Richardson v. C.I.R., 06-1963.

• Citation: 509 F.3d 736
• Decision Date: 11 December 2007
• Docket Number: No. 06-1963.,06-1963.
• Parties: Homer L. RICHARDSON and Gloria M. Richardson, Petitioners, v. COMMISSIONER of INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

509 F.3d 736

Homer L. RICHARDSON and Gloria M. Richardson, Petitioners, v. COMMISSIONER of INTERNAL REVENUE, Respondent.

No. 06-1963.

United States Court of Appeals, Sixth Circuit.

Argued: October 22, 2007.

Decided and Filed: December 11, 2007.

ARGUED: Robert Alan Jones, Las Vegas, Nevada, for Petitioners. Andrea R. Tebbets, United States Department of Justice, Washington, D.C., for Respondent. ON BRIEF: Robert Alan Jones, Las Vegas, Nevada, for Petitioners. Andrea R. Tebbets, Joan I. Oppenheimer, United States Department of Justice, Washington, D.C., for Respondent.

Before: MARTIN, GIBBONS, and SUTTON, Circuit Judges.

OPINION

SUTTON, Circuit Judge.

This appeal arises from income tax deficiencies and fraud-penalty assessments levied by the IRS and upheld by the Tax Court. Because the Tax Court did not clearly err (1) in finding that Homer Richardson fraudulently created sham trusts and underreported the couple's income and (2) in finding that Gloria Richardson failed to show that she was entitled to innocent-spouse relief, we affirm.

I.

Homer and Gloria Richardson spent most of their careers as hardworking and traditional, though perhaps reluctant, taxpayers. Gloria worked as a medical assistant. Homer, a graduate of the University of Missouri, managed drug stores for twelve years and ran a tool business for three. After abandoning the tool business, Homer obtained licenses to sell insurance and securities.

In late 1995, the Richardsons met representatives of the Aegis Company, who promoted several business-trust packages and the trusts' capacities to reduce taxes. Homer set up his own tax-reduction trust in August 1996 and that same year began peddling the Aegis trust packages to others. Homer targeted self-employed insurance agents and conducted informational workshops where he told attendees they could reduce their taxes by up to 70% if they used the Aegis system. He boasted that customers "could leave more money for [their] children," JA 966, and that they "essentially would become [their] own charit[ies]" using the money in their trust as a "retirement plan," JA 971. Homer sold the trust packages for $11,000 apiece, and his success in marketing them generated considerable income—gross receipts of $516,309 in 1996 and $455,750 in 1997.

In the face of this new wealth, the Richardsons created two new trusts for themselves, the HG Asset Management Company (the "business trust") and the HG Richardson Charitable Trust (the "charitable trust"). Although the trust instrument for the charitable trust prohibited transactions that were not to "charitable organizations" or would otherwise "jeopardize the federal income tax exemption of [the] trust pursuant to section 501(c)(3) of the Internal Revenue Code," JA 399-400, the Richardsons never sought § 501(c)(3) tax-exempt status for the trust. The Richardsons transferred all of their assets, including their personal residence, and all rights in their future income to the business trust in exchange for $10 and a full ownership interest in both trusts. The Richardsons maintained exclusive control over the funds of both trusts, and they named their four children as successor directors and beneficiaries of the business trust. Homer served as the Executive Director and Executive Trustee of the business and charitable trusts, and Gloria served as the Executive Secretary of each trust.

For the first six days of the trusts' existence, an Aegis associate served as a director of the business trust, but the Richardsons were otherwise the trusts' lone directors and trustees. Neither trust had any employees, and Homer made all of the day-to-day investment decisions. The Richardsons' tax returns say that Gloria spent two hours a week working for the charitable trust.

Although the Richardsons transferred all of their assets to the business trust, their lifestyle did not change. In exchange for the Richardsons' services, the business trust contractually provided them with housing, transportation, health care, educational and "incidental expenses." JA 335ae. The rationale for "maintain[ing] adequate housing," the contract with the business trust explained, was that "[t]he law says that the rental value of a residence which is maintained for the convenience of any employer is generally not taxable." JA 335ad. In this case, the "adequate housing" the trust provided was their long-time residence. The couple, in their capacity as trust directors, also authorized expenditures from the business trust to remodel their home and to purchase a car (titled in Homer's name).

