Fairbank v. Comm'r of Internal Revenue
| Decision Date | 23 February 2023 |
| Docket Number | 13400-18 |
| Parties | LEIGH C. FAIRBANK AND BARBARA J. FAIRBANK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Robert S. Williams and Samuel T. Houston, for petitioners.
Sean P. Deneault, Edward A. Waters, Mark J. Tober, David D Duncan, and A. Gary Begun, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
This case arises from a notice of deficiency dated April 12, 2018 in which the Internal Revenue Service (IRS or respondent) determined income tax deficiencies for taxable years 2003 2004, 2005, 2006, 2007, 2008, 2009, and 2011 (years at issue) of $20,088, $5,078, $6,136, $23,011, $10,785, $15,910, $28,130, and $95,994, respectively, and accuracy-related penalties under section 6662[1] of $4,018, $1,016, $1,227, $4,602, $2,157, $3,182, $5,626, and $19,199, respectively. After concessions,[2] the issues for decision are whether (1) respondent's notice of deficiency was issued timely under section 6501, (2) respondent's adjustments to petitioners' federal income tax for the years at issue should be sustained on account of Mrs. Fairbank's beneficial ownership of a foreign account held at Union Bank of Switzerland (UBS), and (3) petitioners are liable for accuracy-related penalties under section 6662(a) and (b)(1) for the tax years at issue.
Petitioners maintain that respondent's assessment in this case is time barred by the three-year period of limitations in section 6501(a). Respondent, however, argues the period of limitations for assessment remains open under section 6501(c)(8) since petitioners failed to file the requisite information returns related to Mrs. Fairbank's foreign bank accounts with their joint Forms 1040, U.S. Individual Income Tax Return. We agree with respondent's position and hold petitioners have failed to properly report Mrs. Fairbank's beneficial ownership in her foreign UBS account; accordingly, the period of limitations under section 6501 remained open at the time respondent's notice of deficiency was issued. Therefore, we sustain respondent's determination of tax deficiencies and penalties against petitioners as set forth herein.
This case was tried during the Court's Jacksonville, Florida remote trial session. At trial the parties stipulated to most of the facts, which are so found. Petitioners resided in Florida when they timely filed their Petition on July 9, 2018. This case concerns Mrs. Fairbank's transfers with foreign banking institutions in Switzerland during tax years 2003 through 2009.
Petitioners have been married since 2003 and were U.S. citizens during all relevant years at issue. While petitioners resided in Sopchoppy, Florida, when the Petition was filed, Mrs. Fairbank previously resided in Fullerton, California.
Leigh Fairbank earned a bachelor's degree from West Point and holds a master's degree in business from Georgia State University.
Mrs. Fairbank's legal name is Barbara Jean Fairbank. Mrs. Fairbank was formerly known as Barbara Hagaman, and she held a U.S. passport during all relevant years at issue. Mrs. Fairbank holds an associate's degree from Stephens College in Columbia, Missouri. During much of her adult life Mrs. Fairbank was mostly a homemaker and has seldom worked outside the home. Before her marriage to Mr. Fairbank, Mrs. Fairbank was married to Earl Hagaman, whom she had met in 1960. On November 24, 1961, Mrs. Fairbank married Mr. Hagaman in California, and together they had four children. Their marriage was coming to an end in early 1981 when Mrs. Fairbank (then Mrs. Hagaman) separated from Mr. Hagaman.
Mr. Hagaman was a certified public accountant (CPA) and generally worked for large corporations throughout his marriage to Mrs. Fairbank, until late 1977, when he became an oil broker and began working for his own companies. Before starting his own business ventures, Mr. Hagaman had a successful career in industry working for companies such as Hughes Aircraft, United Convalescent Hospital, Litton Industries, and Urich Oil Co. Being well versed in financial matters, Mr. Hagaman took care of the family finances during his marriage to Mrs. Fairbank. Mr. Hagaman held financial accounts or foreign entities in Liechtenstein, New Zealand, and Switzerland. In 1985 Mr. Hagaman became a permanent resident of New Zealand.
Despite Mr. Hagaman's personal financial success, he failed to file federal income tax returns for tax years 1980 through 1982, a period during which he moved in excess of $16 million from banks in the United States to banks in Switzerland and New Zealand. On April 7, 1983, the IRS served summonses on Mr. Hagaman concerning his failure to pay income tax from 1980 through 1982 on profits earned in an oil brokerage business. On July 25, 1985, the IRS sent Mr. Hagaman and Mrs. Fairbank (then Mrs. Hagaman) a Notice of Jeopardy Assessment and Right of Appeal (jeopardy assessment notice) regarding tax years 1980 through 1982. In the jeopardy assessment notice the IRS stated that Mr. Hagaman had "engaged in sham operations, involving the purchase and sale of crude oil, and [had] derived large profits from these activities."
