Robert K. & Joan L. Paschall, Petitioner

137 T.C. No.

UNITED STATES TAX COURT ROBERT K. AND JOAN L. PASCHALL,- Petitioners v. COMMIS IONER OF INTERNAL REVENUE, Respondent Docket Nos. 1.0478-08, 25825-08.1 , Filed July 5, 2011.

R determined sec. 4973, I.R.C., excise tax deficiencies and additions to tax under sec. 6651(a) (1), 2002 through 2006 tax years. R's assertion that P-H made excess contributions to his Roth individual r tirement account .

for Ps' The determinations stem from I.R.C., Held:

s are liable for the excise tax deficiencies and additions to tax to the extent decided herein.

Howard S. Fisher, for petitioners.

Ronald S. Co lins, Jr. , John A. Guarnieri, and Cindy Park, f or respondent .

The case at docket No. 10478-08 involves petitioners' 2004 and 2005 tax years. petitioners' 2002, 2003, and 2006 tax years. The cases were consolidated for i rial, briefing, and opinion on Feb. 12, 2010 .

The case at docket No. 25825-08 involves SERVE0 JUL - 5 2011

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) li) 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 tihe* statute of limitations bars~respondent from assessing and collecting deficiencies for the 2002, 2003, and 2004 tax years.³ 2Unless otherwise indicate'd, all section references are to the Internal Revenue Code of 1986 (Code), as amended and in effect Tax Court Rules of Practice and Procedure.

for the years at -issue, and all Rule references are to the 3Respondent's $61,164 reduction in petitioners' allowable itemized deductions is computational and need not be addressed in this Opinion.

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 esigned and implemented by A. Blair Stover, Jr.

(Mr. Stover), an his colleagues at the accounting firm of Grant Thornàon, L.L.P.

(Grant Thornton).

I.

Petitioners' Background r. Paschal graduated from Mastsachusetts Institute of Technology with a bachelor of science degree in physics and from the University o Illinois with a master of science degree in physics.

He also received a management certificate for technical persoÁnel from the University of California Los Angeles.

4The basic t x characteristics of a traditional (2) the accrual of tax-free earnings the inclusio of distributions in gross income.

deductible contributions, (except with res ect to sec. 511 unrelated business income), and (3) 219(a), 408 (a), Roth IRA are (1) nondeductible contributions, tax-free earnings, and (3) distrÅbutions from gross income. (2) (A):; Taproot Admin. Servs., 202, 206 (2009).

The basic tax characteristics of a the accrual of (2) the exclusion of qualified Sec. 408A(a), Inc. v. Commissioner, 133 T.C.

IRA are (1) See secs.

(d) (1), (c) (1), (d) (1), (e).

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 secretarialtscience and from 1985 through 2008 worked as'a teacher'š assistant.

II. Roth IRA Restructuring A.

Introduction to Jim Patton As he was nearing retirement, Mr. Paschall attended seminars where Jim Patton, a financial advisers, 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 would recommend".

He ifurther assumed Mr. Patton "would recommend legal thi-ngs and investments that were to my advantage".

B.

Introdu tion to Mr. Stover Mr. Patton ntroduced Mr. Paschall to Mr. Stover. Mr.

Paschall first n t Mr. Stover in Mr. Patton's office in early 2000. At this t me Mr. Stover was a partner-at Grant Thornton.

At the meet ng Mr. Stover gave a presentation and explained the Ryth restructure to Mr., Paschall who "did not fully understand it". Although he acknowledged that.he di-d 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 lette with-Grant Thornton for professional tax and financial consulting servi es, 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 au it by the Internal Revenue Service (IRS).

The engagement er. Paschall explained:

"Grant Thornton was the fifth large t accounting company in the country,- and I believed them to be completely legal and experts in this business of accounting and tax preparation, and I put complete fáïth in what me and did for me".

they told 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.'

The engagement letter provided :that the fee was to be split equally between Grant Thorntod and Nevada ,Corporation Associations, Inc., a laaw firm. Mr. Paschall never asked foranor did he receive an opinion letter regarding the Roth restructure.

D . Kruse Mennillos L . L . P .

, and Individual s 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 account ing f irm .

Neither party presented evidence exp aining the reasoning behin 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.

'As explained further infra note 9, Mr. Paschall did not directly pay Grant Thornton $120,000 to implement restructure. Rather, Paschall's IRA through a corporation.

the Roth the fee was paid indirectly from Mr.

