Ronald V. & Donna-Kay Swanson, Petitioner

T.C. Memo. 2011-156 UNITED STATES TAX COURT RONALD V. AND DONNA-KAY SWANSON, Petitioners .

COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 30714 08.

Filed July 5, 2011.

R dete mined tax deficiencies and accuracy-related I. R. C. , to seå. 6662 (a) , The determinations stem from R's penalties pursuant through 2007 tax years. dete~rmination that ,P-H m de excess contributions to his Roth individual retirement account stipulated Ps' tax years and R conceded iall adjustments relating to the 2007 tax year, for Ps' 2001 through 200d tax years in dispute.

(Roth IRA) . tax deficiencies for the 2001 through 2006 leaving only the accuracy-related penalties for Ps' 2001 The parties Held:

Ps' are liable fòr sec. 6662( ), I.R.C., accUral:y-related penalti s for their 2001 thiough 2006 tax years .

Howard 'S. Fisher, for petitidners MiclíaeÝ W. "Ian and Cindy a - o res ondent Smvåb JUL - 5 2011

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition for redetermination of respondent's determination in a notice of deficiency that petitioners owe tax deficiencies and section 6662(a) accuracy-related penalties for their 2001 through 2007 tax years.¹ After concessions,? the sole issue left for decision is whether petitioners are liable for section 6662(a) accuracy- related penalties for their 2001 through 2006 tax years.

FINDINGS OF FACT

Some of the facts have'been stipulated, and the stipulations, with the accompanying exhibits, are incorporate'd herein by this reference. At the time they filed their petition with this Court, petitioners resided in Nevada.

Petitioners filed joint Federal income tax returns for all relevant years. This case stems from petitioner husband Ronald V. Swanson's attempt to "turn ran IRA into a Roth IRA": (Roth Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for the years at Rules of Practice and Procedure.

issue, and all Rule references are to the Tax Court 2The parties stipulated that petitioners are liable for excise tax deficiencies of $61,277.78, $45,207.79, $58,564.58, $63,774.17, $65,637.06, and $73,911.11 for their 2001; 2002, 2003, 2004, 2005, and 2006 tax years', respectively. The parties further stipulated that petitioners have no excise or income tax deficiency for their 2007 tax year and are not accuracy-related penalty for their 2007 tax year.

liable for the restructure) The Roth erestructure was designed and implemented by A. Blair Stover, Jr.

(Mr. Stover) and his colleagues at- the accounting firm of Grant Thornton, LLP (Grant: Thornton).e The parties have stipúlatedethat in 2000 Mr. Swanson made -an excess contribution intosa Roth indi idual,retirement account (Roth IRA) of $1.61 million and that- as of December 31,- 2006,sit remains in his account.

I.

Petitioners* Backgroundå Petitioner wife, Donna-Kay Swanson, was a homemaker for all tax years in issuesand 'rel·ied on her -husband to determine wheth'er to engage in the Rotherestruc ure.

iMr. Swanson attended college at the Universit of Michigan where he graduated with a degree in mechanical engin ering and mathematics After graduation, Mr.

Swanson began wo king for Hughes Aircraft '(Hughes)s .Mr. Swanson worked for Hughes or one of its subsidiažies for his entire 36 -year - career .

While working .at Hughes; Mr. Swanson attended graduate school at the University of California Los Angeles i(UCLA) where IRA are ,(1) the accrual of 3The basic tax characteristics of.a traditional (2) the inclusiofof diètrib tions in gross income.

deductible contrLbutions, (except with res>ect to sec. 511 unrelated business income), and (3) 219 (a) , 408 (a) , v. Commissioner, 133 T.C. 202, 206 (2009). characteristics of a Roth IRA are (1) nondeductible contkibutions, exclusion of qualified distributions from gross income. 408A (a) , Servs., the accrual of tax-free earnings, and (3) (d) (1) , and (2) (A) ; see also Taproot Admin.

Inc. v. Commissioner, supra at 206.

.(e) ; see also Taproot Admin. Servs .

ta -free earnings The basic tax See secs.

the See sec.

(c) (1) , (d) (1) , Inc .