According to the jeopardy assessment notice, these foreign operations earned Mr. Hagaman substantial income within the United States which he failed to report on his federal income tax returns. The total amount of tax, additions to tax, and interest due in the jeopardy assessment notice was $14,766,694 for tax years 1980 through 1982. On March 3, 1987, the IRS issued Mr. Hagaman and Mrs. Fairbank a Notice of Levy concerning their joint federal income tax liabilities of $18,145,524 for tax years 1980 through 1982. The Notice of Levy was served upon Bank of America in Marina del Rey, California, with a summons requesting additional information about accounts held jointly and individually by Mr. Hagaman and Mrs. Fairbank.
On May 9, 1990, Mrs. Fairbank received innocent spouse relief from her joint and several federal income tax liabilities under section 6013(e) for tax years 1980 and 1981 pursuant to a stipulated decision of this Court. Mr. Hagaman agreed to settle his federal income tax deficiencies (with the IRS) for tax years 1980 through 1982 and a stipulated decision reflecting such was entered by this Court on May 9, 1990.
In early 1981 Mr. Hagaman and Mrs. Fairbank separated, and a Final Judgment of Dissolution of Marriage was granted on May 21, 1982, by the Los Angeles County Superior Court (Superior Court). As part of the divorce proceedings, Mr. Hagaman and Mrs. Fairbank signed an Agreement of Interim and Partial Distribution of Community Property (interim agreement). At the time the interim agreement was signed in 1983, Mr. Hagaman and Mrs. Fairbank had yet to resolve all issues regarding the allocation of their community property and liabilities from their marriage. The interim agreement's validity and enforceability was not dependent upon the approval of the Superior Court, and it was subject to nondisclosure provisions since it was intended to remain a private matter as between the parties. During the divorce proceedings, Mrs. Fairbank was represented by her attorney, Robert Brock.
According to the interim agreement, Section V, Temporary Child Support, Mr. Hagaman agreed to pay Mrs. Fairbank child support of $500 per month per child for a total of $1,000 per month commencing on April 1, 1983, and continuing until the child turned 18, died, became self-supporting, married, was emancipated, or was not residing with Mrs. Fairbank, or until further order of court, whichever event came first. Despite the terms of the interim agreement, Mr. Hagaman subsequently orally agreed to pay Mrs. Fairbank child support of $40,000 per year for 20 years and then to divide the remaining community assets between them. Mr. Hagaman kept his word pursuant to the oral amendment to the interim agreement and made the child support payments to Mrs. Fairbank, who noted receiving $40,000 in child support for years 1984 through 1988.
Notwithstanding the terms of the interim agreement and the subsequent oral amendment thereto, Mr. Hagaman and Mrs. Fairbank again orally amended the interim agreement in December 1989 when Mrs. Fairbank traveled with their children to New Zealand for the holiday season. The second oral amendment to the interim agreement resulted in Mr. Hagaman's agreeing to make three lump-sum cash payments. Under the terms of the second oral amendment, these three lump-sum payments were to be made in January 1990, October 1993, and October 1995, respectively, and in the amounts of $190,000, $190,000, and $160,000, respectively. The interim agreement was silent as to any foreign bank accounts. From December 2005 to October 2012, Mr. Hagaman and Mrs. Fairbank renewed litigation in the Superior Court over their divorce, principally involving the unresolved division of their community property.
As part of this renewed litigation, on November 29, 2007, Mr. Hagaman filed with the Superior Court a Responsive Declaration to Order to Show Cause or Notice of Motion for Injunctive and Other Restraining Orders. In his declaration, Mr. Hagaman stated that the "payments to [Mrs. Fairbank] were made through an attorney in Switzerland, Dr. Walter Müllhaupt, to [Mrs. Fairbank's] attorney, Dr. Xavier Lienert, in Switzerland." Mr. Hagaman further stated that Mrs. Fairbank "wanted the payments to be made to her Swiss establishment, Xavana Establishment."
On October 23, 2012, the Superior Court entered a Judgment on Reserved Issues. The included stipulation notes Mrs Fairbank's assertion...
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