Ioane v. Commissioner of Internal Revenue, T.C. Memo. 2009-68 (U.S.T.C. 3/26/2009)
| Decision Date | 26 March 2009 |
| Docket Number | No. 9903-06.,9903-06. |
| Parties | MICHAEL SCOTT IOANE AND SHELLY JEAN OLSON-IOANE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
Wesley J. Wong and David W. Sorensen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
This case is before the Court on a petition for redetermination of deficiencies concerning petitioners' 2002 and 2003 tax years. Respondent determined that petitioners are liable for Federal income tax deficiencies of $2,104,868 and $457,468 for their 2002 and 2003 tax years, respectively. Respondent also determined a $314,754.30 addition to tax pursuant to section 6651(a)(1)1 for their 2002 tax year and accuracy-related penalties under section 6662(a) of $420,973.60 and $91,493.60 for their 2002 and 2003 tax years, respectively. On brief, respondent concedes that petitioners are not liable for unreported interest income of $1,060.26 in 2002 and $18 in 2003. The issues remaining for decision are:
1) Whether the income of various trusts2 and $140,711 in distributions from a corporation are income to petitioners in 2002 and 2003;
2) whether petitioners are liable for self-employment tax for 2002 and 2003;
3) whether petitioners are entitled to a $14,562 deduction for 2002 and a $14,823 deduction for 2003, as claimed on Schedules C, Profit or Loss From Business, for those tax years;
4) whether petitioners are entitled to a deduction for a $99,172,118 net operating loss (NOL) in 2002 and for a $99,134,330 NOL carryover in 2003;
5) whether petitioners are entitled to itemized deductions of $8,840 for medical and dental expenses in 2002;
6) whether petitioners are entitled to personal exemptions of $15,000 in 2002 and $15,250 in 2003, an earned income tax credit of $2,194 in 2003, and additional child tax credits of $1,800 in 2002 and $1,377 in 2003;
7) whether petitioners are liable for a $314,754.30 addition to tax under section 6651(a)(1) for 2002; and
8) whether petitioners are liable for accuracy-related penalties under section 6662(a) of $420,973.60 for 2002 and $91,493.60 for 2003.
At the time they filed their petition, petitioners, who are husband and wife, resided in Nevada.
At the heart of this case are five trusts whose 2002 and 2003 income respondent has determined is attributable to petitioners. The five trusts are (1) First Amendment Publishers (FAP); (2) American Federal Trust (AFT); (3) Charitable Scholarship Foundation (CSF); (4) Acacia Charitable Foundation (ACF); and (5) Paradise Solutions Trust (PST).
Also at issue is a corporation, Acacia Corporate Management (ACM), from which respondent determined petitioners received distributions in 2003. ACM was apparently incorporated in Nevada.3
Petitioners filed joint Forms 1040, U.S. Individual Income Tax Return, for their 2002 and 2003 tax years. The 2002 return was prepared by "Mary R. Fuentez".4 The 2003 return was self-prepared. Revenue Agent Dennis Brown (Agent Brown) examined petitioners' 2002 and 2003 returns. Petitioners did not cooperate with Agent Brown during the examination process, and Agent Brown developed the case by contacting and issuing summonses to third parties. Although Agent Brown was unable to identify any individual checking or savings accounts petitioners used regularly, he identified entities with which petitioners appeared to be associated. He then summoned and received checks and other records from financial institutions with which those entities held accounts. He requested but never received formation documents relating to FAP, AFT, CSF, ACF, PST, and ACM.
Because the parties have stipulated very little, most of the relevant facts have been gleaned from trial testimony and from exhibits admitted into evidence at trial. Relevant facts relating to petitioners' relationship with each of the relevant entities are provided below.
During or around 1998 Richard Allen Ceraolo (Mr. Ceraolo) was introduced to Mr. Ioane, who identified himself as a trust expert. Mr. Ceraolo and his wife, Angie (Mrs. Ceraolo), eventually hired FAP to establish trusts and provide tax advice. At some point, Mr. Ioane handed Mr. Ceraolo an engagement letter addressed from FAP to Mrs. Ceraolo together with a cover letter and an invoice both of which were dated October 19, 2000. It was common for Mr. Ceraolo to receive correspondence from Mr. Ioane on FAP letterhead, and Mr. Ioane referred to FAP as a trust that Mr. Ioane had established.