(2) , 4 - : he graduated with a 'degree -in Applied Mechanics . Additionally,a Mr. Swanson finished a 2-year extension course at UCLA, where he received a certificatet in business management.

During his career, Mr. Swanson worked at? Hughes as a part- time- master' s fellow and then held positions in various- areas of structural engineering. Eventually, - he was promoted into administrat ive management .

In approximately 1997 Mr. Swanson helped develop Hughes Global Services, a 20-person company and eventual subsidiary of Hughes . Mr. Swanson was appointed president of Hughes Global e Services, where he stayed until his retirement in October 2001.

As an employee of Hughes, Mr. Swanson was the beneficiary of,a thrift and savings plan (Hughes TSP) to help with retirement.

II.

Introduction to the Roth Restructure A .

• Initial Introduction Mr. Swanson initially heard about the Roth restructure from Fred Nardi (Mr . Nardi) , a f riend and coworker . Mr . - Nardi told Mr. Swansonathat on the basise of his discussions with other tax, professionals, including his tax return preparer, Creal & Mather, he understood they felt that the Roth restructure "was solid".

Mr. Nardi showed Mr. Swanson an unsigned opinion letter from Grant Thornton (Nárdi letter) detailing the Roth restructure.

Mr . Swanson claimed he relied on the Nandi letter in deciding whether to engage in the Roth restructure . Apparently, the Nárdi letter discussed Listed transactions, and because of this, Mr.

Swanson looked at the Internal Reirenue Service- (IRS) Web site.'

In addition to Mr . Nardi, Mr Swanson -alsó talked with Jim Patton (Mr. Pattol)' and Bob Mather (Mr.- Mathef) before contacting Grant Thornton.

vir. Patton is"anninvestment. adviser who began advising Mr.I Swanson in 2000 and is-'the 'only ihvestment adviser Mr. Sûanson has ever consultedN Mr² Patton was also of the impression that the Roth restzucture ""was above 'boird" .

Mr . Mather wa s Mr . Nardi ' s tax preparer .

Ac chiding to - Mr .

Swanson, he contacted Mr . Mather, who had other" cliànts doing * * Roth restructures and apparently did not see any~ problêms with B.

* Inti-oduction to Mr. Stover In 'approximately March 2OOÔ 'Mr. Stover metrMr. Swanson while he was on vacat ion ih Las Vegas .

- Mr . Swansön' asked Mr . S tover 4A-listed -transaction is a transaction that -is the -same as, transactions the types of or substantially similar to, one of that -the IRS has -determined to be used-for tax avoidance and has identified by no -..ice, .regulation, or other form of published guidance as a listed transac6ion. See »McGehee Family Clinic, P.A. v. Commissioner, T.C. Memo. 2010-202 (citing sec. (incorporating by 6707A(c) (2) ; sec. 1.6011-4, reference sec. 1.6011-4T(b) (i), Temporary Income Tax Regs., 65 Fed. Reg. 11207 (Mar. 2, 2000)); see also BLAK Invs. v. Commissioner, 133 T.C. 431, 44'0-441 (2009)). effective Oct. 23, 2004, and imposed penalties on those who failed tö report a-reportable transaction"as required undér sec. 6011. Sec . 6707 entitled o'Failure to 3Furnish IInformation Regarding Tax Shalten" was effectiverthrough Oct. 22, 2004, and imposed penalties on those who faïled*to register a 'tax shelter under sec . 6111 (1) .

«Sec. 6707A became Income Tax Regs.

- -6 - several questions, claiming his basic concern -was that het "did not want to do anything illegal". Mr. Stover explained the Roth restructure in detail and told Mr. Swanson that the transaction was not only legal but had been "court tested" .5 1 - After deciding« to engage int the Roth restructure, Mr.

Swanson met with Mr. Stover on other occasions, again inquiring at one or more of these meetings about the legality of the Roth restructure and whether it was a listed transaction.

He also visited 'the IRS Web site and cconcluded the Roth restructure was not a listed transaction.

C.

Engagement Letter On April 11, 2000, Mr. Swanson executed an engagement letter with Grant Thornton.

The engagement letter contained a clause providing that Grant «Thornton would represent and defend Mr.

