T.C. Memo. 2005-18
UNITED STATES TAX COURT
SAM F. FORD AND INGRID D. FORD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4691-99. Filed February 1, 2005.
Kenneth G. Gordon and Mortimer L. Laski,1 for petitioners.
Shirley M. Francis, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners petitioned the Court to
redetermine a $998,754 deficiency in their 1986 Federal income
tax, a related $749,066 addition to tax under section
1 Mr. Gordon and Mr. Laski entered the case on Oct. 2, 2002. Joseph M. Wetzel, Russel A. Sandor, Michael C. Wetzel, and Darin Christensen entered the case on Apr. 30, 1999, on petitioners’ behalf, but withdrew on Oct. 4, 2002. - 2 -
6653(b)(1)(A), and a related time-sensitive addition to tax under
section 6653(b)(1)(B).2 In an amended answer, respondent
asserted an increase in the deficiency of $560,000, a related
$420,000 addition to tax under section 6653(b)(1)(A), and a
related time-sensitive addition to tax under section
6653(b)(1)(B).
We must decide the following five issues as to 1986:
1. Whether respondent arbitrarily or erroneously determined
that petitioners failed to report net capital gains of
$2,341,878. We hold that he did not;
2. whether petitioners failed to report other income of
$2.8 million from the sale of securities. We hold that they did;
3. whether petitioners are liable for additions to tax
under section 6653(b)(1)(A) and (B), and, if so, whether section
6501(c)(1) applies to annul the 3-year period of limitations
under section 6501(a)(1). We hold that they are and that section
6501(c)(1) annuls the 3-year period of limitations;
4. whether respondent’s determination is barred by judicial
or equitable estoppel. We hold that it is not; and
5. whether petitioner Ingrid Doorn Ford (Ms. Ford) is
entitled under section 6015(b) to full or apportioned relief from
2 Unless otherwise indicated, section references are to the Internal Revenue Code applicable to the relevant years, and Rule references are to the Tax Court Rules of Practice and Procedure. - 3 -
joint and several Federal income tax liability. We hold that she
is not.
FINDINGS OF FACT
I. Overview
Some facts are stipulated. We incorporate herein by this
reference the parties’ stipulations of fact and the exhibits
submitted therewith. We find the stipulated facts accordingly.
Petitioners resided in Eugene, Oregon, when their petition
was filed in this Court. They timely filed a 1986 joint Federal
income tax return (1986 return). Sam F. Ford (Mr. Ford) has one
child, Marc J. Ford (Marc Ford), who lives in Chicago, Illinois.
Ms. Ford was born in Indonesia but has lived in the United States
since 1960. She has no children.
In 1983, Ms. Ford worked as a secretary and bookkeeper at
International Tillex in New York, New York, a business owned by
her cousin, Robert Doorn (Mr. Doorn). While there, she exercised
a stock option for $32,500 of International Tillex shares, which
she sold at a profit. She also had a brokerage account with
Yorkton Securities, Inc. She met Mr. Ford during 1983, and they
married on February 7, 1986. During the early months of their
marriage, petitioners rented a house in Beverly Hills,
California. In 1986, Mr. Ford was self-employed. - 4 -
II. Mr. Ford’s Background
Mr. Ford was convicted of securities fraud in 1968, and he
was convicted of mail fraud in 1978. He served 3 years in prison
for the second conviction and was released from Allenwood Federal
Prison in September 1981. Approximately 8 months before his
release, on February 21, 1981, Mr. Ford was ordered to disgorge
$250,000 to the Securities and Exchange Commission (SEC). The
court directed that the $250,000 be paid in installments as Mr.
Ford was financially able.
In 1986, while trying to renegotiate his payments to the
SEC, Mr. Ford concealed assets and income from the SEC by placing
assets in the names of his wife and son. Mr. Ford represented to
the SEC that he owned no stocks or bonds, that he had gross
income of $16,000 in 1985, that he had a net worth of negative
$560,000 throughout 1985 and 1986, and that he was unemployed and
trying to avoid filing for bankruptcy. Each of these statements
was false.
Subsequently, Mr. Ford was charged with two felonies.
First, Mr. Ford was charged under 18 U.S.C. section 1001 (2000)
with making false statements to the SEC. Second, Mr. Ford was
charged under section 7206(1) with filing a false tax return for
1986. He pled guilty on November 15, 1990, to both of these
felonies. In an allocution incident to this plea that he made
under oath and while represented by counsel, Mr. Ford stated: - 5 -
In * * * [petitioners’] 1986 federal personal income tax return, I failed to include income in excess of $2.8 million I had received from the sale of securities belonging to me which I had secreted in accounts in the name of my son and others. The income, however, was reported on my son’s 1986 personal tax return and the tax was fully paid through him. I had arranged for the income to be reported on his income tax return specifically to conceal my earnings * * * In short, when I filed my 1986 federal personal income tax return, I willfully made a return * * * knowing that the return was not true and correct as to material matters.
