petitioner argues that Repetto is distinguishable because there the Roth IRA

corporation created by the taxpayers issued dividends to their respective Roth

IRAs. Petitioner asserts that because Bevco never issued any dividends to his

Roth IRA, no excess contributions were made. Petitioner's argument, however, is

misguided. While it is true that the Roth IRA corporation in Repetto issued

dividends to the taxpayers' Roth IRAs, the case did not turn on this fact. In its

holding, the Court did not limit the construed excess contributions to the amounts

paid as dividends but rather found that all of the payments made by the preexisting

S corporation to the Roth IRA corporation were excess contributions. To wit, the

Court stated: "On these facts we find that the agreements and the payments made

pursuant thereto were designed to permit and permitted the Repettos to make

excess contributions to the Roth IRAs through the disguised service payments."

Repetto v. Commissioner, slip op. at 30.

These cases are substantially similar to Repetto. All of the services

petitioner performed purportedly on behalf of Bevco had been previously

performed by petitioner on behalf of Strategies. During the years at issue

petitioner performed all the sales and consulting work covered under Strategies'

contract with Delphi. Since petitioner was the only person performing the

services, the transfer of payments between Strategies and Bevco had no

- 22 [*22] substantive effect on the manner in which Strategies fulfilled its contract

obligations with Delphi. Furthermore, Delphi was unaware of Bevco's existence

as it continued to execute yearly contracts with Strategies and make all contractual

payments to Strategies.

Additionally, as in Repetto, there was a complete lack of normal business

dealings between Strategies and Bevco. The terms of the initial subcontracting

agreement effective January 2, 2002, dictated that Strategies was to pay Bevco

75% of the revenue received from Delphi. Petitioner asserts that this division is

based on the approximate time he spent performing nontraining consulting

services on behalf of Bevco. The Court disagrees with this assertion for several

reasons. First, this contract was not renewed beyond the initial term of 12 months.

Additionally, even if the agreement survived as an oral renewal, it was not strictly

adhered to when Strategies took the entire Delphi contract payment of $680,000

and transferred it to Bevco in both January 2003 and 2004. Further, Bevco never

kept any accounting of the specific work it performed in relation to the Delphi

contracts. Bevco never sent invoices to Strategies detailing what it did in

exchange for the payments, nor did it keep any records as to what services it had

performed and when. In addition, petitioner did not respect Bevco's business

checking account when he continued to move funds between Strategies and his

- 23 [*23] personal accounts without the appearance of contemporaneous

recordkeeping.

In addition to Bevco's lack of adequate records, there were inconsistencies

with respect to administration. During the years at issue petitioner's

administrative assistant was as an independent contractor for Strategies. Also,

during the same time she performed all of the administrative services petitioner

required for his services to the contracts executed with Delphi. This means that

petitioner's assistant, while an independent contractor for Strategies, performed all

of her general duties for petitioner without any regard to whether he was operating

on behalf of Strategies or Bevco. Petitioner's administrative assistant was

unaware that petitioner was operating as Bevco and thought that Bevco was a

retirement plan for petitioner--which was what she was told when she was asked

to become a 2% shareholder in Bevco. Moreover, Bevco never had a dedicated

address, email account, or phone line, and the record does not suggest that Bevco

ever attempted to market itself to any other clients beyond Strategies.

2. Asset Protection

Petitioner argues that the subcontracting agreement between Strategies and

Bevco should be respected as substantive because it served the legitimate business

purpose of protecting Strategies' assets from an anticipated lawsuit by MH. As

- 24 [*24] evidence of this legitimate purpose, petitioner relies on a threatening letter

written by MH in 2007 and the unsupported assertion that Delphi wrote a check

directly to Bevco, supposedly to shield the payment from MH.

However, petitioner terminated Bevco in August 2006 and continued to do

business with Delphi as Strategies. Furthermore, petitioner's assertion that Delphi

wrote a check directly to Bevco is incorrect. Petitioner claims that there is a copy

of this check in the evidentiary record; however, the cited exhibit actually contains

copies of Bevco's bank records that specifically indicate that the amount in

question was transferred from Strategies to Bevco.