Swanson or any, related entity at no additional cost in case of audit by the IRS.

The engagement letter also contained an indemnity clause providing that Grant- Thornton would.reimbùrse and indemnify the Swansons and any related entity for any civi negligence or fraud penalty assessed against them by Federal or State tax authorities.

sMr . S tover told Mr . Swanson - that the Roth restruc ture had been approved, in Swanson v. Commissioner, 106 T.C. 76, 78-81 (1996) . i s The names- are coincidental- -the taxpayer in Swanson v. Commissioner, supra, has no connection with petitioners. Mr. Swanson read the case and thought that it was very similar to what Mr. Stover was proposing for him.

Petitioners paid - $120 , O⁰⁰ for the Roth restructure, the engagemente letter providing that the fee was&to be. split equally between Grant- Thornton and, Nevada Corp: Assòciations (NCA) , a law firm. Mr.» Swanson assumed NCA was an "outside leg'al firm providing services to Grant Thornton"r a Mr. Swansoni did not ask for a formal opinion letter, när was oneGever issued. - Mr Swanson believed that since he and Mr.

Nardi were engaging in the saine, transaction he did not need his own opinion letter.

* Da a - Kruse Me nnillo and Individuals i Other iThan Mr . -Stover In addition to Mr. -Stove⁴, ;Mr. Swanson had contact with" other individuals at Grant- ThorntonoincludingiLùthèr IOliver; a tax lawyer",1 and Ruth Donovan, at certifiëdopublic -accountant.

In - September 20 015Mr . Stover ; alóng withe otheriindividualsi he worked with, left Grant Thornton for Kruse Mennillo,iLLP (Kruse- Mennillo) , another accounting firm. Neither party prèsented evidence explaining the reason behind'Mr.- Stover's abrupt move.

At the time Mr. Stover left Grant Thornton Mr. -Swansonsbegan using Kruse Mennillo instead òf Grant Thornton Petitioners request. -that wes take udicial noticesof. a Feb.

21, 2008, Department of Justice Press Release and a Complaint for Permanent Injunc -ion against Mr. Stover filed Feb. 21, 2008. This Court shall grant petitioners' judicial notice of Stover, 731 F. Supp. 2d 887, 914-915 (W.D. Mo'. 2010) , holding that Mr. "Stover had reason td know that various structures he 1 - promoted lacked any legitimate business purgode and gi-anting injunctive relie E against him.

the documents requested and United States v.

~ The case fotu'sed on: "three request and pas taken (continued. .

. ) E.

Independent Advice and Knowledge Despite the remarkable promised tax benefits of converting taxable,IRA distributions to nontaxable Roth IIUt distributions, Mr. Swanson did not ask anyone who was completely independent of the Mr. Patton and Mr. Stover groups for an opinion on-the viability of the Roth restructure. Mr. Swanson knew that there were contribution limits to Roth IRAs, specifically that in 2000 the contribution- limit was $2,000.

III. The Roth Restructure ..

Before the years in issue and before petitioners engaged GranteThornton; Mr. Swanson had opened a traditional IRA wi-th Charles Schwab with an account-number ending in 6050 (Schwab IRA). Grant Thornton (specifically, Mr. Stover) and NCA, oversaw all of the steps in the Roth restructure.

The Roth restructure was implemented as follows:

• (Sierra West), was created by NCA.

March 20, 2000--A corporation, Sierra West Global Holdings Inc. Northstar Acquisition and Investment Co., (Northstar) also formed by NCA sometime in the first 6 months of 2000. Sierra-West and Northstar shared the same registered agent and registered office during all relevant periods. Mr. Swanson served:asapresident, secretary, and treasurer of both corporations during 2000 and 2001. At some point, a James Hoeppner began serving as president and secretary of Sierra West, but acted as Mr. Swanson's nominee when doing It then joined Inc.

( .

.

. cont inued) multiple business entity structures sold and arranged by" Mr. Stover. as the Roth/S structure -"[skirted] applicable to Roth IRAs."

referred to by the district court the contribution limits The third structure, Id. at 900.

