Fry v. C. I. R., 021191 FEDTAX, 46185-86

Docket Nº:46185-86.
Case Date:February 11, 1991
Court:United States Tax Court

61 T.C.M. (CCH) 1812




No. 46185-86.

United States Tax Court

February 11, 1991

Phillip S. Fry, pro se. [1]

David W. Otto and S. Mark Barnes, for the respondent.



Respondent determined deficiencies in and additions to petitioners' joint Federal income taxes as follows:

Additions to Tax Section
Year Deficiency 6653(b)[2] Section 6654(a)
1977 $ 108,999.00 $ 54,499.50 $ 3,878.57
1978 604,924.70 302,462.35 19,311.18
1979 1,102,594.23 551,297.12 46,092.03
Respondent determined a separate deficiency of $2,436,382.86 and additions to tax under sections 6653(b) and 6654(a) of $1,218,191.43 and $155,234.30, respectively, in petitioner Phillip S. Fry's Federal income taxes for 1980. After concessions by the parties, the issues remaining for decision are: (1) Whether petitioners failed to report substantial amounts of gross receipts during the years in issue; (2) whether petitioners are entitled to expense deductions in excess of those respondent allowed; (3) whether petitioners are liable for the addition to tax for fraud under section 6653(b); (4) whether assessments of deficiencies and additions to tax for the years in issue are barred by the statute of limitations; (5) whether petitioners are liable for self-employment taxes pursuant to sections 1401 et seq.; and (6) whether petitioners are liable for an addition to tax for failure to make estimated tax payments under section 6654(a). For clarity and convenience we have combined, in major part, our findings of fact and opinion herein because of the mass of financial and documentary data contained in the record. GENERAL AND BACKGROUND FACTS Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference. Petitioners resided in Mesa, Arizona, at the time they filed their petition in this case. Petitioners conducted business during the years 1977, 1978, 1979, and 1980 through an organization called Tax Information Center (TIC), which may appropriately be described as an income tax, estate planning, and financial consulting firm. TIC operated as Mr. Fry's sole proprietorship and was headquartered in buildings on part of 120 acres of land petitioners owned near New Concord, Ohio. [3] By 1980 petitioners were successful in soliciting a nationwide clientele of over 1,000 clients for TIC's tax return preparation practice. Mr. Fry graduated from Case Western Reserve with a degree in economics. He also attended law school classes at the University of Akron and Georgetown University Law Center, and he has taken courses toward earning a masters of business administration at George Washington University. However, he has not received a graduate degree from any of these institutions. Throughout his education, Mr. Fry never enrolled in a course involving Federal income taxation. Even so, he was variously identified in TIC promotional materials as “ one of the nation's most creative year-round income tax and estate planning specialists” ; a “ tax accountant and multi-millionaire” ; a “ highly eloquent lecturer who has explained our nation's complicated tax laws in everyday, easy to understand words” ; a “ leading tax consultant” ; and a “ multi- millionaire tax specialist” . TIC marketed its services through an aggressive self-promotion campaign featuring free seminars at which Mr. Fry was the featured speaker. Petitioners scheduled seminar dates at motels or hotels in various towns and cities and promoted them through advertisements in local newspapers. The newspaper advertisements announced that Mr. Fry, as a noted tax expert, would be speaking on the subjects of tax savings and financial planning. In addition, he would appear on local talk shows to discuss theories of taxation and estate planning and to further publicize the upcoming seminar. During the seminars, Mr. Fry described the tax burden borne by the average wage-earning taxpayers and self-employed people. He identified the benefits available through the use of estate planning devices, particularly involving revocable trusts, and promoted TIC's services to the audience. Mr. Fry conducted interviews after the seminars where he and his confederates sought to contract with individuals for TIC's services. He also offered books and other publications he had written for sale through another Fry-owned entity, “ Let the People Know” Law Book Store. Mr. Fry authored books with the following titles and copyright dates: “ How to Disinherit the IRS & Probate Court” (copyright 1973, 1975, 1977, 1978 and 1979); “ Pay No Income Tax Without Going to Jail” [4] (copyright 1975 and 1978); “ How to Cut Your Taxes in Half By Incorporating Your Job or