The Court finds that petitioner's argument--largely unsupported by any

evidence beyond self-serving testimony--lacks credibility. Despite petitioner's

claim that the agreements and transfers between Bevco and Strategies served the

legitimate purpose of asset protection, petitioner continued to contract directly

between Strategies and Delphi. Furthermore, the payments issued by Delphi all

went directly to a Strategies bank account. It was only after these amounts were

received and negotiated by Strategies that they were transferred to Bevco.

3. Hellweg v. Commissioner, T.C. Memo. 2011-58

Petitioner also argues that the instant case is more similar to Hellweg than it

is to Repetto. In Hellweg the taxpayers owned an S corporation. The taxpayers

- 25 [*25] established Roth IRAs, and the Roth IRAs formed a Domestic International

Sales Corporation (DISC) that entered into a commission agreement with the S

corporation. Each Roth IRA subsequently contributed its ownership interest in the

DISC to a C corporation in exchange for all of that corporation's unissued stock.

Because of the DISC's tax treatment, the C corporations reported and paid

applicable Federal income tax resulting from the commission fees generated by the

DISC. Each C corporation then distributed some amount as a dividend to the Roth

IRA shareholder. The Commissioner determined that the transaction resulted in

excess contributions to a Roth IRA subject to section 4973 excise tax. However,

the Commissioner made neither adjustments for Federal income tax purposes nor

adjustments for reallocation of income.

The Court held that the transactions had to be treated consistently for

section 4973 excise tax and income tax purposes. The Court stated that because

the Commissioner made no section 482 adjustment that would result in

distributions from the S corporation to the taxpayers for income tax purposes the

commission payments could not be treated as excess contributions to the

taxpayers' Roth IRAs.

Here the Court is presented with a different set of adjustments in the notices

of deficiency. Although respondent did not specifically make a section 482

- 26 [*26] reallocation, the reallocation of income to Strategies served essentially the

same purpose. The use of a section 482 adjustment was not necessary because the

income was paid directly from Delphi to Strategies and incorrectly reported on

Bevco's return and not reported by Strategies for 2004. This determination,

among others, demonstrates that there were income tax adjustments for 2004 that

were consistent with respondent's excise tax adjustments.

In Repetto the taxpayers made a similar argument that the Commissioner

failed to treat that transaction with consistency for section 4973 excise tax and

income tax purposes. The Court noted that although the Commissioner did not

make a section 482 adjustment, he disallowed the business expense deductions the

S corporation claimed for its payments to the Roth IRA corporation, holding that

was sufficient to demonstrate consistency and distinguish the case from Hellweg.

Respondent made similar determinations with respect to Bevco and

Strategies. Respondent essentially determined that amounts transferred from

Strategies to Bevco were income for reporting purposes of Strategies for 2004. A

taxpayer cannot avoid tax on income he earns by assigning it to another taxpayer.

S_e_e Lucas v. Earl, 281 U.S. 111, 114-115 (1930). Therefore, the Delphi payment

was income to Strategies resulting in a distribution from petitioner's wholly

owned S corporation to petitioner, which he failed to report on his income tax

- 27 [*27] return for 2004. As in Repetto, the Court finds that respondent has

demonstrated adequate consistency such that these cases are distinguishable from

Hellweg. However, respondent did not make a similar determination for 2005.

The determination was limited to the adequate documentation of travel and meals

and entertainment expenses of Strategies. Strategies reported the Delphi income

on its Form 1120X, and respondent did not determine additional income for

Strategies for 2005.

4. Calculation of the Excise Tax Under Section 4973

As stated above, section 4973 imposes for each taxable year an excise tax of

6% for excess contributions, computed on the lesser of (1) the amount of the

excess contributions and (2) the value of the IRA account as of the end of the

taxable year. Calculating the excise tax under section 4973 therefore requires: (1)

calculating the excess contributions made; (2) calculating the Roth IRA's value at

yearend; and (3) calculating the excise tax on the lesser of the two prior

calculations. Because of the definition of an excess contribution, the excise tax

will continue to accrue on an excess contribution for each year that it remains

within the Roth IRA. Sec. 4973(f)(2).