• • • • so. NEach corporation opened arbank account with can initial deposit of $250 on May 4, 2000 April 25 , 20 30 - -On or aroundSApril 25 , 20 0 0 , Mr . Swanson opened a Rota IRA accoun with First Union with an account number endinfin 0381 (FU Roth IRA) .

April 28, 2030--On or around April 28 opened a Sel-f-Directed Tbaditional the First Trust Company.of Osaga with:an account number ending 0500 .(FNBO IRA). On May 5, 2000, of $1,207,802.55 from the Hughes TSP. Swansón dire±ted the-FNBC IRA to purchase 100 percent of stock of Siecra West for $1,207,7802.55. The purchase -price was deposited intoe the Sierra West account on-May :C⁹, 2000.

the FNBO IRA was funded via a.rollover On May 19, 2000, Mr.

2000, Mr. Swanson IRAsat the May 1, 2000--On oraaround Mayal,s 2000, Mr. Swanson opened a Self-Directed Roth IRA at -thexGeorge K. Baum Trust Company with an accoant number ending in 8305 (Baum Roth IRA) which was "funded -with ta $2,000icontribution-from a-personal investment a::count :Mr . Sùansondmaintained at Charles Schwab (CS Investment Account). j On May 2, 2000, Mr. Swansons directed the Baum Roth IRA to purchase 100 percent of stock of Northstar for-$2,000. deposited into-the Northàtar accountoon June 6,--2000.

The" purchase price was a the from the CS Investment Account.

May 16; 2000--Mr. Swansoá-deposited $150,000 into the Northstar account 22, 2000, Mr. Swanson ordered $1,087,802.55 transferred from the "Sierra Wests account On May 22, 2000, Mr. Swanson,ordered, $1 238,000-transferred from the Northstar account of a dividend declaration."

to the Baum Roth IRA under the guise t o theGNorthstar account On May 7For 2000.ard 2001:Sierrá West filed Forms 1120, U.S.

reporting zero gross receipts, Corporation-Income Tax Return, had no employees and only nodinal expenses, and because it saw no need did not maintain books and records. Northstar filed Forms 1120 showing zero gross reáeipts, employees and only nominal e penses; and saw no-reason to maintain books oc records. Swanson to eventaal-ly perform consulting services through Northstar after ais retirement, but because"of health.reasons, he never did.

The claimed rintention was for Mr.

For 2000 through 2007 it had no it AThe transfer was not a dividend because it did not come from Northstar's earnings and profits The- $1,238,000 can (continued. . e ) • • • • • • "June.⁸, 2000--Mr. Swanson -wired.$250,000 into the Northstar account Mr. Swanson ordered $252,000 transferred from the Northstar account from the CS Investment Accounty.

to the Baum Roth IRA.9 On June 9, 2000, December 19, 2000--Mr. Swanson deposited $120,,000 into the Northstar account Muchestly, Schwab. transferred from -the Northstar account On December 29, 2000, Mr.aSwanson ordered $120,000 from a brokerage account under tihe name that Mr . Swanson maintained at Charles to the iBaum Roth Inc .

, for a total of $1,610,000, had been January 8, 20 01- -By January 8 , 2001, $1, 238,.0 00 , and $120/000, transferred into ,the Baum Roth IRA and from there had been transferred to the FU Roth IRA and invested in various mutuals funds . As , of eDecember 31, 20 01, value -of the FU Roth IRA was , $1, O²¹, 296 . 28 .

the fair market , $252, 000 , December 2001--Merger documents were executed merging-Sierra West into -Northstar,' with Northstar being the surviving corporation.

December 2002--The fair market value of of December 31, 2002, was $753,463.24. 2003, 31, 20 04 , the fair market value was $976,078.04.

the f air market value was $1, 062, 90 2 . 7 9 .

the FU Roth IRA as As of December 31 As of December May 2005--All securities held in the FU Roth -IRA were .transferred to a Roth IRA Mr. Swanson opened with:H&R Block Financial Advisors - (H&R Roth IRA) .

* ( .

.

. continued) apparently be traced to (1) $197.45 from the initial $250 capital contribution; brokerage account- on May 16, 2000;, and (3) a' $1,087,802.55 transfer from Sierra West on May 22, 2000 .

