Alexander v. Comm'r

• Decision Date: 29 August 2013
• Parties: STANLEY L. ALEXANDER AND RUTH A. ALEXANDER, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

STANLEY L. ALEXANDER AND RUTH A. ALEXANDER, ET AL.,¹ Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2013-203
Docket No. 7907-06
Docket No. 7908-06
Docket No. 7909-06
Docket No. 7910-06
Docket No. 14047-07

UNITED STATES TAX COURT

Filed August 29, 2013

David C. Greer and Robert H. Hishon, for petitioners.

Richard J. Hassebrock, Timothy S. Sinnott, David S. Weiner, Abigail Raines, and Archana Ravindnath, for respondent.

Page 2

CONTENTS

FINDINGS OF FACT. . . . . . . . . . . . . . . . . . . . . . . 12

1. Dr. and Mrs. Stanley Alexander. . . . . . . . . . . . . . . . . . . . . . . 12

2. Fountain Skin Care, Cosmetic, Plastic & Reconstructive Surgery, Inc.. . . . . . . . . . . . . . . . . . . . . . . 14

3. Stanley L. Alexander, M.D., Inc.. . . . . . . . . . . . . . . . . . . . . . . 16

4. Anthony Kritt. . . . . . . . . . . . . . . . . . . . . . . 17

5. The Cincinnati Vein Clinic & the Midwest Vein Center.. . . . . . . . . . . . . . . . . . . . . . . 18

6. Kenneth Reiserer. . . . . . . . . . . . . . . . . . . . . . . 18

7. Galen Co./Da Vinci Group. . . . . . . . . . . . . . . . . . . . . . . 19

8. Offshore Employee Leasing Transaction. . . . . . . . . . . . . . . . . . . . . . . 20

9. Nationwide Executive Staff Leasing, Inc. . . . . . . . . . . . . . . . . . . . . . . 23

10. Professional Leasing Services, Inc.. . . . . . . . . . . . . . . . . . . . . . . 25

11. Montrain Services, Inc.. . . . . . . . . . . . . . . . . . . . . . . 25

12. International Advisory Services, LLC. . . . . . . . . . . . . . . . . . . . . . . 27

13. Rosmol. . . . . . . . . . . . . . . . . . . . . . . 28

14. Ruritania. . . . . . . . . . . . . . . . . . . . . . . 28

15. London & Capital. . . . . . . . . . . . . . . . . . . . . . . 29

16. Associated Enterprises, Ltd.. . . . . . . . . . . . . . . . . . . . . . . 29

17. Blenheim Fiduciary Group Ltd./Elfin Trust Group. . . . . . . . . . . . . . . . . . . . . . . 30

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18. Returns. . . . . . . . . . . . . . . . . . . . . . . 32

OPINION. . . . . . . . . . . . . . . . . . . . . . . 33

I. Burden of Proof. . . . . . . . . . . . . . . . . . . . . . . 33

II. Deficiencies of Dr. and Mrs. Alexander . . . . . . . . . . . . . . . . . . . . . . . 34

A. Statute of Limitations . . . . . . . . . . . . . . . . . . . . . . . 34

B. Underpayment of Wage Income to Dr. Alexander. . . . . . . . . . . . . . . . . . . . . . . 35

1. Constructive Receipt of Money Transferred Into the Deferred Compensation Plan. . . . . . . . . . . . . . . . . . . . . . . 35
2. Sections 402(b)(1) and 83(a). . . . . . . . . . . . . . . . . . . . . . . 37
3. Economic Substance Doctrine. . . . . . . . . . . . . . . . . . . . . . . 37

C. Whether Dr. and Mrs. Alexander Are Entitled to Schedule F Farming Loss Deductions for 2001 and 2002. . . . . . . . . . . . . . . . . . . . . . . 39

1. Substantiation of Deductions. . . . . . . . . . . . . . . . . . . . . . . 39
2. Activity Engaged In for Profit . . . . . . . . . . . . . . . . . . . . . . . 40

D. Whether Dr. and Mrs. Alexander Are Entitled to Unsubstantiated Schedule A Mortgage Interest Deductions for 2001 and 2002. . . . . . . . . . . . . . . . . . . . . . . 40

III. Penalties and Additions to Tax for Dr. and Mrs. Alexander. . . . . . . . . . . . . . . . . . . . . . . 41

A. Section 6663 Fraud Penalties for the Underpayments of Tax Associated With the OEL Transaction. . . . . . . . . . . . . . . . . . . . . . . 41

1. Underpayment of Tax. . . . . . . . . . . . . . . . . . . . . . . 41
2. Fraudulent Intent. . . . . . . . . . . . . . . . . . . . . . . 42

a. Analysis of Fraudulent Intent. . . . . . . . . . . . . . . . . . . . . . . 43
b. Badges of Fraud. . . . . . . . . . . . . . . . . . . . . . . 45

i. Consistent Pattern of Underreporting. . . . . . . . . . . . . . . . . . . . . . . 46
ii. Lack of Credibility of the Taxpayer's Testimony. . 46
iii. Concealment of Income or Assets . . . . . . . . . . . . . . . . . . . . . . . 47
iv. Dr. and Mrs. Alexander's Failure to Maintain Adequate Records Pertaining to Their Participation in the OEL Transaction and To Fully Cooperate in the Examination of Their Returns or in the Litigation. . . . . . . . . . . . . . . . . . . . . . . 48
v. Failure To File a Return for 2003. . . . . . . . . . . . . . . . . . . . . . . 48