In 1996 and 1997, the Richardsons filed joint personal tax returns and a separate Form 1041 (Income Tax Return for Estates and Trusts) for the business trust. On their personal returns, they reported only Homer's insurance-sales receipts ($11,069 for 1996 and $9,694 for 1997), and after taking the standard deduction and two exemptions, they reported no taxable income for either year. They opted to report their far more substantial Aegis income (a combined total of nearly one million dollars of gross income for 1996 and 1997) on the business trust's returns and managed to reduce the trust's taxable income to zero through a series of deductions. The business trust claimed deductions for the Richardsons' personal living expenses, their health insurance, their homeowners insurance, their car payments, depreciation on their residence and certain fiduciary fees. The business trust then took charitable deductions for the balance of its income ($259,880 in 1996 and $51,299 in 1997) based upon transfers to the charitable trust. The Richardsons did not file a tax return in 1996 for the charitable trust, but in 1997 and 1998 they reported the business trust's charitable contributions on a Form 990-PF (Return of Private Foundation).

The Richardsons had several opportunities to consider the legitimacy of the trusts and their tax returns. At a "board meeting" on June 27, 1997, they discussed IRS Notice 97-24, which warned taxpayers about the illegality of abusive trusts. The Notice said that "[a]busive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions," "frequently involve more than one trust" and "purport to involve charitable purposes." I.R.S. Notice 97-24, 1997-16 I.R.B. 6, 6 (Apr. 21, 1997). The IRS Notice characterized a business trust as abusive when the trust "makes payments to the trust unit holders or to other trusts created by the owner (characterized either as deductible business expenses or as deductible distributions)." Id. And it explained the legal principles behind the tax treatment of abusive trusts and threatened severe penalties against those who utilized or promoted them. Id. at 7. At this board meeting, the Richardsons allegedly consulted legal research about this IRS Notice, provided by Aegis, and determined that "the Aegis business trust is [not] the kind of trust that is addressed." JA 335az.

At some point between 1999 and early 2001, Missy Vaselaney, an attorney hired by some of Homer's clients to help them close their Aegis trusts, told Homer that the Aegis schemes were illegal. Homer dismissed her advice because she "was not a tax expert as far as trusts were concerned." JA 903. Although Homer said that he had consulted other lawyers, he never provided the name of a lawyer not affiliated with Aegis.

On July 13, 1999, the IRS sent the Richardsons a copy of Notice 97-24, advised them that they might be involved in an abusive trust and gave them an opportunity to correct their tax returns. The letter asked the Richardsons to send the IRS their trust documents, but instead of complying with the inquiry Homer questioned the agents' authority to look into the trusts and failed to attend an appointment with IRS agents to discuss the trusts.

After the Richardsons refused to cooperate, the IRS audited them and issued a series of third-party summonses to obtain the Richardsons' financial records. Homer responded to these summonses by threatening his banks with lawsuits if they disclosed any information, by threatening to sue an IRS agent because he had "had enough" of the agent's "lawless disregard for [his] rights," JA 505, and by filing a motion to quash in the district court.

After the district court denied this motion, the civil investigation lay dormant for two years while the IRS commenced a criminal investigation of the Richardsons. The IRS resumed the civil investigation in 2002. The Richardsons continued to challenge the IRS agents' authority to investigate them and failed to furnish any of the requested documents to the agents. In July, the IRS issued the Richardsons two deficiency notices ($164,442 for 1996 and $123,848 for 1997), asserting that the trusts were sham entities, attributing all of the couple's Aegis income to them and making the income taxable to them personally. In addition to assessing joint tax liabilities, the notices charged Homer individually with fraud penalties of $123,077 for his 1996 tax filings and $92,886 for his 1997 tax filings. Through all of this, Homer's "point of view," as described by one of his clients, "was to stick with it and continue to try to fight it because ... we're in the tax protesting mode." JA 982.

The Richardsons challenged the deficiency findings in the Tax Court. They argued that (1) the invalidation of the business trust as a sham entity violated Ohio law and the Tenth Amendment to the U.S. Constitution; (2) the trusts were not sham entities; (3) the fraud penalty against Homer was insufficiently supported; (4) the statute of limitations barred the assessment because there was no fraud; and (5) Gloria was entitled to innocent-spouse relief. The Tax Court upheld all of the Commisioner's findings.

II.

The Richardsons appeal the tax deficiencies and fraud penalties levied against them. Because the Tax Court's fraud, economic-substance and innocent-spouse rulings...