(2) a $150,000 transfer from Mr. Swanson's - "The $252, 000 transfers was made via another purported June 8, 2000, dividend declaration; however, once again the transfer was not a dividend because it did not come from Northstar' s earnings and profits. initial Roth IRA contribution and (2) a $250, 000 transfer from Mr. Swanson's brokerage account on June 8, 2000.

The transfer may be traced tos (1) a.$2,000 1°The $120, 000 transfer was yet again made as a purported dividend but not come from Northstar's earnings and profits.

the transfer was also not a dividend because -it edid · 11 - • • December -200 5---By December 2005 all securities transferred from the FU oth IRA to the H&R Roth IRA had been liquidated and invested in annuities at "Lincoln National' Life Insurance Co., also known as American Legacy (American Legacy Annuity) . December 31, 2005, was $1,093,951.07. of $1,231,851.75.

the H&R Roth IRA as of December 231, 2006, was The fair' markét value of the H&R Roth IRA as of The fair market value December 200 7--Mr. Swanson surrendered the American Legacy Annuity and withdrew substantially all the funds from his H&R Roth IRA.

IV. Reporting the Roth Restructure

With the exception of 1 or 2 years, Mr. Swanson prepared his and Mrs. Swanson' s joint tax returns for 1965 through 1998."

While Mr. Swanson had no formal study in taxation, he did "buy a tax book each year to look at the highlights and see if there [was] anything that was new that would affect" him.

As part of the fee Mr. Swanso paid for the Roth restructure, Grant Thornton began preparing the Swansons' tax returns in 1999.

This was because Mr. Swanson indicated he "wanted to make su.re that the people that had developed the [Roth restructure] * * * continually followed it and knew exactly what they should be doing" .

Kruse Mennillo prepared the Swansons' tax returns beginning in 2001.

9Dui-ings the period eMr .

consisted of a Form 1040, U.S. Schedule A, and Losses.

Itemized Deductions; and Schedule D Capital Gains anson prepared his own return, Income Tax Return; Individual it "The tax returns included Federal income tax returns and Federal excise tax retürn . Nobthstar' s 2000 tax return was prepared'by Grair Thornton, and Northstar's 2001 through 2007 tax . ) (continued. .

In order to facilitate the preparation of therreturns, Mr.

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

Individuals inc luding Mr . Stover , Mr . Oliver , and Ms .

Donovan presumably worked on the returns .

None of these individuals testified.

When Mr. Swanson received the returns, he reviewed them to make sure that all the information he had given was transcribed properly, that the deductions that were taken were proper, and that each of the corporate entities had a tax return.

t Petitioners' tax returns showed excise tax on excess contributions to a Roth IRA of $2, 000 for the 2000, 2001, 2002, 2003, and 2007 tax years; $3,500 for the 2004 tax year; and'$5000 for the 2005 and 2006 tax years.

V.

The Result of the Roth Restructure and Audit As a result of the Roth restructure, Mr. Swanson made an excess contribution of $1,610,000 into his Baum Roth IRA through three different transfers occurring in 2000.

In 2004 Grant Thornton sent Mr. Swanson a letter regarding the Roth restructure (Grant Thornton letter) stating that the Roth restructure was potentially a listed transaction pursuant to IRS " ( .

.

. continued) returns were prepared by Kruse Menillo. Sierra West's 2000 tax return was prepared by Grant Thornton, sand its 2001 tax return was prepared by Kruse Menillo. prepared by different firms, of,people.

-Even though the tax returns were they were prepared by the same team 4 13 - Notice 2004--8 2004-1 C.B. 333. Notice 2004-8,séntitled "Abusive Roth IRA Transactions",3 -states, in part, that taxpayers are using transactions "to avoid- the limitations on contributions to Roth IRAs" and- that- "these transactions, as well'as substantially similar transaction" are listed t'ransactions.

The transactions described ïn'Notice 2004-83 supra, ainvolve the taxpayer, a Roth or IRA, -and a corporation substandially all the shares of which' are owned or acquired by the Roth t];RA".