As discussed above, the transfers between Strategies and Bevco were, in

substance, merely a mechanism for transferring value into petitioner's Roth IRA.

- 28 [*28] As such, Strategies' transfers to Bevco should properly be considered

contributions to petitioner's Roth IRA. Petitioner argues that he made no

contributions to his Roth IRA beyond the initial contribution used to fund the Roth

IRA because Bevco never issued any dividends and the value of the Roth IRA

should be the same amount as TASC reported on Form 5498, that being $2,665.

However petitioner's argument is unpersuasive. See Paschall v. Commissioner,

137 T.C. at 19. Much like what the Court found in Repetto, all of Strategies'

payments to Bevco were excess contributions.

a. Excess Contributions

Generally, section 4973(f) defines an excess contribution to a Roth IRA as

the excess of the amount contributed over the amount allowable as a contribution.

Respondent on brief reduced petitioner's excess contributions, and the Court will

treat the difference as a concession by respondent.°

The record reflects that Strategies transferred payments from the Delphi

contract to Bevco at the direction of petitioner for the benefit of his Roth IRA for

2003 and 2004. Therefore, after accepting respondent's concessions, the Court

concludes that for purposes of section 4973(f) petitioner had excess contributions

9Respondent allowed reductions from petitioner's excess contribution for

the maximum allowable contribution to a Roth IRA for 2003, 2004, and 2005

under sec. 4973(f)(2)(B).

- 29 [*29] for 2004 and petitioner had prior year excess contributions reflected in the

value of the Roth IRA in 2005.

b. Valuation of the Roth IRA

Necessary to the calculation of excise tax under section 4973 is the yearend

value of the Roth IRA. In the notices of deficiency, because Bevco's stock was

the only asset in petitioner's Roth IRA, respondent determined the yearend values

of the Roth IRA were equal to the gross receipts reported by Bevco on its

corporate tax returns. Accordingly, respondent determined that the yearend value

of petitioner's Roth IRA for 2004 was the sum of Bevco's gross receipts for its

fiscal years ending January 31, 2003 and 2004. Respondent also determined that

the yearend value of petitioner's Roth IRA for 2005 was the sum of Bevco's gross

receipts for its fiscal years ending January 31, 2003, 2004, and 2005.

Respondent argues that his determinations are presumptively correct and

that petitioner has failed to introduce any relevant evidence to satisfy his burden of

proof with respect to the yearend values of his Roth IRA. Petitioner has argued

that Bevco's stock has no value in that "Bevco was a one-man service corporation,

set up to provide consulting services" or that the value was no more than what was

reported by TASC on Form 5498, $2,665. Petitioner's assertions are similar to the

failed arguments made by the taxpayer in Paschall, that the excise tax should be

- 30 [*30] based only on the $2,000 initial contribution to his Roth IRA to purchase the

corporate stock. Petitioner has failed to present any relevant evidence to satisfy

his burden of proof that respondent's use of Bevco's reported gross receipts do not

accurately reflect the value of his Roth IRA.

The Court agrees with respondent that petitioner has failed to satisfy his

burden of proof with respect to the yearend value of petitioner's Roth IRA. The

Court finds that petitioner's excess contributions as calculated under section

4973(f) are less than the yearend values of his Roth IRA for 2004 and 2005, and

the excess contributions or prior year excess contributions as the lesser of the two

calculations should be used to calculate the excise tax.

III. Strategies' Gross Receipts

Section 61(a)(1) defines gross income as all income from whatever source

derived including compensation for services such as wages, salaries, and bonuses.

See also sec. 1.61-2(a)(1), Income Tax Regs. It is also well established that

income is taxed to the person who earns it, and a taxpayer cannot avoid income by

assigning it to another taxpayer. Commissioner v. Culbertson, 337 U.S. 733, 739-

740 (1949); Lucas v. Earl, 281 U.S. at 114-115.

Strategies received $680,000 from Delphi for 2004. The annual payment

was received pursuant to a written consulting agreement between Strategies and

- 31 [*31] Delphi, and Delphi issued the payment to Strategies under the terms of that

contract. It is therefore clear that the $680,000 payment was gross income to

Strategies for 2004.

