Paschall v. COMMISSIONER OF INTERNAL REVENUE, s. 10478-08

• Decision Date: 05 July 2011
• Docket Number: 25825-08.[1],Nos. 10478-08,s. 10478-08
• Citation: 137 T.C. No. 2,137 T.C. 8
• Parties: ROBERT K. AND JOAN L. PASCHALL, Petitioners,<BR>v.<BR>COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

137 T.C. No. 2

ROBERT K. AND JOAN L. PASCHALL, Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 10478-08

25825-08.[1]

07-05-2011

Howard S. Fisher, for petitioners.

Ronald S. Collins, Jr., John A. Guarnieri, and Cindy Park, for respondent.

2 WHERRY, Judge.

These consolidated cases are before the Court on petitions for redetermination of respondent's determinations, in notices of deficiency, that petitioners owe excise tax deficiencies and section 6651(a)(1) additions to tax for their 2002 through 2006 tax years as well as an income tax deficiency and a section 6662(a) accuracy-related penalty for their 2005 tax year.^[2]

The issues for decision are: (1) Whether petitioner husband made an excess contribution to his Roth individual retirement account (Roth IRA) and is liable for section 4973 excise tax deficiencies for the 2002 through 2006 tax years; (2) whether petitioner husband is liable for additions to tax under section 6651(a)(1) for failure to file Forms 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, for the 2002 through 2006 tax years; and (3) whether the statute of limitations bars respondent from assessing and collecting deficiencies for the 2002, 2003, and 2004 tax years.^[3]

[137 T.C. No. 3]

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulations, with the accompanying exhibits, are incorporated herein by this reference. At the time they filed their petitions, petitioners resided in California.

Petitioners filed timely joint Forms 1040, U.S. Individual Income Tax Return, for all relevant years. This case stems from petitioner husband Robert K. Paschall's attempt to "convert a traditional IRA to a Roth IRA" (Roth restructure).^[4] The Roth restructure was designed and implemented by A. Blair Stover, Jr. (Mr. Stover), and his colleagues at the accounting firm of Grant Thornton, L.L.P. (Grant Thornton).

I. Petitioners' Background

Mr. Paschall graduated from Massachusetts Institute of Technology with a bachelor of science degree in physics and from the University of Illinois with a master of science degree in physics. He also received a management certificate for technical personnel from the University of California Los Angeles.

[137 T.C. No. 4]

Mr. Paschall spent his entire career until his 1996 retirement working at North American Aviation, which eventually became Rockwell International. Petitioner wife, Joan L. Paschall, has a degree in secretarial science and from 1985 through 2008 worked as a teacher's assistant.

II. Roth IRA Restructuring

A. Introduction to Jim Patton

As he was nearing retirement, Mr. Paschall attended seminars where Jim Patton, a financial adviser, was one of the speakers. At one of the seminars, Mr. Paschall gave Mr. Patton his name and telephone number.

Mr. Patton would occasionally call Mr. Paschall. On one occasion he claimed that he had a client who was performing a transaction that was perfectly legal and would convert a traditional IRA to a Roth IRA and that met all the tax requirements. He also contended that it was in full compliance with the tax laws and was a good investment. He recommended that Mr. Paschall pursue this transaction. The client Mr. Patton spoke of, Fred Nardi, eventually sent Mr. Paschall the notes he had taken on his own Roth restructure.

Mr. Paschall assumed Mr. Patton "was a very knowledgeable financial adviser with considerable experience and knowledge of the taxes and the finances and the legality of anything that he

[137 T.C. No. 5]

would recommend". He further assumed Mr. Patton "would recommend legal things and investments that were to my advantage".

B. Introduction to Mr. Stover

Mr. Patton introduced Mr. Paschall to Mr. Stover. Mr. Paschall first met Mr. Stover in Mr. Patton's office in early 2000. At this time Mr. Stover was a partner at Grant Thornton.

At the meeting Mr. Stover gave a presentation and explained the Roth restructure to Mr. Paschall who "did not fully understand it". Although he acknowledged that he did not understand the Roth restructure, Mr. Paschall believed it was "completely compliant with the tax law at that time" and was not a tax shelter.^[5] Mr. Paschall decided to engage in the Roth restructure, his stated purpose being to save money on taxes.

C. Engagement Letter

On March 17, 2000, Mr. Paschall executed an engagement letter with Grant Thornton for professional tax and financial consulting services, specifically the Roth restructure. The engagement letter contemplated a fee of $120,000 and contained a clause providing that Grant Thornton would represent and defend Mr. Paschall or any related entity at no additional cost in case of audit by the Internal Revenue Service (IRS). The engagement

[137 T.C. No. 6]

letter also contained an indemnity clause providing that Grant Thornton would reimburse and indemnify the Paschalls and any related entity for any civil negligence or fraud penalty assessed against them by Federal or State authorities.