Mr. Swanson asserts that:he discussed the Grant Thorntons letter-with tax ]:awyerà at Kruše Ménnillo', including Mr. Stover, and was tóld that his transaction was hot' covered by the notice, 7 he would not be penalized for nondisclosure",e and th'at it was up to him whether hei disclosed'. Mr. Swanson did not 'discuss the Grant Thornton letter or attempt to c iscern whether he had engaged in a listed transaction with anyone else.- M .'-Swanson decided to - disclose the transaction anyway "just to make sure * * * [he] wasn't violating anything * * * [and because he wanted to take] the safest route".

To disclose, Mr. Swanson attached a Form 8886, Reportable Transaction Disclosure Statement, to Northstar's 2003, 2004, and 2006 tax returns."

"While Mr. Swanson explained that Form 8886 was used to disclose his Roth restructure, little'explanation on,Form 8886. Under th'e*Facts section of form, petitionere typed "TiiE TAXPAYER WAS FORMED TO PERFORM SERVICES FOR MUL' IPLE BUSINESNES IN THE FIELD OF, CONSULTING. BUSINESS REASONS-FOR ITS EXISTENCE INCLUDE, BUT ARE NOT LIMITED - TO:

- ASŠET PROTECTION, SUCCESSION PLANNING, ANI) RETIREMENT this Court noteå that there was the THE (continued...)

In 2006, the Swansons' returns were audited by the California* Franchise. Tax Board. According to Mr. Swanson, this' was the first time that he suspected that the Roth restructure swas not -100 percent viable.

-Mr. Stover and his colleague, Marc Sommers indicated to Mr . Swanson that their opinion was "that tihe audit would not show any shortcoming. of taxes paid" .

The ,audit was concluded in 2007 with "no change". Mr. Swanson "felt that the clearance by the California Tax Board was a further indication that the structure was viablerand proper" .

The Swansons etimely filed Forms 1040, U.S.

Individual sIncome Tax Return, and Forms 5329, Additional Taxes on Qualified, Plans (Including IRAs)- and Other Tax-Favored Accounts, for all years in issue.

On October 6, 2008, respondent issued three notices of defi-ciency collectively showing the following deficiencies and section 6662 (a) accuracy-related- penalties :

(. .

. continued)

THIS PROTECTIVE DISCLOSURE IS BEING FILED BECAUSE IT

PLANNING. IS NOT CLEAR WHETHER THE GOVERNMENT WOULD VIEW THE TRANSACTION AS SUBSTANTIALLY SIlvíILAR TO THOSE IDENTIFIED IN NOTICE 2004-8". the Expected Tax Benefits section, Mr. Swanson typed "THE POTENTIAL BENEFIT IF ANY COULD BE EITHER A TAX SAVINGS OR COST DEPENDING ON THE TAXPAYERS RATE" .

In .3 Tax Yea 2001 . 20 0 2 20 03 2004 2005 2006 2007 ÷ 15 - De iciency $96,495 96, 111 96, O⁹¹ 95,984 95,879 95,863 Penalty Sec . 6662 (a) $19i299.00 19 , 222 . 20 19, 218 . 2,0 19,196.80 19,175.80 19,172.60 614, 627 122, 925.40 The deficiencies for tax years 2001 through 2006 were excise tax defidiencies tÅsed upon respondent's determination that Mr.

Swansori had malle an ezcess òon ribution of $1.61 million to his Roth IRA in 2000 and a portion of tl e exaess cI>ntriliution remained in the accounÊ through Decembei 31, 2006.

T1e deficiency r 2007 was an income tax deficiency bÂsed upon respõndenti's 'determination that Mr. Swanson had unreported income of $1,803,900 and a computational adjÙtment of $3 1è8 t itemized dedúctions.

Thê Swansons timely pe tiitioneci thi Court .

A tiia] was held on March 5," 2010, iii Los Ar.geles, California.