.i .

To Mr. Paschall's knowledge Kru¯se Mennillo did not receive any of the $120, 00 fee that was paid to Grant Thornton for the Roth estructure. Mr. Stover eventually stopped dealing with Mr.

Paschall, and at that time Marc Sommers, a- tax lawyer at Kruse Mennillo and a sformer IRS employee, took over Mr. Pasahall's Federal tax work.

E.

Independent Advice and Knowledge bespite the remarkable promised tax benefits of converting taxable IRA distributions to nontaxable:Roth IRA distributions, Mr. Páschall did not ask anyone else's opinion on the viability of the Roth restructure. Mr. Paschall did not do any research on contribution lim ts to IRAs, taxation of excess contributions to IRAs, or taxatior of 'distributions from, IRAs.

Mr. Paschal¹ understood that contributions to traditional IRAs were made tax free and distributions from them were taxable.

IPetitioners request that'we take judicial notice of a Feb.

request and has taken judicial Injunction against Mr. Stover filed Feb. 21, 2008.

21, 2008, Department of Justice Press Release and a Complaint for Permadent This ourt will grant petitioners' notice of the documents requested and United States v. Stover, 731 F. Supp. 2d '887, 914-915 (W.D. Mo. 2010), holding that Mr. Stover had reason to know that various structures he-promoted lacked any legitimate business purpose and granting injunctive relieÈ against him. entity structures sold and arranged by" Mr. Stover. structure, structure "[skirted] IRAs." organ$zing, establishing, promoting, and selling certain tax structures. United States v. Davison, 105 AFTR 2d 2010-2278, 2010-1 USTC par. 50,406 (W.D. Mo. 2010), affd. as modified and remanded 407 Fed. Appx. 997 (8th Cir. 2011).

Id. at 900. Allen Davison has also been enjoined from referred to by the District Court as the Roth/S The case focused on "three multiple business the contribution limits applicable to Roth The third 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 a 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" Inc.

(Telesis), and West Star Global Inc. (West Star),.were organized, Investment Co., Holdings, 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."

in the State of "For 2000 and 2001, West Star filed Forms 1120, U.S.

Corporation Income Tax Return, zero deductions for each year. West Star reported assets of $2,000 cash as of Dec. 31, 2000, and assets of $1,000 stock as of (continued...)

reporting zero gross receipts and March 20, 2000--Mr. Paschall opened a Roth IRA with First Union Secur ties, (First Union Roth IRA).

Inc., with account number ending in 4078 2 00--As of this date, the Paschalls maintained a IRA account at Resources Trust with account March 22, traditional number ending in 1977 (Resources Trust 2000, Mr. P schall opened a Self Directed Traditional First National Bank of Onaga with account number ending in 3200 (FNBO RA). FNBO IRA vi Trust a rollover of $1,391,941.64 from the Resources On March 30, 2000, Mr. Paschall On March 22, IRA).

IRA.

funded the IRA at purchased all of March 27, 2'00--The Baum Roth IRA purchased all of On April 26, 2000, shares of s ock of Telesis for $2,000. the FNBO I 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, $1,27 ,801.96 was transferred from Telesi's 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. securities nd mutual The money was invested in various publicly traded funds.

the December 17 2001--Telesis and West Star executed articles of merger w th each share of West Star stock being converted into 1 shar of Telesis stock and with.Telesis being the surviving c rporation. with the Ne ada secretary of state on December 31, 2001. West Star w s dissolved as of December 31, 2001. Telesis was dissolved on March 28, 2006.

The articles of merger were filed October 25, 2005--The Paschalls Greceived a $41,900 distributior from their First Union Roth IRA.

On December • • • • • (...continu d) For 2000 through 2004, Telesis filed Forms 1120 Dec. 31, 2001. reporting zero receipts and zero deductions for each year. Telesis reported assets of $2,000 cash as of Dec. 31, 2000; $1,900 cash as of Dec. 31, 2001 and Dec. 31, 2002; and zero assets as of Dec. 31, 2003 and Dec. 31, 2004. Neither West Star or Telesis had any employees at any time.

"The $120,000 difference between what the FNBO IRA purchased the stock in West Star for and the amount West Star,transferred to Telesis was used to pay Grant Thornton's fee.

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

IV. Reporting the Roth Restructure 3 Mr.

Paschall personally prepared and' completed his and Mrs.