Around that time, Mr. Ioane helped Jay M. Steuer (Mr. Steuer) set up trusts for Cade Co. (a business in which Mr. Steuer owned a 25 percent interest) and for Mr. Steuer personally. Cade Co. funds were then channeled through FAP. Mr. Steuer received his Cade Co. distributions through FAP and two other trusts, North Bay Associates and Jewish Education Foundation. Mr. Ioane handled those funds. It was Mr. Steuer's understanding that FAP was Mr. Ioane's trust.
A sampling of canceled checks5 and bank statements6 from FAP's accounts at (1) Saratoga National Bank (which subsequently became part of San Jose National Bank), (2) California Federal Bank, (3) Wells Fargo Bank, (4) Morgan Stanley, and (5) Charles Schwab reflects that checks to Capital One, Nordstrom, Target, Providian Financial, Merced Christian School, Stone Ridge Christian High School, and Blue Cross of California were written on petitioners' behalf from those accounts.7 FAP also wrote a check to Mr. Ioane for a "car purchase", and Mrs. Ioane endorsed an FAP check made payable to cash. The checks were signed using the signature stamps of "Laurel Fierro" or "Glen Halliday".8
In a prior Tax Court case at docket No. 21063-04 involving FAP, Mr. Ioane signed a "Consent to Rescind Notice of Deficiency", which was filed as a petition on behalf of FAP. In that document Mr. Ioane referred to himself as "Michael S. Ioane, general trustee For MICHAEL SCOTT IOANE, whom [sic] is the underlying funding Source and POA for FIRST AMENDMENT PUBLISHERS". In addition, FAP's address, as listed on that petition—108 East John Street, Carson City, Nevada 89706 (East John Street address)—is the same address petitioners listed in their petition in this case.
Agent Brown used the bank deposits method to reconstruct FAP's income for 2002 and 2003. He determined that FAP had unexplained bank deposits of $2,229,987.48 in 2002 and of $838,889.72 in 2003. He also determined that FAP had received $6,946.97 in dividends in 2002.9
AFT held an account with Dean Witter Reynolds, Inc.(now Morgan Stanley). Mr. Ioane is listed as one of two grantors of AFT on the account application. "Eric Wennerstrand" is listed as the trustee and "Laurel Fierro and/or Judie Rogers" are listed as the successor trustees.10 The signature card of California Federal Bank11 for AFT listed Mr. Ioane as an authorized signer. AFT's signature card for its account at Saratoga National Bank listed petitioners as trustors of AFT. Petitioners wrote checks to FAP, CSF, and ACF from that account. Those checks were signed by Mrs. Olson-Ioane and with the signature stamp of Jeffrey P. Rosenberg.
On November 2, 2004, Mr. Ioane filed with the Tax Court a "Consent to Rescind Notice of Deficiency", which the Court construed as a petition on AFT's behalf and to which it assigned docket No. 21065-04. Therein, he referred to himself as "general trustee" and "underlying funding Source and POA for AMERICAN FEDERAL TRUST". He listed the East John Street address as AFT's address.
Agent Brown used the bank deposits method to reconstruct AFT's income for 2002 and 2003. He determined that AFT had unexplained bank deposits of $1,124,356.69 in 2002 and of $55,700 in 2003. He also determined that AFT had received $2,926.71 in dividends in 2002.
CSF held an account with A.G. Edwards. Mr. Ioane is listed as CSF's employer on the account application. A "Resolution for Association or Other Non-Corporate Organization" associated with that account was signed by Mr. Ioane in his capacity as "Secretary" of CSF.
CSF also held an account with Morgan Stanley.12 In the investment powers portion of the application for that account, Mr. Ioane was listed as "successor trustee" of CSF. Mr. Ioane was authorized to trade in and withdraw assets from that account.
Canceled checks from CSF's account at Morgan Stanley reflect payments to the Merced Christian School and Stone Ridge Christian High School. Canceled checks from CSF's account at A.G. Edwards reflect payments to Merced Christian School.
Agent Brown used the bank deposits method to reconstruct CSF's income for 2002 and 2003. He determined that CSF had unexplained bank deposits of $1,309,482.22 in 2002 and of $58,410 in 2003. He also determined that CSF had received $5,036.41 in dividends in 2002 and $10,613.64 in dividends in 2003.
ACF held an account at Citibank. Petitioners both possessed signature authority over that account. ACF also held an account at A.G. Edwards. Mr. Ioane is listed as CSF's employer on the account application. A "Resolution for Association or Other Non-Corporate Organization" associated with that account was signed by Mrs. Olson-Ioane in her capacity as "Secretary" of CSF and by Mr. Ioane in his capacity as "President" of ACF. Petitioners both had check-writing authority over that account. In addition, ACF held an account with Morgan Stanley. In the application for that account, petitioners were...
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