OPINION

I. Burden òf Proc.f We Ÿirst address the" Swansons' cont-ention that thë bu den of proof has shifted to respondent.

They contend hat Where a petit ioner has introduced credible evidence relevant to ascertain-ing-the petitioner's liability, the burden of proof burden of proof with respect- income tax issties (Code Sèction 7491) .

in court pròceedings shifts so that the Service has the to factual issues related ,to The Petitioner in this case had introduced the requisite credible evidence, an [sic] had maintained all of cooyerated during the audit process with the Service Hende in this proceeding the burden had shifted to the Respondent.

the required records, and Petitioner has confused the burden of proof for pénalties, see sec."7491(c), with the burden of proof for income tax liability, see sec . 7491 (a) . Pursuant to section 7491 (a) , the burden of proof on factual issues that affect the taxpayer's income and estate or gift tax liability (imposed by subtitles A and B of title 26 United States Code) may shift to the Commissioner in certain circumstances .

There is no underlying income, estate, or gift tax liability at issue. Accordingl , section 7491(a) is not applicable.

Under section 7491(c) , respondent bears the burden óf production with respect to Mr. Swanson's liability for the section 6662 (a) accuracy-related penalty. This means that respondent "must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty."

See Higbee v.

Commissioner, 116 T . C. 438, 446 (2001) . However, respondent does not have the additional burden of producing evidence of reasonable cause, good faith, substantial authority, or lack of willful neglect, except as may be necessary t o rebut evidence introduced by petitioners .

See & II. Analysis Section 6662 (a) imposes an accuracy-related penalty of 20 percent on any únderpayment of tax that is attributable to causes 17 - specified in ásubsection (b) . Respondent asserts negligence or disregard of the rules and regulations as the justification for thé imposition of - the penalty .

See sec è 6662 (b) (1) . More spec if ically, respondent urges that Mr Swansona was .negligent- in failing -to report <his excess contributions Ito a Roth "IRA foi the 2001 through 2006 tax years.

"[N]egligence", sfor this burpos'e,a is "any failure-to make a reasonable attempt toscomply ewith the provisions o * 2* * [the Internal Revenue dode] " . " Sec . 6662 (c) . Under caselaw, "'Negligence is a lack of due aare"ór failure to do what a e reasonable -ánd.orc inarily prudent sperson wóuld:do under the circumstiances.'" Freytag v. Commissioner, 89 T.C.

:849,2 887 (1987) (quoting Marcel~l'o v. Cotñmissioner, 380 F.2d 49.9, 506 (5th Cir. - 1967) , af f g : on tlkis is sue 43 T . C. 168 (1964 ) and T . C . Memo . 1964 299),'affd. 904 F.2d 10114(5th Cir. 1990), affd. 501 U.S. 868 (1991) .

"Negligence is "strongly indicated" a when 4 [a] taxpayer fails to make a reasonable atitemp't -to ascertaina the correctness of a deduction, cred t, or exclusion on a rettirn which·sould seem to ae-reasonable and-prudent person to b'e 'too góod to be true' under the circumstances " Hansen W. Commissioner, 471 F.3d 1021, 1029 (9th Cir. 2006), affg. T.C. Mehio. 2004-269; sec.al.6662- 3 (b) (1) (ii) , Indoge Tax Regs "Disregard of the rules and regulations "includes any careless, regulations . " reckless, or intentional disregard of rules or S ac . 1. 6662-3 (b) (2) , Income Tax Regs .

In determining a taxpayer's liability for a -negligence penalty, courts generally look both to whether the underlying investment was legitimate and whether the taxpayer exercised -due - care in the position taken on the return.

Sacks i Commissioner,

. Roberson v.

Commissioner, T.C. Memo. 1996-335, affd. without published opinion 142 F.3d 435 (6th Cir.. -1998); see also Mortensen ve Commissioner 440 F.3d 375, 3862387 (6th Cir. 2006), affg. T.C. Memo. 2004-279; Pasternak v. Commissioner, 990 F.2d 893, 903 (6th C-i.r. 1993) , affg. Donahue v. Commissioner;i "T.C. Memo. 1991-181 (stating "A reasonably prudent person would have asked a qualified tax adviser if this windfall was not too good to be true".), affd.,without published opinion 959 F.2d 234 (6th Cir. «1992) .