Paschall's income tax returns from 1959 until 1993. Stuart Jaeger prepared the Paschalls' income tax returns from 1994 through 1999. Mr. Paschall did not ask Mr. Jaeger his opinion on the sviability of the Roth restructure.

As part of the fee Mr.ePaschall paid for the Roth restructure, Grant Thornton prepared the Paschalls' tax returns for .2000.

- Kruse Mennillo prepared the Paschalls' tax returns beginning in 2001 and therefore prepared all of the returns for the tax, years that are in issue befože this Court.

, Mr. Paschall paid Kruse Mennillo to prepare the tax returns starting in -2001.

In order to facilitate the preparation .of the returns, Mr.

Paschall would provide the information and copies of pertinent documents asked for each year by either Grant Thornton or Kruse Mennillo.

Because "They were prepared by reputable accounting firms", Mr. Paschall asserts that he thought that his 2000 through 2006 tax returns "were completely accurate".

V.

The Result of the Roth Restructure and the Audit In 2003 the Paschalls' returns were audited by the California Franchise Tax Board, with the California Franchise Taxr Board concluding that the Paschalls did not owe any additional taxes.

The Paschalls were defended in the audit by Michael Coopit of Kruse ennillo, eho told the Paschalls at that time that the Roth re tructure "was completely legal and that there was no problem at all".

In either 2 03 or 2004 Mr. Paschall received a letter stating that Gra t Thornton.was turning over the names of people who had engaged in Roth restructures to the IRS. Mr. Stover at this time advised Mr. Paschall that the Roth restructure was legal but that he "might want to disclose on [his] income tax returns the structure". Mr. Paschal¹ thereafter attached to 1- Telesis' and his personal tax returns Forms 8886,. Reportable Transàction Disc]osure Statement.¹⁰ Sometime in 2004 Mr.

Pascháll received, via Mr. Coopit, a memo concluding that the Roth restructure "was legal and met with all tax laws" .

The Paschalls timely filed Forms 1040 for all years in issue They did not file Form 5329 for any of the years in issue.

On February 1 and July 23, 2008, respondent issued notices of deficiency showing the following deficiencies, additions to tax, and penalties:"

The Form 8886 contained little information, stating in the expect ed tax benefits section "THE POTENTIAL- BENEFITS IF ANY COULD BE EITHER A TAX SAVINGS OR COST DEPENDING ON THE TAXPAYERS RATE . YEARS" .

HAS HAD NO ACTIVITY FOR THE PAST THREE TAX

THE COMPAN

"The notice of deficiency for the 2004 and 2005 tax years was issued on Feb. 1, 2008.

The notice of deficiency for the (continued. .

.

) -. 12 - Tax Year Deficiency Addition to Tax Sec. 6651(a) (1) - Penalty Sec. 6662(a) 2002 , $83,238.00 $20,809.50 2003 2004 2005 2006 83,028.15 20,757.00 82,818.00 94,151.00 20,704.00 20,637.00 82,278.00 20,569.50 - $2,320 The Paschalls timely petitioned this Court. Trial was held on February 25, 2010, in Los Angeles, California. At that trial, the Paschalls' attorney asked Mr. Paschall what advice he had ' received from professional advisers. Respondent objected to this testimony as hearsay, and thé Court sustained those objections The Paschalls later requested that the record be reopened to permit Mr. Paschall's testimony regarding expert advice in the light of United States v. Noran, 493 F.3d 1002 (9th Cir. 2007) That request was granted and additional testimony was heard on June 3, 2010.

OPINION

I.

Whether Respondent's Proposed Assessments of Excise Tax for the 2002, 2003, and 2004 Tax Years Are Barred by the Statute of Limitations Mr. Paschall argues that the statute of linitations ba s respondent from assessing deficiencies for his 2002, 2003, and "(...continued) 2002, 2003, and 2006 tax years was issued on July 23, 2008. $94,151 deficiency fož the 2005.tax year comprised (1) an excise - tax deficiency of $82,548 and (2) an income tax deficiency of $11,603.

The 2004 tax years.

The deficiencies as determined by respondent for these years are excise tax deficiencies under section 4973 and additiions to tax under section 6651(a) (1) for failure to file Forms 5329, the sax form on which the section 4973" e'xcise tax is computed and disclosed.

Séction 650 (a) providës the general rule that the amount 'of any tax imposed by the Code shall be assessed within 3 years of the fiiling of the return. However, in case of a failure to file a return, the tar may be assessed "att any time".

Sec.

6501(b) (3)".