Petitioner argues that Strategies did not err in failing to include the

$680,000 from Delphi in gross receipts on its Form 1120S for 2004. Petitioner

asserts that both he and Bevco paid tax on the proportional amounts received and

that in the end no tax savings resulted from the omission.

Petitioner's position is predicated on the notion that any of the revenue

Strategies received from Delphi that was later paid to Bevco should not be taxable

income to Strategies. However, as discussed above, the Court finds that the

substance of the subcontract agreement or any other transfers between Strategies

and Bevco was that it was merely an instrument for transferring value to

petitioner's Roth IRA in furtherance of a transaction that is substantially similar to

the listed transaction in Notice 2004-8, supra. Strategies and Delphi had a

contract that required the sole shareholder to provide substantial personal services

and in return Delphi annually paid Strategies $680,000 on their contract to include

payment in 2004. Accordingly, Strategies had additional unreported gross receipts

of $680,000 in 2004.

- 32 [*32] IV. Strategies' Business Expense Deductions

Deductions are a matter of legislative grace, and the taxpayer bears the

burden of proving that he is entitled to any deduction claimed. Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934). Section 6001 requires taxpayers to

maintain records sufficient to establish the amount of each deduction. See also

sec. 1.6001-1(a), Income Tax Regs.

Section 162(a) allows a deduction for ordinary and necessary expenses that

a taxpayer pays in connection with the operation of a trade or business. See, e.g.,

Boyd v. Commissioner, 122 T.C. 305, 313 (2004). To be "ordinary" the expense

must be of a common or frequent occurrence in the type of business involved.

Deputy v. du Pont, 308 U.S. 488, 495 (1940). To be "necessary" an expense must

be "appropriate and helpful" to the taxpayer's business. Welch v. Helvering, 290

U.S. at 113. Additionally, the expenditure must be "directly connected with or

pertaining to the taxpayer's trade or business". Sec. 1.162-1(a), Income Tax Regs.

Section 274 requires stricter substantiation for travel, meals, and certain

listed property such as passenger automobiles. See Sanford v. Commissioner, 50

T.C. 823, 828 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969); sec. 1.2745T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Section

- 33 [*33] 274(d) provides that no deduction shall be allowed unless the taxpayer

substantiates, by adequate records or by sufficient evidence corroborating the

taxpayer's own statements, the amount, time and place, and business purpose of

the expense. See Oswandel v. Commissioner, T.C. Memo. 2007-183; sec. 1.274-

5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

On its Form 1120S for 2004, Strategies claimed deductions for travel

expenses of $139,323 and meals and entertainment expenses of $11,898.

Following the audit related to these cases, respondent allowed a deduction for an

additional $73,453 of travel expenses substantiated by Strategies' canceled

checks, bringing the total to $222,474. This amount consisted of travel expenses

of $212,776 and meals and entertainment expenses of $9,699.¹° As of his reply

brief, respondent has also conceded an additional $15,800 of travel expenses for

2004, increasing the substantiated amount to $238,274."

On its amended Form 1120S for 2005, Strategies claimed deductions for

travel expenses of $274,830 and meals and entertainment expenses of $24,250.

¹°While the audit resulted in a substantial increase in the deduction for travel

expenses allowed for 2004, it resulted in a net decrease of $2,199 for meals and

entertainment expenses.

"Respondent discovered during this proceeding that a typographical error in

the audit preparation reflected a check written on October 8, 2004, of $1,725

versus the correct amount of $17,525--a difference of $15,800.

- 34 [*34] During the audit Strategies was able to substantiate expenses of only

$240,634 for 2005, consisting of $221,123 in travel expenses and $19,511 in

meals and entertainment expenses. Accordingly, respondent disallowed

deductions for travel expenses of $53,707 and meals and entertainment expenses

of $4,739 for 2005.

Petitioner claims in his brief that he "previously provided proof of his

[expense] charges via American Express to respondent" and that such proof in

combination with the extensive travel itineraries he provided at trial is sufficient to

substantiate all of his travel and meals and entertainment expenses. Petitioner

makes no other argument with respect to these expenses, nor does he make any

attempt to identify or account for these disallowed expenses that he has

purportedly substantiated.