III. Canadian Stock Transactions
Mr. Ford’s criminal conviction had its genesis in the early
1980s, when Mr. Ford purchased and sold International Tillex
stock through Canadian brokerage accounts which were owned by at
least seven nominee corporations, namely: (1) For Door
Investments, Ltd.; (2) Pooh Bear Investments, Ltd.; (3) Bear &
Pebbles Investments, Ltd.; (4) Canadian American Aquafarms
International, Ltd.; (5) Solar Aquafarms, Ltd.; (6) Toronado
Resources; and (7) Blackbird Investments. Ostensibly, these
nominee corporations were owned by either Ms. Ford or Marc Ford,
but in reality, they were controlled by Mr. Ford. Each of these
nominee corporations traded in shares of International Tillex
and, later, Beverly Development. These nominee corporations
received income totaling more than Can$ 8 million from trading in - 6 -
International Tillex stock.3 No taxes were paid by anyone on
this income.
Mr. Ford initially owned 69,111 shares of International
Tillex stock, which he held in a brokerage account in the name of
Marc Ford. Mr. Ford sold those shares at a profit.
Subsequently, but prior to his marriage, Mr. Ford invested
another $26,000 in shares of International Tillex. Mr. Ford
owned these shares through accounts in the name of Marc Ford and
Ms. Ford (using her maiden name of Doorn).
IV. Petitioners’ Control of the Nominee Brokerage Accounts
Mr. Ford, through his assistant Linda Hazlett, who acted
under his direction and control, set up and controlled Blackbird
Investments and its corporate trading account. Ms. Ford
purchased a house in Montecito, California, in 1986, and funds
from a Blackbird Investments account were pledged as security for
the purchase loan. Approximately $25,000 was also taken from a
Toronado Resources account for a downpayment. At the time of the
purchase, Blackbird Investments had a brokerage account in Canada
which traded in International Tillex stock. On June 12, 1986, an
additional $250,000 was wired into Ms. Ford’s bank account in
3 Blackbird Investments, for example, received more than $2 million (Canadian) from trading in International Tillex stock, and Toronado Resources received income of approximately $1.2 million (Canadian) from trading in International Tillex. - 7 -
California for the purpose of making home improvements and buying
home furnishings.
Mr. Ford received $1,750,000 from the Maryland Bank in
Luxembourg, secured by a Blackbird Investments trading account,
and from a Toronado Resources account. These funds were used for
Ms. Ford’s purchase of the Montecito home and to pay taxes which
Mr. Ford owed from the 1970s. In March 1986, Mr. Ford also
authorized a withdrawal from a Solar Aquafarms, Ltd., account,
which Ms. Ford used to buy fur coats at the Pappas Fur Co. in
Canada. Mr. Ford also transferred money from various Canadian
corporate accounts, derived from International Tillex stock
transactions, into his own bank accounts. Further, in April
1986, funds were transferred from at least one of the Canadian
corporate accounts into a bank account in Beverly Hills,
California, belonging to Ms. Ford.
V. Petitioners’ 1986 Return
On petitioners’ 1986 return, they did not report that they
had received any wages, salaries, or other compensation (e.g.
self-employment income). They did not attach any Forms W-2, Wage
and Tax Statement, to their 1986 return. The 1986 return did not
include a Schedule C, Profit or Loss From Business. Petitioners
reported taxable income of negative $275,937, stated they had no
income tax liability, and requested a refund for the full amount
of their estimated tax payments of $38,000. Mr. Ford knew when - 8 -
petitioners were filing their 1986 return that they were not
reporting all of their income.
Item 10 on Schedule B, Interest and Ordinary Dividends,
asked the following question: “At any time during the tax year,
did you have an interest in or a signature or other authority
over a financial account in a foreign country (such as a bank
account, securities account, or other financial account)?”
Petitioners responded that they did not. This was false: in
addition to the Canadian brokerage accounts, petitioners each
opened foreign bank accounts in 1985 at the TSB Private Bank
International S.A. in Luxembourg and maintained them throughout
1986.