Mr. Paschall did not file Form 5329 for -any year at issue; however, he timely filed Forms 1040 for all yêars.

He asserts that Ford 5329 is not a separate tax return from Form 1040, that the statute of limitations started running when he filed the Forms!1040, and that the period of limitations had:expired before respondent issued the notices of -deficiency for the 2002, 2003, and 2Ò04 tax yeaïs. Respondent assefts that Form 5329 is a separate tax return from Form 1040 and that since Mr. Paschall never filed Forms 5329, the seótion 4973 excise tax may be assessed at any time.

The resolution of' this issue is governed by the Supreme Court's decision in Commissioner v. Lane-Wells Co., 321 U.S. 219, 223-224- (1944). Springfield v. United States, 88 F.3d 750, 752 (9th ir. 1996).

taxpayer does not start the statute of [A] running by filing one return when a different return is required if the return -filed is insufficient to advise the Commissioner that any liability exists for the tax that should- have been disclosed on the other return * relevant inquiry is whether the return filed sets forth the facts.establishing liability. * limitations the * * * * Id_ (citing Commissioner v. Lane-Wells Co. , supra at 223) .

"Of crucial importance is whether the return, as filed, included sufficient information to,.allow the IRS to compute the taxpayer's liability". Atl. Land & Improvement Co. v. United States, 790 :

F.2d 853, 858 (11th Cir. 1986).

Section 4973 imposes an excise tax on excess contributions to Roth IRAs which is ,to be reported and disclosed on.Form 5329.

Upon review of Mr. Paschall's Forms 1040, respondent was not reasonably able to discern that Mr. Paschall was potentially liable for a section 4973 excise tax. While a line on each Eðrm 1040,,i.e., line 54 for 2000, line 55 for 2001, line 58.for 2002 line 57 for 2003, line 59 for 2004, and line 60 for 2005 and 2006, states "Tax on qualified plans, including IRAs, and other tax-favored accounts. Attach 5329 if required", Mr. Paschall left these lines blank, giving respondent no indication of his excess contribution.

We hold that the filing of the Forms 1040 did.not start the statute of limitations running for purposes of ,the section 4973 excise tax in the absence of accompanying Forms 5329.

See,, e.g., Springfield v. United States, supra at 752 (holding that because Form 1099 requests information about nonemployee compensation and Form 941 request informationsabout employee compensation, filing Form 099 does n t start the statute of limitations running for purposes of Form 941); Atl. Land & Improvement Co. v. United States, supra at 858 (holding that a payroll tax return (FICA) filed by an employer did not start the statute of limitations running for the gmployer's railroad tax biability (RRTA) because a the FiCA return did not contains,all the information necessary to compute the RRTA).

Because Mr:aPaschall failede to file Forms 5329 for the years in issue, respondent may -assess the excise tax, deficiencies at any time.

II. Section 497$ Excise Tax

Deficiencies for the 2002, Through 2006 Tax Years A.

Burden of Proof As a genera rule, the Commissioner's determination of a taxpa er's liability in the notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the deterEination is improper.

See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, pursuant to section 7491(a), in ce tain circumstances, the burden of proof on factual issues that affect the taxpayer's tax liability "for any tax imposed by subtitle A or B" may shift to the Commissioner.

Mr. Paschall claims that pursuant to section 7491(a) respondent bears the burden of proof. However, section 7491(a) applies only to subtitles A and B, which include income taxes and estate and gift taxes.

The excise tax deficiencies determined by respondent were computed under subtitle D. Section 7491(a) is therefore inapplicable,- and Mr. Paschall bears the burden of proof.

B. Analysis The amount of contributions a taxpayer may make in any given year to a Roth IRA is limited.

Sec. 408A(c) (2) and (3). Section 4973(f) defines an excess contribution to a Roth IRA as the excess of the amount contributed over the amount allowable as a contribution.

There is imposed for each taxable year an excise tax of 6 percent for excess contributions, computed- on the lesser of (1) -the amount of the excess contribution, and (2) the fair market value of the account as of the end of the taxable year.

Sec. 4973 (a).

The excise tax is imposed each year until the excess contribution plus earnings is eliminated.

Mr. Paschall presented no evidence to establish that he did not make an. excess contribution to his Roth IRA. However, he "A taxpayer may convert an amount from an IRA to a Roth IRA is $100,000 or less) in income.