Page 4

vi. Dr. and Mrs. Alexander's Attempts at Distancing Themselves From the OEL Transaction. . . . . . . . . . . . . . . . . . . . . . . 49

3. Conclusion. . . . . . . . . . . . . . . . . . . . . . . 50

B. Section 6662(a) Penalty for Underpayment of Tax. . . . . . . . . . . . . . . . . . . . . . . 50

1. Substantial Understatement . . . . . . . . . . . . . . . . . . . . . . . 51
2. Reasonable Cause Under Section 6664. . . . . . . . . . . . . . . . . . . . . . . 51

C. Section 6651(f) Fraudulent Failure To File Addition to Tax for 2003. . . . . . . . . . . . . . . . . . . . . . . 54

D. Section 6651(a)(2) and 6654 Additions to Tax for 2003 . . . . . . . . . . . . . . . . . . . . . . . 55

1. Section 6651(a)(2). . . . . . . . . . . . . . . . . . . . . . . 55
2. Section 6654. . . . . . . . . . . . . . . . . . . . . . . 56

E. Section 6651(a)(1) Failure To File Addition to Tax for 2002 and 2003. . . . . . . . . . . . . . . . . . . . . . . 57

IV. Whether Mrs. Alexander Is Entitled to Innocent Spouse Relief Under Section 6015. . . . . . . . . . . . . . . . . . . . . . . 58

V. Fountain's Deficiencies. . . . . . . . . . . . . . . . . . . . . . . 64

A. Dr. Alexander Was an Employee of Fountain During the OEL Transaction. . . . . . . . . . . . . . . . . . . . . . . 64

1. Employment Status. . . . . . . . . . . . . . . . . . . . . . . 64
2. Relief Under Section 530 . . . . . . . . . . . . . . . . . . . . . . . 66

B. Fountain Is Liable for Employment Taxes With Respect to Dr. Alexander's Services During the Taxable Quarters Ended March 31, 1999, Through December 31, 2003. . . . . . . . . . . . . . . . . . . . . . . 69

VI. Fountain's Penalties and Additions to Tax. . . . . . . . . . . . . . . . . . . . . . . 69

A. Fraud Penalty Under Section 6663. . . . . . . . . . . . . . . . . . . . . . . 69

B. Penalty Under Section 6662. . . . . . . . . . . . . . . . . . . . . . . 70

C. Section 6656 Penalty. . . . . . . . . . . . . . . . . . . . . . . 70

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MEMORANDUM FINDINGS OF FACT AND OPINION

GOEKE, Judge: Dr. Stanley Alexander, a plastic surgeon, engaged in a transaction under which he used an offshore entity to purportedly lease back his services to his medical practice company in Ohio, ostensibly to facilitate a deferred retirement program in which a large part of his income rested untaxed. His participation in this plan is the principal reason for respondent's determinations of income tax deficiencies against Dr. Alexander and his wife, Ruth A. Alexander, determinations of deficiencies against his medical practice company for employment tax, and determinations against all consolidated petitioners for various additions to tax and penalties, including some for fraud.

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure

Respondent determined deficiencies in and additions to tax with respect to petitioners' Federal income tax as follows:

Page 6

Docket No. 7907-06--Stanley L. Alexander & Ruth A. Alexander

Year	Deficiency	Additions to tax/penalties
		Sec. 6651(a)(1)	Sec. 6662(a)	Sec. 6663
1999	$152,835	$30,469.60	$30,587.00	$114,626.25
2000	157,746	23,507.60	54,425.00	118,309.50
2001	221,104	54,425.00	44,220.80	165,828.00

Docket No. 7908-06--Ruth A. Alexander

Year	Deficiency	Additions to tax/penalties
		Sec. 6651(a)(1)	Sec. 6662(a)	Sec. 6663
2002	$241,182	$60,485.28	$48,176.20	$180,660.75

Docket No. 7909-06--Stanley L. Alexander

Year	Deficiency	Additions to tax/penalties
		Sec. 6651(a)(1)	Sec. 6662(a)	Sec. 6663
2002	$241,182	$60,485.28	$48,176.20	$180,660.75

Docket No. 7910-06--Stanley L. Alexander

Year	Deficiency	Additions to tax/penalties
		Sec. 6651(f)	Sec. 6651(a)(2)	Sec. 6664
2003	$175,291	$113,202.33	(2)	$4,030.55

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Docket No. 14047-07--Fountain Skin Care, Cosmetic, Plastic & Reconstructive Surgery, Inc.

Quarter ended	OASDI	Hospital insurance	Income tax withholding	Penalty sec. 6663(a)	Penalty sec. 6656	Penalty sec. 6662(a)
3/31/99	$9,002.40	$5,412.56	$52,259.20	$50,005.62	$720.75	-0-
6/30/99	2,250.66	2,512.85	24,262.00	21,769.09	238.17	-0-
9/30/99	2,250.66	2...