VI. Respondent’s Notice of Deficiency
In respondent’s notice of deficiency, dated February 26,
1999, he determined that petitioners had unreported income for
1986. Specifically, respondent determined that petitioners
should have reported all of the long-term and short-term capital
gains and losses from the Canadian brokerage accounts in 1986,
totaling $5,084,483, because Mr. Ford was the beneficial owner of
the stocks traded.
VII. Respondent’s Increase in Deficiency
Respondent amended his answer in this case to assert
additional unreported income of $2.8 million based on statements
made under oath by Mr. Ford in his allocution quoted above as to - 9 -
his failure to include income of more than $2.8 million from the
sale of securities. Petitioners conceded during this case that
this unreported income of more than $2.8 million was not included
in the notice of deficiency.
Mr. Ford used Marc Ford’s name in many of petitioners’
financial transactions. During 1985 and 1986, Mr. Ford had
access to bank accounts which were opened under the name of Marc
Ford, and he wrote checks from those accounts. Mr. Ford owned
assets in Marc Ford’s name and opened brokerage accounts in Marc
Ford’s name. During 1986, Mr. Ford owned, in Marc Ford’s name,
shares of International Tillex and Beverly Development.
VIII. Ms. Ford’s Financial Transactions
Ms. Ford signed many financial documents relating to these
transactions, including some relating to ownership in shares of
International Tillex. In 1986, she had multiple brokerage
accounts and bank accounts in her name and signed documents
relating to them.
During 1986, Ms. Ford purchased several items for large
amounts of money. For instance, she purchased fur coats costing
approximately $17,000 from the Pappas Fur Co. in British
Columbia. On or about April 30, 1986, she purchased a 1986
Rolls-Royce from Gregg Motors Rolls-Royce of Beverly Hills,
California, for $114,736.80, which she paid by checks in the
amounts of $100,000 and $14,899.50. - 10 -
Ms. Ford also transferred large sums of money among her
various personal accounts during 1986. On August 11, 1986, she
wrote a check for $286,000 from her personal account at Security
Pacific National Bank, made payable to Security Pacific National
Bank, with a notation that it was for a cashier’s check. On
August 27, 1986, Ms. Ford wrote another check from her Security
Pacific account, this time payable to “Cash”, for $346,290.78.
On April 15, 1986, Ms. Ford deposited a check for $55,074 from
her brokerage account at Yorkton Securities, Inc., into her
account with the National Bank of Canada. On February 9, 1986,
Ms. Ford wrote a check for $10,000 to Codowell S.A., in
Switzerland. Less than a year after signing her 1986 return, on
April 12, 1988, Ms. Ford sent a handwritten letter to the
managing director of the TSB Private Bank International S.A., in
Luxembourg, requesting that $100,000 be placed in a high-yield
account for her.
On or about June 19, 1986, Ms. Ford purchased a house in
Montecito, California, for $1,150,000. Ms. Ford borrowed
$1,150,000 from the Maryland Bank International N.A. in
Luxembourg to make the purchase, signing documents for a deed of
trust to the Maryland Bank. The downpayment was taken from the
Canadian brokerage account of one of the nominee corporations,
and the Maryland Bank loan was guaranteed by another nominee
corporation’s trading account. Ms. Ford made no monthly payments - 11 -
as to this house during 1986. However, on the 1986 return,
petitioners claimed a deduction for home mortgage interest of
$56,416 on Schedule A, Itemized Deductions.
Ms. Ford was a partner in at least one business venture.
She purchased an interest in the Courtyard by Marriott Ltd.
Partnership on August 1, 1986, for $200,000, comprising $30,400
in cash and a “limited partner note” of $169,600. The 1986
return listed a $17,163 loss which had been passed through to Ms.
Ford from her ownership interest in the Courtyard by Marriott
Limited Partnership.
OPINION
I. Net Capital Gains
We decide whether respondent arbitrarily or erroneously
determined that petitioners failed to recognize $2,341,878 in net
capital gains in 1986 attributable to more than $5 million of
capital gains for the year. Petitioners bear the burden of
proving that the amount set forth in the notice of deficiency is
arbitrary or erroneous; respondent is presumed correct once he
has put forth some probative evidence linking petitioners with
the income-producing activity. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111 (1933); Weimerskirch v. Commissioner, 596
F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977).4
4 Sec. 7491(a) was added to the Internal Revenue Code by the Internal Revenue Service Restructuring and Reform Act of 1998, (continued...) - 12 -
As a threshold matter, respondent must show some income
source to support his determination. Weimerskirch v.