(1) modified AGI Income Tax Regs.

the married taxpayer files jointly; and (3) if, before Jan. 1, 2010, (2) reports the conversion amount sec. 1.408A-4, followed, the taxpayer has a failed conversion which triggers the sec. 4973 excise tax on the amount IRA. 1, 2010, conversions may occur without consideration of $100,000 modified AGI that he converted an amount did he report limitations. Mr. Paschall never argued the taxpayer Sec. 408A(c) (3) (B); transferred from the IRA to the Roth from his IRA to his Roth IRA. Nor On or after Jan. the If these rules are not Sec. 1.408A-4, Q&A-3 (b), the conversion amount Income Tax Regs.

in income.

disp tes respondent's calculation of the section 4973 excise tax, stating that the issue is "How the excise tax is calculated under Code Section 4971(f), with regards to excess funding".

Respondent' sserts that the entire $1,272,801.96 contrlibution fron Telesis to the Baum Roth IRA on April 28, 2000, was an excess contribution." Respondent further asserts that the excise tax calculations for the 2002 through 2006 tax years should be based on the value of the Baum Roth IRA at the end of each respective ax year because those amounts are less than the initial excess c ntribution.

he value of the Baum Roth IRA at the eþd of each ax year was as follows:

ORespondent has chosen not to assert a 2000 income tax deficiency arising from the conversion, against Mr. Paschall, because the period of has e pired.

limitations for assessment for that year The funds held in the Baum Roth IRA on Apr'. 28, 2000, were transferred to the First Union Roth IRA. brief¡continue to refer to Mr. Paschall's Roth IRA as the Baum Roth IRA, we do so as well.

Because the parties on "On brief, respondent provided the Court Qith the fair market value of t e Baum Roth IRA at the -end of each tax year. Apparently, Mr. Paschall had provided respondent with the fair market values immediately before trial but did not into the record. Respondent has accepted the fair market values as acáurate and correct.

introduce them As of Dec. 31 Fair Market Value 2002 2003 2004 2005 2006 $764,200 919,173 991,675 1,245,804 1,037,275 Mr. Paschall asserts that the excise tax should be based on the $2,000 he used to initially fund the Baum Roth IRA and which was contributed to Telesis when the Baum Roth IRA purchased all of the stock of Telesis.¹⁵ In arguing this, he places significance on the merger of West Star and Telesis, which occurred on December 17, 2001, months after the April 28, 2000, transfers moving the $1,272,801.96 initially in Mr. Paschall's traditional IRA to the Baum Roth IRA occurred.

We find Mr. Paschall's assertion unavailing.

It is well settled that the substance of a transaction controls tax liability. Gregory v. Helvering, 293 U.S. 465, 469-470 (1935); Lazarus v. Commissioner, 58 T.C. 854, 864 (1972), affd. 513 F.2d 824 (9th Cir. 1975). Where a series of transactions, taken as a whole, shows either that the transactions themselves are shams or that the transactions have no "purpose, substance, or utility SAs stated supra, the allowable amount of contributions to Roth IRAs-is limited under the Code. This limit was $2,000 for the 2000 tax year. respondent has acknowledged, the Baum Roth IRA generated no tax consequences.

Secs. 219(b), 408A(c) (2). Hence, as the $2,000 initially contributed.to apart from their anticipated tax consequences", the transactions are nullified and not recognized. Goldstein v. Commissioner, 364.

F.2d 734, 740 (2d Cir. 1966), affg.- 44 T.C._ 284 (1965).

The substance of what happened in the instant case is that approximately $1 3 million began the year in Mr. Paschall's traditional IRA and was transferred to his Roth IRA by the end of the year with no taxes being paid. Mr. Paschall did not attempt to provide a nontax business, financial, or investment purpose for what he did, and this Court cannot ascertain one.

Instead, Mr. Paschall, incited by and at the urging of Mr. Stover, used corpogate formations, transfers, and mergers in an attempt to avoid taxes and isguise excess contributions to his Roth IRA.

Mr. Paschall states that "The excise tax should be based upon the contrib tion to the Roth-IRA".

We agree.

The April 28, 2000, contribution to the Baum Roth IRA via a transfer from Mr.

Paschall's tradi ional IRA to West Star to Telesis tö the Baum Roth IRA was an excess contribution.

As responder.t contends, Mr. Paschall "sought to have [his] cake ånd eat it too, contributing the funds tax-free into the traditional IRA and withdrawing them tax-free from the Roth IRA, payin no tax on the conversion stratagem." Accordingly, we sustain respondert's determination and hold that Mr. Paschall is liable for secticn 4973 excise tax deficiencies for his 2002 through 2006 tax years.

