Fields v. Commissioner
| Decision Date | 19 September 1996 |
| Docket Number | Docket No. 26636-87. |
| Citation | 72 T.C.M. 675 |
| Parties | Charles L. Fields and Barbara S. Fields v. Commissioner. |
| Court | U.S. Tax Court |
Lawrence F. Ruggiero and Robert Koppelman, for the petitioners.1
Cheryl A. Mclnroy, Elizabeth A. Maresca, and Steven D. Tillem, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Charles L. Fields and Barbara S. Fields petitioned the Court to redetermine respondent's determinations with respect to their 1980 through 1982 taxable years. Respondent determined deficiencies of $525,389, $243,493, and $1,365 in their 1980, 1981, and 1982 Federal income taxes, respectively. Respondent also determined that Mr. Fields was liable for a: (1) $262,695 addition to his 1980 tax under section 6653(b), (2) $121,747 addition to his 1981 tax under section 6653(b), (3) $683 addition to his 1982 tax under section 6653(b)(1), and (4) time-sensitive addition to his 1982 tax under section 6653(b)(2) with respect to that year's entire deficiency. Respondent's determinations are reflected in a notice of deficiency dated May 14, 1987.
We must decide:
1. Whether petitioners received commission income of $487,104 and $182,020 in 1980 and 1981, respectively.2 We hold they did.
2. Whether petitioners received dividend income of $22,135 and $19,510 in 1980 and 1981, respectively. We hold they did.
3. Whether petitioners received interest income of $7,791, $37,612, and $8,429 in 1980, 1981, and 1982, respectively. We hold they did.
4. Whether Mr. Fields (petitioner) is liable for additions to his 1980 through 1982 taxes for fraud. We hold he is.
5. Whether the 3-year period of limitation under section 6501(a) bars the assessment and collection of tax for any of the subject years. We hold it does not.
6. Whether Mrs. Fields is an innocent spouse under section 6013(e). We hold she is not.
Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the subject years. Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded to the nearest dollar.
Some of the facts have been stipulated and are so found. The stipulations and attached exhibits are incorporated herein by this reference. Petitioners have been married for the last 33 years, and they resided in Rye, New York, when they filed their petition herein. They are cash method taxpayers, and they signed and filed 1980, 1981, and 1982 Forms 1040, U.S. Individual Income Tax Return, using the status of "Married filing joint return". Their 1980, 1981, and 1982 returns reported taxable income of $56,847, $71,010, and $5,550, respectively. Gross (and adjusted gross) income for the respective years were reported as $86,153, $107,373, and $37,766. Wages for the respective years were reported as $96,412, $111,652, and $40,166.
Petitioner is well-educated in the intricacies of the business world, and he has been deeply involved in that world for almost 40 years. He received a bachelor's degree in political science with a minor in business from Florida A & M University in 1958. He received a master's degree in business from Columbia University Graduate School of Business in 1972. He lectured at Northwestern University, Harvard University, University of Chicago, Florida A & M University, and Southern University in Louisiana, mainly on the procedures and policies for conducting business in Africa. He taught as an adjunct professor in organizational behavior at the Graduate School of Business at Harvard University. He consulted for the Commerce Department, on the topic of conducting business in Africa. He served as an executive, during at least the subject years, advising management on development work and international trading. He founded the National Black MBA Association. He created the first database of minorities with bachelor's, master's, and Ph.D. degrees.
BarSon International Ltd. (BarSon) is a Delaware corporation that was organized by petitioner and Dr. Walter F. Young (Dr. Young) on March 4, 1977, to provide consulting services for American corporations abroad and to entice American construction companies to build in Africa.4 Dr. Young and petitioner are BarSon's president and secretary, respectively, and they each own 50 percent of its stock. BarSon is a cash method taxpayer, and its taxable year ends on March 31.
On November 19, 1979, BarSon and Ashland Oil, Inc. (Ashland), entered a written agreement under which BarSon's managing directors (petitioner and Dr. Young) or other key employees would advise Ashland on starting business abroad (including the requirements for purchasing crude oil in foreign countries) in exchange for a daily fee of $750 plus expenses.5 The agreement did not contain a provision for Ashland to pay BarSon commissions on the actual purchase of oil by Ashland. Petitioner and Dr. Young, on behalf of themselves, entered into a separate oral agreement with Ashland under which Ashland would pay commissions to petitioner and Dr. Young for any oil purchased as a result of their efforts. Petitioners have never reported any income on their personal income tax returns for commissions paid under the terms of the oral agreement with respect to petitioner's services.