Commissioner, supra. Here, respondent has established the
existence of income from the Canadian brokerage accounts in the
form of an exhibit presented at Mr. Ford’s Fatico5 hearing. This
exhibit showed over $5 million in capital gains for 1986 on which
no tax was paid. Respondent has also established that both
petitioners controlled these accounts and that these corporations
received income totaling more than Can$ 8 million from trading in
International Tillex stock.
The record shows that both petitioners controlled, and
received income from, the nominee corporations. Mr. Ford,
through his assistant Linda Hazlett, who acted under his
direction and control, set up and controlled Blackbird
Investments and its corporate trading account. He and Ms. Ford
received $1,750,000 from the Maryland Bank in Luxembourg, secured
4 (...continued) Pub. L. 105-206, sec. 3001(c), 112 Stat. 727, effective for court proceedings arising from examinations commencing after July 22, 1998. Sec. 7491(a)(1) provides that the burden of proof shifts to the Commissioner in specified circumstances. Petitioners make no argument that sec. 7491(a)(1) applies to this case, and we conclude that it does not (as this case predates the enactment of sec. 7491(a)). 5 In U.S. District Court, the parties are given an opportunity to present evidence with respect to sentencing. U.S. Sentencing Guidelines sec. 6A1.3 (2002). This evidentiary hearing is held before the sentencing of a convicted criminal. See United States v. Fatico, 579 F.2d 707 (2d Cir. 1978). - 13 -
by the Blackbird Investments trading account, and from a Toronado
Resources account. These funds were used by Ms. Ford to purchase
the Montecito home and for Mr. Ford’s payment of taxes owed from
the 1970s. In March 1986, Mr. Ford authorized a withdrawal from
a Solar Aquafarms, Ltd. account, which Ms. Ford used to buy fur
coats at the Pappas Fur Co. in Canada. Mr. Ford also transferred
money from various Canadian corporate accounts, derived from
International Tillex stock transactions, into his own bank
accounts. Further, in April 1986, funds were transferred from at
least one of the Canadian corporate accounts into a bank account
in Beverly Hills, California, belonging to Ms. Ford. Ms. Ford
purchased a house in Montecito, California, in 1986, financed by
a mortgage for which funds from a Blackbird Investments account
were pledged as security. Approximately $25,000 was also taken
from a Toronado Resources account for a downpayment. At the time
of the purchase, Blackbird Investments had a brokerage account in
Canada which traded in International Tillex stock. On June 12,
1986, an additional $250,000 was wired into Ms. Ford’s bank
account in California for the purpose of making home improvements
and buying home furnishings. These facts show that each
petitioner had control, and made frequent beneficial use, of the
income in the Canadian accounts based on which respondent
determined the deficiency and additions to tax stated in his
notice of deficiency. The Court concludes that respondent has - 14 -
met his minimal burden of establishing a source of income
underlying his determination of deficiency. See Weimerskirch v.
Commissioner, supra.
Petitioners urge that we should find respondent’s
determination arbitrary and erroneous because respondent lost
some of the evidence upon which it was based. Petitioners’ only
evidence in support of their argument is their own testimony. We
do not find petitioners credible; their testimony was
inconsistent and implausible, as discussed infra. We hold that
respondent correctly determined unreported net capital gains of
$2,341,878 for 1986.
II. Other Unreported Income
We next decide the correctness of the increased deficiency
based upon the $2.8 million of unreported income asserted by
respondent in an amended answer. Respondent bears the burden of
proof on this issue. Rule 142(a). In support of his increase,
respondent points the Court to Mr. Ford’s previously quoted
allocution and his testimony before this Court, both of which
were under oath and made while represented by counsel. During
his allocution Mr. Ford acknowledged that he had: “failed to
include income in excess of $2.8 million I had received from the
sale of securities belonging to me which I had secreted in
accounts in the name of my son and others”. - 15 -
In this Court, petitioners conceded that respondent’s notice
of deficiency did not include this $2.8 million. While
petitioners now claim in their brief that respondent erred in
calculating this amount, we conclude to the contrary. Mr. Ford’s
words, which were spoken under oath on at least two occasions
while represented by counsel, are clear and unambiguous. We
conclude that petitioners failed to report this other $2.8
million from the sale of securities.6
III. Fraud
We decide whether petitioners are liable for the above-
mentioned additions to tax for fraud under section 6653(b)(1)(A)
and (B).7 Respondent must prove his determination of fraud by
6 Our decision as to this $2.8 million and the approximately $5 million above is also consistent with our finding that the nominee corporations controlled by petitioners failed to recognize income totaling more than Can$ 8 million. 7 In relevant part, sec. 6653(b) provides:
(1) In general.--If any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to the sum of--
(A) 75 percent of the portion of the underpayment which is attributable to fraud, and
(B) an amount equal to 50 percent of the interest payable under section 6601 with respect to such portion for the period beginning on the last day prescribed by law for payment of such underpayment (determined without regard to any extension) and ending on the date of the assessment of the tax or, if earlier, the date of the (continued...) - 16 -
clear and convincing evidence. See sec. 7454(a); Rule 142(b);
Rowlee v. Commissioner, 80 T.C. 1111, 1113 (1983). Respondent
must prove that petitioners fraudulently intended to underpay
their tax. See Powell v. Granquist, 252 F.2d 56 (9th Cir. 1958);
Miller v. Commissioner, 94 T.C. 316, 332-333 (1990). Respondent
must meet his burden through affirmative evidence because fraud
is never imputed or presumed. See Beaver v. Commissioner, 55
T.C. 85, 92 (1970). Whether fraud exists in a given situation is
a factual determination that must be made after reviewing the
particular facts and circumstances of the case. DiLeo v.