These deficiencies are to be calculated - 20. - upon- the fair market value of the Baum Roth IRA at the end of each tax year.

III. Section 6651(a) (1)

Additions to Tax for Failure To File Forms 5329 A. Burden of Proof Respondent bears the burden of production with regard to the section 6651(a) (1) additions to tax.

See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001) .

To meet his burden, respondent must produce sufficient evidence that it is appropriate to impose the determined additions to tax.

See Higbee v. Commissioner, supra at 446. However, respondent does not have to produce evidence of reasonable cause, substantial authority, or lack of willful neglect.

See id.

B. Analysis Section 6651(a) (1) , in the case of a failure to file on time any return required under section 6011(a), imposes an addition to tax of 5 percent of the tax required to be shown on the return for each month or fraction thereof for which there is a failure to file, not to exceed 25 percent in the aggregate. Generally, "any person made liable for any tax * * * shall make a return or statement according to the forms and regulations prescribed by the Secretary." Sec. 6011(a).

The addition to tax will not apply if it is shown that such failure is due to reasonable cause and not due to willful neglect.

Taxpayers ho have made excess contributions to an IRA are required to file Form 5329 each year that they have 'excess contributions.

Hellweg v. Commissioner, T.C. Memo.'2011-58; Frick v. Commissioner, T.C. Memo. 1989-86, affd. without published opinio¹ 916 F.2d 715 (7th Cir. 1990); sec. 54.4972- 1(a), Excise Tax Regs.

Form 5329 is a tax return within the meanind of section 6011, and failure to files Form 5329 can result in section 6651 dditions to tax. Frick v. Commissioner, suora.

Further, as discussed supra part I, Form 5329 is a separate tax retuin from Form 1040.

See -also Martin Fireproofing Profit- Sharing Plan & Trust v. Commissioner,

Mr. Paschal] stipulated that he did not file Form 5329 for any of the years at issue. Respondent has, therefore met his burden of production.

We now turn to the question of whether Mr.

Paschall has proven that his failure to file was due to reasonable cause and not due to willful neglect.

The sfailure to timely file a tax return is considered due to reasonable cause where a taxpayer is unable to file the return within the prescribed time despite exercising "'ordinary business care and prudence.'" Jackson v. Commissioner, 86 T.C. 492, 538 (1986) (quoting section 301.6651-1(c) (1), Proced. & Admin.

Regs.), affd. 864 F.2d 1521 (10th Cir. 1989) .

,"[W]illful neglect" is defined as-"a conscious, intentional failure or reckless indifference". United States v. -Boyle, 469 U.S. 241, 245 (1985).. Mr. Paschall, citing United States v. Boyle, supra at 249 -251, argues that his reliance on tax advisers "constitutes reasonable cause for avoiding a failure to file «penalty under" section 6651.

Generally, circumstances considered to constitute reasonable cause arise as a result of factors beyond a taxpayer's control and include situations such as unavoidable postal delays,a t-imely filing of ;a return with the wrong office, death or serious illness of the taxpayer or a member of his immediate family, the taxpayer's unavoidable absence from the United States, destruction by casualty of the taxpayer's records or place of business, and reliance on the erroneous advice of an IRS office or employee. McMahan v. Commissioner, 114 F.3d 366, 369 (2d Cir.

1997), affg. T.C. Memo. 1995-547; see also Gagliardi v.

Commissioner, T.C. Memo. 2008-10. Reliance on a mistaken legal opinion of a competent tax adviser that it was unnecessary to file a return also constitutes reasonable cause.

McMahan v.

"While the Supreme Court has indicated that reliance on a tax adviser as to whether a taxpayer needs to file can constitute reasonable cause, reliance on a tax adviser to prepare the return does not constitute reasonable cause.

- United States v. Boyle (continued .

.

. ) Commissioner, su ra at 369. However, while good faith reliance on professional dvice may provide a basis for a reasonable cause defense, it is not absolute." Freytag v. Commissioner, 89 T.C.

849, 888 (1987), affd. 904 F.2d.1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991); LaPlante v. Commissioner, T.C. Memo. 2009-226.

"The advice must be from competent and independent parties, not from promoters of the investment" or advisers who have a conflict of inte est.