In an attempt to secure large amounts of crude oil for Ashland, petitioner and Dr. Young traveled many times to Cameroon (at the instruction of Ashland), and they met with officials of Cameroon's national oil company, Socioto Nationale des Hydrocarbures (SNH). In March 1980, Ashland and Cameroon agreed that Ashland would acquire oil from SNH through Ashland's Bermuda subsidiary, Ashland (Bermuda) Limited (ABL).
At or about the same time, petitioner and Dr. Young decided that they wanted to organize a corporation in Bermuda or some other traditional tax haven to avoid Federal income tax on their commissions from Ashland. They contacted the law firm of Danzansky, Dickey, Tydings, Quint & Gordon (which was merged into Finley, Kumble, Wagner, Heine, Underberg & Casey on or about January 1, 1981, and which with its successor will hereinafter be referred to as Finley Kumble),6 to obtain assistance in organizing such a corporation. Following discussions with petitioner and Dr. Young, Finley Kumble understood that petitioner and Dr. Young would render valuable management and consulting services to the foreign corporation as corporate employees, and that these services would result in substantial revenue. Finley Kumble anticipated that the corporation would distribute the revenue to Dr. Young and petitioner in the form of salaries over several years. Finley Kumble believed that, although the corporation would most likely be a "controlled foreign corporation" and a "foreign personal holding company", a careful structuring of the arrangement would allow petitioner and Dr. Young to escape the U.S. tax until they actually received their salary payments. Finley Kumble believed that the arrangement was subject to attack by the Commissioner under section 367 or 482, or by arguing doctrines such as: (1) Substance over form, (2) sham transaction, (3) assignment of income, or (4) deductibility of compensation. Finely Kumble relayed these understandings, anticipations, and beliefs to petitioner and Dr. Young. Petitioner and Dr. Young chose to organize the foreign corporation.
Finley Kumble, on behalf of petitioner and Dr. Young, contacted Max Quin (Mr. Quin), an attorney with a Bermuda law firm named Vaucrosson's, to organize the corporation because it was customary to use Bermudan counsel to organize a Bermudan corporation. On or about April 10, 1980, Mr. Quin organized the corporation for petitioner and Dr. Young under the name of Cameroon Atlantis International (CAI).7 Finley Kumble helped Mr. Quin in the organization by relaying to him information from petitioner and Dr. Young. Petitioner was very active in the organizational process.
CAI's address was Vaucrosson's address in Bermuda, and CAI was organized under the Companies (Incorporation by Registration) Act of 1970 (the Act) as an exempt company that could not hold land. CAI's initial capital was 12,000 shares of stock with a $1 par value,8 and all of its shares were issued to nominees for petitioner and Dr. Young. Permission had been given on April 25, 1980, by Bermuda's Minister of Finance, to incorporate CAI as an exempt company, and CAI's memorandum of association was deposited in the Bermudan Office of the Registrar of Companies in accordance with the provisions of the Act, on April 28, 1980. Upon its organization, petitioner and Dr. Young transferred to CAI their contractual right to receive commissions from Ashland on any barrels of oil purchased as a result of their efforts.
The sales of oil between ABL and Cameroon in 1980 and 1981 were accomplished through the use of back-to-back contracts involving CAI as an intermediary. Under these contracts, CAI contracted with SNH to buy oil at a fixed price, and CAI contracted to sell that same oil to ABL for the same price plus a commission of 25 to 30 per barrel.9 ABL received 404,968 barrels of oil shipped from Cameroon on March 30, 1980, and ABL paid CAI a 30-cent-per-barrel commission (totaling $121,490) for this shipment. The oil was purchased on the spot market, and local custom did not allow for a written contract on the delivery.
On April 10, 1980, CAI agreed to buy 190,000 metric tons of oil from SNH at a set price, with 120,000 of these metric tons to be delivered in April 1980 and the balance to be delivered in May 1980. On April 21, 1980, ABL agreed with CAI to purchase the same oil at the same price plus a commission of 30 cents per barrel.10 Ashland arranged the terms for shipping the oil, it nominated the vessels used for lifting the oil, and it set the mode of payment for the oil. Petitioner and Dr. Young arranged for ABL's purchase of the oil, and ABL paid them...
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