Commissioner, 96 T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir.
1992).
If respondent establishes that some part of an underpayment
was due to fraud, the entire underpayment is treated as
attributable to fraud unless petitioners prove otherwise. Sec.
7 (...continued) payment of the tax.
(2) Determination of portion attributable to fraud. If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes is not attributable to fraud.
(3) Special rule for joint returns. In the case of a joint return, this subsection shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse. - 17 -
6653(b)(2). The fraud penalty may be applied against a spouse
only where some part of the underpayment is due to the fraud of
the spouse. Sec. 6653(b)(3).
A. Underpayment of Tax
Mr. Ford has acknowledged under oath and while represented
by counsel that petitioners’ 1986 return does not report all of
their income for 1986 and that this unreported income was subject
to significant Federal income tax. This testimony conclusively
establishes the existence of a knowing underpayment by
petitioners. See Considine v. United States, 683 F.2d 1285, 1287
(9th Cir. 1982).
B. Intent To Evade Tax
Fraudulent intent may be proven by circumstantial evidence
because direct proof of a taxpayer’s intent is rarely available.
Reasonable inferences may be drawn from the relevant facts.
Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson v.
Commissioner, 79 T.C. 995 (1982), affd. 748 F.2d 331 (6th Cir.
1984). Fraud requires a clear and convincing showing that the
taxpayer intended to evade a tax known or believed to be owing by
conduct intended to conceal, mislead, or otherwise prevent the
collection of tax. Stoltzfus v. United States, 398 F.2d 1002,
1004 (3d Cir. 1968). While a conviction under section 7206(1)
does not, in and of itself, establish fraudulent intent, it is a
factor from which we “may properly infer fraud” where it is - 18 -
combined with other badges of fraud. Considine v. United States,
supra; Estate of Rau v. Commissioner, 301 F.2d 51 (9th Cir.
1962), affg. T.C. Memo. 1959-117.
We often rely on certain indicia of fraud in deciding the
existence of fraud. The presence of several indicia is
persuasive circumstantial evidence of fraud. Beaver v.
Commissioner, supra at 93. The badges of fraud include: (1)
Understatement of income, (2) maintenance of inadequate records,
(3) failure to file tax returns, (4) implausible or inconsistent
explanations of behavior, (5) concealment of income or assets,
and (6) failure to cooperate with tax authorities. Spies v.
United States, supra; Estate of Trompeter v. Commissioner, 279
F.3d 767, 773 (9th Cir. 2002), vacating and remanding 111 T.C. 57
(1998); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.
1986), affg. T.C. Memo. 1984-601. We discuss each of the badges
as it may relate to our case.
1. Understatement of Income
Understating income is indicative of fraudulent intent.
Bradford v. Commissioner, supra. The existence of an
understatement of income was clearly and convincingly established
by Mr. Ford’s guilty plea, by his testimony in both his criminal
case and in this case, and by our findings concerning
petitioners’ unreported taxable income for 1986. The evidence - 19 -
also establishes that Ms. Ford played an integral part in this
understatement of income.
Ms. Ford testified that she had no knowledge of the
understatement, but she owned several of the nominee corporations
at issue in this case. She also recognized the corporate names
of Pooh Bear Investments, Ltd.; Bear & Pebbles Investments, Ltd.;
For Door Investments, Ltd.; and Solar Aquafarms, Ltd. Ms. Ford’s
recognition of these names and their history (she testified that
For Door was a combination of the names Doorn and Ford, and that
Pooh Bear as well as Bear & Pebbles was named for petitioners’
dogs) makes her testimony that she had no knowledge of Mr. Ford’s
activities less than credible. The Court concludes that Ms. Ford
had knowledge of, and involvement in, the fraudulent financial
transactions of 1986. This factor weighs against petitioners.