Petitioner is a sophisticated businessman and has indeed submitted

extensive records of his travel in the form of travel calendars and trip-specific

itineraries. These records detail the dates, locations of travel, and business

purposes of his various trips. However, these travel records on their own do not

substantiate the expenses as they do not show the amounts of the expenses nor that

such expenses were actually paid. Respondent has allowed deductions for

petitioner's travel and meals and entertainment expenses to the extent petitioner

- 35 [*35] has substantiated the amounts through his American Express charges and the

production of canceled checks written on Strategies' checking account.

For 2004 petitioner produced 10 checks written to American Express

totaling $238,274. For 2005 petitioner produced an additional 10 checks totaling

$240,634. Respondent has allowed exactly those amounts as deductions for 2004

and 2005. Petitioner has made no attempts to provide the Court with evidence of

any other payments for travel and meals and entertainment expenses. With the

heightened substantiation requirements under section 274 and the lack of

additional documentation of the reported business expenses, petitioner has failed

to show that he is entitled to any deductions beyond those already allowed by

respondent.

V. Form 5329 and Section 6651(a)(1) Addition to Tax

Failure to file a tax return on the date prescribed leads to a mandatory

addition to tax unless the taxpayer shows that such failure was due to reasonable

cause and not due to willful neglect. Sec. 6651(a)(1). For each month the return

is late, an addition to tax equal to 5% of the amount of tax required to be shown on

the return shall be imposed, not exceeding 25% of the aggregate. Id. Under

section 7491(c), the Commissioner has the burden of production to show that the

imposition of an addition to tax under section 6651(a)(1) is appropriate. The

- 36 [*36] burden of proving reasonable cause and lack of willful neglect falls on the

taxpayer. Rule 142(a); United States v. Boyle, 469 U.S. 241, 249 (1985).

Taxpayers are required to file a Form 5329 for each year they have excess

contributions to an IRA. See Paschall v. Commissioner, 137 T.C. at 20. A Form

5329 is also required if a taxpayer has excess contributions from prior years. A

Form 5329 is a tax return within the meaning of section 6011, and the failure to

file a Form 5329 when a taxpayer has an excess contribution or a prior year excess

contribution can result in the imposition of an addition to tax under section

6651(a)(1). Id.; Repetto v. Commissioner, T.C. Memo. 2012-168. A Form 5329

may be filed as an attachment to an income tax return or as a separate return. See

sec. 301.6058-1(d)(2) and (3), Proced. & Admin. Regs.

The Court has found that petitioner made excess contributions to his Roth

IRA for 2004 and had prior year excess contributions reflected in the value of the

Roth IRA in 2005. Petitioner has stipulated that he did not file a Form 5329 for

either of the years at issue. Petitioner has not alleged that such failure to file was

due to any reasonable cause and not due to willful neglect.¹² Accordingly,

¹²To wit, petitioner's only argument is that he did not make excess

contributions to his Roth IRA for the years at issue and therefore is not liable for

any additions to tax.

- 37 [*37] petitioner is liable for the addition to tax under section 6651(a)(1) for 2004

and 2005.

VI. Section 6651(a)(2) Addition to Tax

Section 6651(a)(2) imposes an addition to tax on taxpayers for their failure

to timely pay the amount of tax shown on a return. A substitute for return

prepared by the Commissioner under section 6020(b) is treated as a return filed by

the taxpayer for purposes of section 6651(a)(2). Sec. 6651(g)(2); see also, e.g.,

Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), aff'd, 521 F.3d 1289

(10th Cir. 2008).

Respondent has the burden to prove that substitutes for returns satisfying

the requirements of section 6020(b) were submitted. See Cabirac v.

Commissioner, 120 T.C. 163, 170 (2003); Gleason v. Commissioner, T.C. Memo.

2011-154. A return for section 6020(b) purposes must contain sufficient

information from which to compute the taxpayer's tax liability. Spurlock v.

Commissioner, T.C. Memo. 2003-124. Respondent has produced such

information for Forms 5329 with respect to 2004 and 2005 and thus has met his

burden.