Mr. Paschall paid the $120,000 fee for the Roth restructure.^[6] The engagement letter provided that the fee was to be split equally between Grant Thornton and Nevada Corporation Associations, Inc., a law firm. Mr. Paschall never asked for nor

D. Kruse Mennillo, L.L.P., and Individuals Other Than Mr. Stover

In addition to Mr. Stover, Mr. Paschall had contact with other Grant Thornton employees including Ruth Donovan, Allen Davison, and Angela Parker.

In September 2001 Mr. Stover left Grant Thornton for Kruse Mennillo, L.L.P. (Kruse Mennillo), another accounting firm. Neither party presented evidence explaining the reasoning behind Mr. Stover's abrupt move. When Mr. Stover moved to Kruse Mennillo, certain individuals he worked with at Grant Thornton went with him. At the time Mr. Stover moved to Kruse Mennillo, Mr. Paschall followed him and began using Kruse Mennillo instead of Grant Thornton.

[137 T.C. No. 7]

To Mr. Paschall's knowledge Kruse Mennillo did not receive any of the $120,000 fee that was paid to Grant Thornton for the Roth restructure. Mr. Stover eventually stopped dealing with Mr. Paschall, and at that time Marc Sommers, a tax lawyer at Kruse Mennillo and a former IRS employee, took over Mr. Paschall's Federal tax work.^[7]

E. Independent Advice and Knowledge

Despite the remarkable promised tax benefits of converting taxable IRA distributions to nontaxable Roth IRA distributions, Mr. Paschall did not ask anyone else's opinion on the viability of the Roth restructure. Mr. Paschall did not do any research on contribution limits to IRAs, taxation of excess contributions to IRAs, or taxation of distributions from IRAs.

Mr. Paschall understood that contributions to traditional IRAs were made tax free and distributions from them were taxable.

[137 T.C. No. 8]

He also understood that Roth IRAs were different in that, while the contributions were not deductible, the distributions were not taxed.

III. The Roth Restructure

Grant Thornton, specifically Mr. Stover, "orchestrated and oversaw" all of the steps in the Roth restructure. Papers were prepared and then sent to Mr. Paschall for his signature. Mr. Paschall explained that he did not doubt anything they did and believed that the Roth restructure was a firm-sanctioned Grant Thornton transaction as opposed to a Mr. Stover individually conceived transaction. The Roth restructure was implemented as follows:

• March 14, 2000—The Paschalls maintained an investment account with Calvert Group with account number ending in 8724 (Calvert account).

• March 2000—In March 2000 Mr. Paschall opened a Self Directed Roth IRA at George K. Baum Trust Co. with account number ending in 2306 (Baum Roth IRA). On March 14, 2010, the Baum Roth IRA was funded with a $2,000 contribution made from the Calvert account.

• March 20, 2000—Two corporations, Telesis Acquisition and Investment Co., Inc. (Telesis), and West Star Global Holdings, Inc. (West Star), were organized, in the State of Nevada, by Nevada Corporation Associations. Telesis and West Star had the same principal place of business, and Mr. Paschall served as president, secretary, and treasurer of both corporations during all relevant periods.^[8]

[137 T.C. No. 9]

• March 20, 2000—Mr. Paschall opened a Roth IRA with First Union Securities, Inc., with account number ending in 4078 (First Union Roth IRA).

• March 22, 2000—As of this date, the Paschalls maintained a traditional IRA account at Resources Trust with account number ending in 1977 (Resources Trust IRA). On March 22, 2000, Mr. Paschall opened a Self Directed Traditional IRA at First National Bank of Onaga with account number ending in 3200 (FNBO IRA). On March 30, 2000, Mr. Paschall funded the FNBO IRA via a rollover of $1,391,941.64 from the Resources Trust IRA.

• March 27, 2000—The Baum Roth IRA purchased all of the shares of stock of Telesis for $2,000. On April 26, 2000, the FNBO IRA purchased all of the shares of stock in West Star for $1,392,801.96. On or about April 26, 2000, West Star transferred $1,272,801.96 to Telesis.^[9] On April 28, 2000, $1,272,801.96 was transferred from Telesis to the Baum Roth IRA. Also on April 28, 2000, $1,272,801.96 was transferred from the Baum Roth IRA to the First Union Roth IRA. The money was invested in various publicly traded securities and mutual funds.

• December 17, 2001—Telesis and West Star executed articles of merger with each share of West Star stock being converted into 1 share of Telesis stock and with Telesis being the surviving corporation. The articles of merger were filed with the Nevada secretary of state on December 31, 2001. West Star was dissolved as of December 31, 2001. Telesis was dissolved on March 28, 2006.

• October 25, 2005—The Paschalls received a $41,900 distribution from their First Union Roth IRA. On December

[137 T.C. No. 10]

7, 2006, the Paschalls received a $100,000 distribution from their First Union Roth IRA, which by that time had been renamed H&R...