Swanson v. Commissioner, T-.C. Memo. 2009- 31 (citing LaVerne v. Commissioner, 94 T.C. 637, 652-653 -(1990), affd. without pu lished opinion 956 F.2d 274 (9th Cir. 1992)); see Hansen v. Commissioner, 471 F.3d 1021, 1031 (9th Cir. 2006), affg. T.C. Memo. 2004-269.

"Courts have repeatedly held that it is unreasonable tor a taxpayer to rely on a tax adviser actively involved in plan ing the transaction and tainted by an inherent conflict of inte est". Canal Corp. v. Commissioner, 135 T.C.

(...continued) 469 U.S. 241, 251 (1985); Jackson v. Commissioner, 86 T.C. 492, 539 (1986), affd. 864 F.2d 1521 (10th Cir. 1989).

* that "We have held that for a taxpayer to rely reasonably upon the taxpayer meets "the taxpayer must prove * * the following three-prong test:

advice, each requirement of adviser was a co etent professional who had sufficient expertise to justify reliance, (2) accurate information to the adviser, and (3) the taxpayer actuaily relied in good faith on the adviser's judgment." Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.- 2002); see also Charlotte's Office Boutique, (9th Cir. 2005) test), affg. 121 r.C. 89 (2003).

Inc. v. "Commissioner, 425 F.3d 1203, 1212 & n.⁸ (quoting with approval the taxpayer provided necessary and the above three-prong (1) The 199, 218 (2010); see ,also Pasternak v. Commissioner, 990 F.2d 893, 902-903 (6th Cir. 1993), ,affg. Donahue v. Commissioner, T.C Memo. 1991-181; LaVerne v. Commissioner, supra at 652-653.

, * A promoter is "'an adviser who participated in structuting the transaction or is otherwise related to, has an interest in, or profits from the transaction.';"" 106 Ltd. v. Commissioner, 136 T.C. 67, 79 (2011) (quoting Tigers Eye Trading, LLC v., , Commissioner, ToC. Memo. 2009-121).

"A promoter's self-interest makes * * *- 'advice' inherently unreliable." Tigers Eye Trading LLC v. Commissioner, supra.

At a minimum, Nr. Stover and his colleagues charged a $120,000 flat fee. Mr. Stover set up the various entities and coordinated the. deal "from start to finish."

106 Ltd. v.

Commission'er, supra at 80. Grant Thorntoh and Mr. Stover nere paid a flat fee for "implementing -* * *.

[the Roth restructure] and wouldn't have been compensated at all if * * * [Mr. Paschall) decided not to go through with it".

See id. Mr.- Paschall blindly followed Mr. Stover to Kruse Mennillo without questioning "We have held that a tax adviser was not a promoter of a transaction when he had a longiterm and continual relationship with his client, did not give unsolicited advice regarding the tax shelter, advised only within his field of.expertise (and not because of his regular involvement in rendering followed a regular course of conduct scrutinized), his advice, and had no stake in the transaction besides what.he bills at his regular hourly rate. T.C. 67, 80 (2011) Commissioner, 132 T.C. 347, 352-355 (2009)).

(citing Countryside Ltd. Pship. v.

106 Ltd. v. Commissioner, 136 in the transaction being the reasons for his departure from Grant Thornton. Hence, Mr.

Paschall cannot argue this alleged reliance on Mr. Stover and/or Grant Thornton e tablishes reasonable cause and good faith.

See Hanse v. Commis ioner, supra at 1027-1031 (affirming the Tax Court holding when the taxpayers relied solely on the organ zation promoting the transaction and did not independently verify, their tax returns despite .warnings by the IRS) (citing Neely v. United- States, 775 F.2d 1092, 1095 (9th Cir. 1985) ) ; see also Laverne v.

lommissioner, supra at 652.

i'o support his argument, Mr. Paschall cites Haywood Lumber & Mining Co. v. Co missioner, 178 F.2d 769, 771 (2d Cirs 1950) , modifying 12 T.C. 735 (1949), orient Inv.- & Fin. Co. v.

Commiasioner, 166 F.2d 601 (D.C. Cir. 1948) , and Hatfried, Inc.

v. Commissioner, 162 F.2d 628 (3d Cir. 1947) . Unlike the case at ha d, in those Mr. Pasdhall relies⁵ on there'~is no evidence that the tax advisers were not independent .

See Havigood Lumber & Minind Co. v. Commissioner, supra at 770-771) Orient Inv. & Fin.