Petitioner has failed to pay the amounts shown on the substitutes for returns

respondent issued for Forms 5329. Petitioner once again does not argue that his

- 38 [*38] failure to timely pay was due to reasonable cause and not due to willful

neglect. Accordingly, petitioner is liable for the addition to tax under section

6651(a)(2) for 2004 and 2005.

VII. Section 6662A Penalty

Section 6662A provides: "If a taxpayer has a reportable transaction

understatement for any taxable year, there shall be added to the tax an amount

equal to 20% of the amount of such understatement." The penalty applies to any

item that is attributable to any listed transaction or any reportable transaction if a

significant purpose of the transaction is the avoidance or evasion of Federal

income tax. Sec. 6662A(b)(2). The penalty is increased from 20% to 30% of the

amount of the understatement if the disclosure requirements of section

6664(d)(2)(A), requiring disclosure in accordance with the regulations under

section 6011, are not met. Sec. 6662A(c). Section 6664(d) provides a defense to

section 6662A if the taxpayer acted with reasonable cause and in good faith.

However, this defense is unavailable in situations where the increased 30%

penalty applies. See sec. 6664(d)(2).

A listed transaction as defined in section 6707A(c) is a transaction that is

the same as or substantially similar to one of the types of transactions that the

Commissioner has determined to be a tax avoidance transaction and has identified

- 39 [*39] in a written notice, regulation, or other published guidance as a listed

transaction. Blak Inys. v. Commissioner, 133 T.C. 431, 445 (2009). Respondent

contends that the transaction petitioner engaged in is the same as or similar to the

listed transaction identified in Notice 2004-8, supra.

The regulations define the term "substantially similar" as "any transaction

that is expected to obtain the same or similar types of tax consequences and that is

either factually similar or based on the same or similar tax strategy." Sec. 1.60114(c)(4), Income Tax Regs. The goal in the transactions described in Notice 20048, supra, and the transaction petitioner executed is to avoid the limitations on

contributions to a Roth IRA. Furthermore, the transaction described in the notice

is factually similar to the transaction at issue, involving an individual with a

preexisting business, a new Roth IRA for that individual, and a new Roth IRA

corporation to which value from the preexisting business is transferred.

Considering all the facts and circumstances, the transaction petitioner executed is

substantially similar to that described in Notice 2004-8, supra. In addition,

petitioner failed to comply with the disclosure requirements of section 6011 and

its accompanying regulations. Therefore, petitioner is liable for the increased 30%

penalty.

- 40 [*40] Generally, section 6662A applies "to any item which is attributable to" any

listed transaction. Sec. 6662A(b)(2)(A). For 2004 respondent's notice of

deficiency determined that the Schedule E adjustments of $608,746 were

attributable to the transaction in question. These amounts included unreported

gross receipts from Strategies of $680,000 and the allowance and disallowance of

certain deductions resulting in a net $608,746 increase in income. Respondent

contends that the $680,000 of unreported gross receipts is clearly attributable to

the listed transaction discussed above. The Court agrees. The effect of that

transaction was to shift value away from Strategies, petitioner's wholly owned S

corporation, and into Bevco, a company owned by petitioner's Roth IRA. The

underreporting of income by Strategies is directly attributable to this scheme.

Respondent also asserts that the allowance and disallowance of certain

deductions for 2004 are not attributable to the listed transaction and the proper

amount subject to the penalty under section 6662A should be the full $680,000.

However, since respondent did not seek an increased section 6662A penalty

beyond the amount attributable to the $608,746 set forth in the notice of

deficiency, he has conceded the difference. Respondent has also conceded the

section 6662A penalty for 2005 because none of the amounts determined in the

notice of deficiency are attributable to the listed transaction in question.

- 41 [*41] Accordingly, petitioner is liable for the 30% penalty under section 6662A

for 2004 but only on the original amount reflected in the notice of deficiency.

The Court has considered all arguments the parties have made, and to the

extent not discussed herein, we find that they are moot, irrelevant, or without

merit.

To reflect the foregoing,

Decisions will be entered

under Rule 155.