2. Maintenance of Inadequate Records
Lack of records is indicative of fraudulent intent. Id.
Mr. Ford acknowledged during his testimony in this case that
petitioners kept few records as to the subject transactions. The
“records” in this case consist of handwritten letters, some
canceled checks, a few banking records from domestic and
international accounts, and a stock option exercise agreement by
Ms. Ford. Those records show direct control and management of
the Canadian accounts by both petitioners.
This factor weighs against petitioners. - 20 -
3. Failure To File a Tax Return
Failing to file tax returns is indicative of fraudulent
intent. Bradford v. Commissioner, supra. Although petitioners
did file a 1986 tax return, the mere filing of that return does
not necessarily weigh in favor of petitioners. Where, as here,
the return was admittedly filed with an understatement of income
and requested a full refund of the $38,000 paid in estimated
taxes, this factor weighs against petitioners.
4. Implausible or Inconsistent Explanations of Behavior
Giving implausible or inconsistent explanations of behavior
is indicative of fraud. Id. Mr. Ford testified before this
Court that the Canadian accounts held money owned by Mr. Doorn.
The record, however, shows that Mr. Ford controlled the accounts
in question and repeatedly received financial benefit from them,
by his own admission taking up to $1 million in 1986. This sum
was never repaid, and there was never an accounting between
petitioners and Mr. Doorn. The Court finds his explanation
implausible, because the evidence establishes petitioners’
ownership and control of the Canadian money.
Ms. Ford claimed that she did not even notice petitioners’
negative income on their tax return when she signed it. This is
not credible given her expenditures in 1986: she wrote over
$600,000 in checks to cash, purchased a $1.15 million home,
purchased a Rolls-Royce automobile, and purchased $17,000 in - 21 -
Canadian furs. Ms. Ford testified she did not know why the house
in Montecito was titled only in her name, but it was, and she
signed multiple documents to make it so. She also claimed to
have no knowledge as to where she found the money to buy the
house in Montecito or whether she borrowed money from the
Maryland Bank in Luxembourg. In fact, she personally signed a
mortgage on the Montecito home with the Maryland Bank in
Luxembourg.
Ms. Ford testified that she does not know where she found
the money to write a check to cash for $346,290.78, or how the
cash was used. When asked whether the amount of $346,290.78 was
wired to her domestic bank account from an account at the
Maryland Bank in Luxembourg, she responded that it was possible,
but she could not recall. She testified that she did not
remember whether in 1986 she had an account with the Maryland
Bank in Luxembourg, or whether she had money wired to her from
overseas, but the evidence shows she was involved in
international money transfers in that year, at least one of them
from her personal trading account at Yorkton Securities, Inc.,
into her personal bank account in California. Ms. Ford testified
that she does not recall having worked for International Tillex
in 1985, having exercised an International Tillex stock option
while there, or even what a stock option is. After she was shown
a copy of a Tillex option agreement she signed on August 20, - 22 -
1984, she testified that she did not recall a relationship with
the company. She further claimed that she was not aware of Mr.
Ford’s criminal charges until sometime after his Fatico
sentencing hearing.
Ms. Ford testified that she did not read the question on
Schedule B of the return which asked whether she had an interest
in, or signature or other authority over, a foreign bank account,
and she could not confirm whether the question was answered
truthfully. The record evidence shows that she did have several
bank and brokerage accounts overseas in 1986, and she even
admitted in testimony that she had a bank account at TSB Private
Bank International S.B. in Luxembourg. Ms. Ford’s testimony was
not truthful. She testified, under oath, that she had no
financial experience, but she did. She testified under oath that
she never looked at anything her husband gave her to sign, but
she did—she later admitted that she knew the names of the nominee
corporations and even from where they were derived. She stated
on the 1986 return that she had no overseas bank accounts, but
she did. The Court finds Ms. Ford’s testimony inconsistent and
implausible because her claims of ignorance are not credible when
viewed against her complex and numerous financial dealings in
This factor weighs against petitioners. - 23 -
5. Concealment of Income or Assets
Concealing income or assets is indicative of fraud.
Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986). Mr. Ford
admitted under oath that he “secreted” securities belonging to
him “in accounts in the name of my son and others.” Further
examination by respondent uncovered money hidden in Canadian
brokerage accounts which respondent determined belonged to
petitioners. Ms. Ford played a critical role in Mr. Ford’s
concealment of assets, taking sole title to their Montecito home
and to their Rolls-Royce. She also was listed as the owner of
several of the nominee corporations at issue, and she owned in
her own name many investments, including shares of International
Tillex. Had these assets been owned by Mr. Ford, he would have
been unable to represent to the SEC that he owned no stocks or
bonds, that he had gross income of $16,000 in 1985, that he had a
net worth of negative $560,000 throughout 1985 and 1986, and that
he was unemployed and trying to avoid filing for bankruptcy.
On the basis of Mr. Ford’s own testimony and upon the
evidence before the Court, the Court concludes that petitioners
concealed assets from the SEC and from respondent.
Ms. Ford played a sophisticated role in petitioners’
concealment of assets; she was not financially naive. Her
testimony to the contrary is flatly contradicted by all the
evidence before this Court. In 1986, she was a business partner - 24 -
in the Courtyard by Marriott Limited Partnership, a personal
investment which indicates some business knowledge on her part.
That same year, she received money from her Yorkton Securities,
Inc. brokerage account and deposited it into her personal bank
account. She also took title to, and paid for, a Rolls-Royce and
$17,000 in Canadian furs, and she wrote a cashier’s check and a
check to cash totaling over $600,000. These transactions
establish that Ms. Ford personally benefited from the fraudulent
scheme of which she now claims utter ignorance. She sent a
handwritten letter to an international banker in Luxembourg less
than a year after she signed the fraudulent return, instructing
him in detail to open an overseas bank account in her name. Such
evidence of actions subsequent to the act at issue is admissible
where it shows knowledge, intent, or absence of mistake. Fed. R.
Evid. 404(b); Huddleston v. United States, 485 U.S. 681 (1988)
(the conditional relevancy of subsequent acts is determined by a
preponderance of the evidence); United States v. Olivo, 69 F.3d
1057 (10th Cir. 1995) (conditionally relevant evidence that
criminal defendant, charged with possession of marijuana with
intent to distribute, still had some marijuana in his car over a
year after the alleged crime, held admissible). The Court
concludes that Ms. Ford was directly involved in the financial
transactions of 1986 and finds her testimony to the contrary not
credible. - 25 -
This factor weighs against petitioners.
6. Cooperation With Authorities
Failure to cooperate with authorities is indicative of
fraud. Mr. Ford was less than forthcoming with the SEC, and we
do not find any evidence that petitioners were helpful in
reconstructing the transactions underlying respondent’s notice of
deficiency. We find this factor weighs against petitioners.
7. Conclusion
On the basis of the above analysis, we find that all of the
badges of fraud weigh against both petitioners. We therefore
conclude that petitioners intended to evade tax known or believed
to be owing.
C. Portion of Underpayment Attributable to Fraud
Respondent has proven clearly and convincingly that a
portion of petitioners’ underpayment is attributable to fraud.
Thus, the whole underpayment is attributable to fraud, except to
the extent petitioners prove otherwise. Sec. 6653(b)(2).
Petitioners testified that Mr. Doorn and other unnamed Europeans
owned the money in the Canadian accounts. Mr. Ford allegedly
viewed his role as that of an “agent” for the Europeans, and
testified that his only interest in the Canadian accounts was a
50-percent profit participation once the Europeans’ original
investment was recouped. Thus, he testified, the moneys which
petitioners used from these accounts were “loans” repayable to - 26 -
Mr. Doorn and the Europeans. Mr. Ford admitted under oath and
while represented by counsel that petitioners have no documents
or other evidence to support these assertions. He attempted to
rationalize this lack of records by saying that “it was family.
It was informal”.
Contrary to Mr. Ford’s testimony, the evidence shows a
consistent pattern of ownership and control of these funds by
both petitioners as discussed above. At trial, Mr. Ford
testified that he received at least a few hundred thousand
dollars, and perhaps as much as a million dollars, in purported
“loans” from the Canadian accounts, which he admittedly never
repaid. He also testified that there was never an accounting
between petitioners and Mr. Doorn. Petitioners did not call Mr.
Doorn, Marc Ford, or any of their accountants as witnesses. It
is well established that the failure of one party to introduce
evidence within his or her possession leads to the inference that
the information if produced would be favorable to the opposing
party. Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.