Co. v. Commissioner, supra at 602-603; Hatfried, Inc. v.

Commi sioner, supra at 631-632.

While Mr. Paschall argues that he also relied on Mr. Patton, there is no evidence, other than Mr. Paschall's testimony, what the two t·alked ab ut .19 Mr. Patton is not competent in tax RMr. Paschall also appears to rely .on individuals who (continued .

.

. ) matters; he introduced Mr. Paschall to Mr. Stover; and Mr.

* Paschall did not seek Mr. Patton out for an independent review of the Roth restructure; rather, Mr. Paschall contacted Mr.. Stover.

Only Mr. Paschall testified. Mr. Paschall appears to believe that his own self-serving testimony is enough to establi'sh reasonable cause.

We disagree.

We have "found reliance to be unreasonable where a taxpayer claimed to have relied upon an independent adviser because the adviser either did not testify or testified too vaguely to convince us that the taxpayer was;reasonable in relying on the adviser's advice".,, Swanson v. Commissionet, supra; see also Heller v. Commissioner T.C. Memo. 2008-232 (in upholding a penalty stating that aside f rom the taxpayer' s - "self -serving testimony, there [was] . no evidence in the -record as to the specific nature of * *. * [the professional's] advice".), affd., 403 Fed. Appx. 152 (9th,Cir.

2010). Mr. Paschall's failure to introduce evidence "which, if true, would be favorable to [him], gives rise to the presumption that if produced it would be unfavorable". Wichita Terminal " ( .

.

. continued) signed his individual and corporate tax returns, Encluding Angela Parker, Kelly Webb, and Jennifer Swearinger., However, no evidence that he ever spoke to any of the Roth restructure. interest because they worked with Mr. Stover on the Roth restructure and were employees of Grant Thornton and/or Kr.use Mennillo.

these indiv'iduals about they also have confliáts of In any event, there is Elevator Co. v. Commissioner,

Mr. Paschall should have realized that the deal was too good to be true.

See LaVerne v. Commissioner, supra at 652-653. Mr.

Paschall is' a hi hly educated and successful businessman.

He explaained to thi Court that because he grew up in the Depression, he was conservatiee with his investments and worried "about having enough money" to last through retirement. Yet he paid $120,000 fo.. a transaction that e "did not fully understand".

Mr. Paschal:. had doubts, repeatedly asking whether the Roth restructure was legal. Despite these doubts, he never asked for an opinion lette or sought the advice of an independent adviser, including Mr. Ja ger, who was preparing his tax returns at the time he met Mr.

tover.

This was even after he received a letter warning him that there might be problems with the Roth restructure and that his name was being turned over to the IRS.

Mr. Paschall has failed to establish that he meets the reasoáable cause and not willful neglect exception to the section 6651(a) (1) addition to tax.2o Therefore, we sustain respondent's ÚMr. Pascha 1 also stated that he relied on the audit by the California Franchise Board and resulting "no-change" letter issued by that entity. Because of Mr. Paschall's lack of evide ce, we attribute little significance to his alleged reliance on the California Franchise Board.

imposition of the section 6651(a) (1) additions to tax for the Paschalls' 2002 through 2006 tax years.

IV.

Income Tax Deficiency and Section 6662 (a) Accuracy-Related Penalty for Petitioners' 2005 Tax Year In 2005 petitioners received a $41, 900 distribution from Mr.

Paschall's Roth IRA which they did not report on their 2005 Form 1040 .

To guard against a whipsaw, respondent determined an income tax deficiency and a section 6662(a) accuracy-related penalty for petitioners' 2005 tax year that were based on petitioners' possible argument" that the Baum Roth IRA should be deemed a traditional IRA. Respondent has stipulated that he would concede the income tax deficiency and the related section 6662(a) accuracy-related penalty for petitioners' 2005 tax year if this Court held that Mr. Paschall was liable for section 4973 excise tax deficiencies.

As we have found Mr. Paschall- liable for excise tax deficiencies, the issue of whether petitioners are liable for an income tax deficiency and a section 6662 (a) accuracy-related penalty for the 2005 tax year is conceded.

The Court h s considered all of petitioners' contentions, arguments, reque ts, and statements.

To the extent not discussed herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing, Decisions will be entered under Rule 155.

6. T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
92. T.C. 1173, 1192 (1989) (concluding that the same reqdirements apply in deciding both whether a return is sufficient for statute of limitations purposes and whether a return is considered filed for section 6651(a) (1) purposes).