Business” (copyright 1976 and 1978); “ Our Lady of Perpetual Deductions” (copyright 1977); and “ Blood Taxes at Harvest Time” (copyright 1977). [5] Individuals interested in TIC's services signed a formal agreement as to the scope of services to be provided and the fee charged. [6] The client fee was calculated on the financial condition of the particular client and was paid in cash or by credit card at the time of signing the TIC Agreement. Prospects were officially considered TIC's clients after signing the agreement. TIC created at least 14 regional franchises staffed by sales representatives for the promotion and sale of TIC's services. Mr. Fry sold one TIC franchise for $25,000. Sales representatives received a percentage of the fees collected from TIC clients solicited by the representative. Mrs. Fry attended high school through the eleventh grade, but has a general equivalency degree (ged). She worked with Mr. Fry at TIC from its inception through 1980 and was described as TIC's business manager and publicity director. However, she received no direct compensation for her services to TIC during the years in issue. Her duties included assisting in the preparation and maintenance of internal books and records. Petitioners made a practice of opening a separate bank checking account for most of the entities (or trusts) they created, and each had signatory authority on the checking accounts they established. Mrs. Fry was in charge of overseeing the banking transactions in each checking account of petitioners, enterprises. The deposits were handled by Mrs. Fry or TIC office personnel under her supervision. Mrs. Fry prepared the checks and she signed the majority of them, often at her husband's direction. During 1977 through 1980, Mrs. Fry signed thousands of checks drawn on accounts for TIC and other entities petitioners controlled. TIC was the nucleus of petitioners' operations. However, during 1977 through 1980, petitioners also conducted various other business activities and promotions through subentities. As previously alluded to, “ Let the People Know” Law Book Store (LBS) was a clearinghouse for books and publications authored by Mr. Fry. Petitioners created Orlando Advertising to obtain advertising agency discounts for their promotion of TIC. [7] Mr. Fry used the name “ William Carlson” and Mrs. Fry used the name “ Kathy Orlando” when conducting business through the agency. Petitioners created Family Health & Improvement Society (FHIS) in the form of a trust. FHIS operated as a mail order ministry whereby clients of TIC had the opportunity to form their own church as a tax avoidance device. As an adjunct to FHIS, petitioners created a legal services plan to benefit the members of FHIS and named it Group Legal Plan (GLP). Whenever trusts were prepared for TIC clients, the trusts were prepared by GLP attorneys. GLP attorneys were independent lawyers practicing in Pennsylvania and Arizona who were paid for their services through TIC [8] FRY FAMILY TRUSTS In 1973 Mr. Fry formed the Fry Family Trust, a grantor trust. In 1976 petitioners formed a second grantor trust as a successor to the Fry Family Trust called the MLJ Trust. The two trust documents are identical except for the name of the trust created. Mr. Fry was the trustee and sole income beneficiary of the Fry Family Trust and the MLJ Trust. Mrs. Fry was the successor trustee for both trusts. In 1977 and the years that followed, petitioners used the MLJ Trust exclusively. SYNDICATED TRUSTS Beginning in 1978, petitioners encouraged investors and clients of TIC to invest in Precious Metals Holding Company, a Trust (Precious Metals). Precious Metals was designed to be an investment vehicle for Mr. Fry and certain of his clients. Mr. Fry served as the trustee of the Precious Metals trust. By 1979, petitioners began to actively prepare and present other investment opportunities to TIC clients. [9] Eight syndicated trusts were organized and participations sold to TIC investors in 1979. Most of these syndicated trusts involved an investment in mobile home parks around the United States. In 1980, eight additional syndications were formed and sold by Mr. Fry, each taking the form of a trust. The syndications existing and marketed to clients during 1979 and 1980 were as follows:
1979 1980
Precious Metals Holding Capital Appreciation Trust
Co. A Trust (1978) Columbus Game Arcade, A Trust
Casa Serena Trust I Energy Lodging Trust
Casa Serena Trust II Innovative Investors Trust
Central Ohio Trust #1 Jordan Estates, A Trust
Hamilton Road Partnership, Fantasyland Trust I
A Trust (1978) Orchard Lakes Estates Trust
La Oficina Trust Sports Paradise Recreational

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