1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947); see also
McKay v. Commissioner, 89 T.C. 1063, 1069 (1987) (failure of
witness to testify to fact peculiarly within his knowledge
suggests that testimony would have been unfavorable), affd. 886
F.2d 1237 (9th Cir. 1989). On the basis of this evidence and his
lack of credibility while testifying, the Court is not persuaded - 27 -
by Mr. Ford’s testimony and finds that petitioners have failed to
show that any of the underpayment of tax was not due to fraud.
D. Period of Limitations Under Section 6501(c)
After a return is filed, the Commissioner generally has 3
years within which to assess a deficiency in a civil tax case.
Sec. 6501(a)(1). However, in the case of a false or fraudulent
return that is filed with the intent to evade tax, the tax may be
assessed at any time. Sec. 6501(c). Since we conclude that
petitioners’ 1986 return was such a return, we also conclude the
period for assessment remains open. Id.; see also Considine v.
United States, 683 F.2d at 1288.
IV. Estoppel
Petitioners urge in their opening brief that the Court apply
judicial or equitable estoppel to overturn respondent’s
determination. Neither estoppel argument is timely presented.
Rule 39 requires that all affirmative defenses be set forth in
the pleadings. Fazi v. Commissioner, 105 T.C. 436, 444-446
(1995). Rule 34(b)(4) requires that concise assignments of error
be stated in the initial pleadings for each error asserted and
states that any issue not raised in the assignments of error
shall be deemed to be conceded. Because petitioners have failed - 28 -
properly to raise the issue of judicial or equitable estoppel, we
decline to allow them to raise it now.8
V. Section 6015(b) Relief
Ms. Ford requests section 6015(b) relief from joint and
several liability. Spouses filing a joint Federal income tax
return are generally jointly and severally liable for the tax
shown on the return or found to be owing. Sec. 6013(d)(3);
Butler v. Commissioner, 114 T.C. 276, 282 (2000). In certain
cases, however, an individual filing a joint return may avoid
joint and several liability for tax (including interest,
penalties, and other amounts) by qualifying for relief under
section 6015. The three types of relief prescribed in that
section are: (1) Full or apportioned relief under section
6015(b) (full or apportioned relief), (2) proportionate relief
under section 6015(c) (proportionate relief), and (3) equitable
relief under section 6015(f) (equitable relief). Ms. Ford claims
entitlement only to relief under section 6015(b). Ms. Ford bears
8 Petitioners would still not prevail even if these issues were properly before us. Contrary to petitioners’ assertions on this issue, the fact that Marc Ford may have paid tax on the referenced $2.8 million does not mean that respondent is estopped from determining the $2.8 million is rightfully taxed to petitioners. Nor would a finding that petitioners were “prevented” by respondent’s actions from filing an amended return for 1986, on which they would have reported the disputed income, serve to estop respondent from now asserting fraud. A taxpayer who files a fraudulent return does not purge the fraud by a subsequent voluntary disclosure. Badaracco v. Commissioner, 464 U.S. 386, 394 (1984). - 29 -
the burden of proving that claim. See Alt v. Commissioner,
119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir.
2004); see also Rule 142(a)(1).
Section 6015(b) provides relief from joint and several
liability to the extent that the liability is attributable to an
understatement of tax. To be eligible for this relief, a
requesting spouse needs to satisfy the following five elements of
section 6015(b)(1):
(A) a joint return has been made for a taxable year;
(B) on such return there is an understatement of tax attributable to erroneous items of 1 individual filing the joint return;
(C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement;
(D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; and
(E) the other individual elects (in such form as the Secretary may prescribe) the benefits of this subsection * * *.
The requesting spouse’s failure to meet any one of these
requirements prevents him or her from qualifying for section
6015(b) relief. Alt v. Commissioner, supra at 313.
Respondent concedes that the elements of subparagraphs (A)
and (E) have been satisfied and focuses on the remaining
subparagraphs. Respondent argues that Ms. Ford meets none of - 30 -
these requirements. We consider only the second of these three
subparagraphs because we agree with respondent that its
requirements have not been met.
We conclude that Ms. Ford knew or had reason to know of the
1986 underpayment at the time she signed the return so as to be
precluded from receiving her requested relief under section
6015(b). Credible evidence shows that Ms. Ford was intimately
involved in the convoluted financial transactions which
transpired in 1986, that she played a crucial role in the
utilization of nominee corporations and brokerage accounts, and
that she played a crucial role in the concealment of assets
acquired in 1986, as previously discussed.
The previously discussed inconsistencies in her testimony,
piled one upon the next, also make her testimony not credible to
the Court.
______________________________
All of the parties’ arguments have been considered. We have
rejected as meritless those not discussed herein. Accordingly,
Decision will be entered
under Rule 155.