Petitioners' education and experience with business and financial decisionmaking will -be considered. in determining whether they were negligent in blindly accepting the advice of adviser promoters who charged large fees. Respondent has introduced sufficient evidence that Mr. Swanson negligently fai-led to report excess contributions to his Roth IRA and therefore has met his burden öf production with regaids toothe section 6662(a) accuracy- related penalty.

III. Reasonable Cause Exception

There is an exceptión to the section 6662 (a) penalty when a taxpayer scan demor.str:ate:

(1) Reasonable cause forsthe underpayments and (2) that the taxpayer, acted in góod faith with e respect to the unierpayment :

Sec a 6664 (c)9(1) ; sec . 1. 6664-4 (a) , Inc'ome - TaxaRegs .' GRegulations þromulgated under - section ~6664 (c) provide that the teterminatión oforeasonable cause and good faith "is made on a scase -by-case.basis, "taking into- account all pertinent facts ar.d circutñstances."- Sec. 1.6664-4(b) (1*), Income Tax Regs.

Mr . Swanso'n bears thel burden ofa proving that he meets thé reasonable cause a.nd good faith exception.

He asserts that he meets it because -he:- t(1) Investigated the Rothérestructure before engaging in it; (2) -read and relied on Swanson v. Commissioner, 106 T.C. 76 (1996) ; -(3) consulted dith numerous people including accountants and tax attorneys; and (4) received a "no-change" letter after hisdeturns were audited by athe State ofeCalifornia.

To begin,E we do 'not -deterniine whether Mr . Swanson' s alleged reliance on the "no-change". letter .issued by the State of California helps to establish ëeasonable caúse and, good faith.

Importantly, the : ssuestin this case are the accuracy-related penalties for his 2001 through 2006 tax/years, the 2007 year having already been conceded by, respondent dai full. According to Mr. Swanson's testimony, he received the "no-change" letter in 2007.

That means the "no-change" letter could not have had anything to do with the justification for petitioners'.failure to act properly with the tax years 2001 through 2005. We-recognize a that Mr..Swanson's 2006 tax return could have been:timely filed in 2007 after the receipt of the "no-change" letter. But, Mr. y - e Swanson never.provided any evidence as to exactly when in 2003.he receiVed-the "noschange" letter-or filed the joint Federal income tax return,and attached Form 5329. Further, by failing to - a introduce the "no-change" letter into evidence, Mr. Swanson÷has failed-to-provide this Court with proof as to the exact issues, s California audited and its reasons for concluding the audit with a "no-change" letter.

. We now turn _the Swansons'- asserted reliance on $wanson v.

Commissioner, supra. Mr. Swanson states athat the Swanson case "approved the holding of 100% of the stock of a company by a pension". While the.Court in Swanson did implicitly approve the holdihg of stock by an IRA, that was not the central issue in Swanson.

Swanson v. Commissioner, supra at 87-90.- Rather the Court was called upon to determine whether the IRS was substantially justified in its litigation position in-order to determine whether the taxpayer was entitled to an award of reasonable litigation costs.

21 - We cannot fird that the Swansons' claimed reliance on the Swanson decision as reasonable.

The issue andefacts :of Swanson are easily distin uishable from the transaction Mr. Swanson engaged in. Respcndent is not contending that an IRA cannot own stock, rather that Mr. Swanson made excess contributions to his Roth IRA. «Importêntly,r there is no evidence sother than Mr.

Swanson' s testimory that he ever even read the case or personally analyzed it as opposed to simply taking, Mr . Stover' s word for- awhat it held.

See, e.ç'., Hansen-v Conimissioner, ,47]l F.3d at 1032• (noting that even though the taxpayer read _a previous decis-ion, there was no evidence that :the taxpayer understood or relied ont i the decision independently of what the promoter.told sthe taxpayer the decision meant.) .

Next, we- turn to the Swansons' argument that they relied on Mr. Stover and other professionals.

To support thirstargument petitioners cite United States VCBoyle, 469 U.rS. 241a (1985) ; Haywood Lumber & 19ining Co . # Commis s i'oner ,' 178 e F . 2d 76 9 (2d Cir .

1950), modifying 12. T*.C.

'735 ( 949); Orient Inv. & Fin. Co.', Inc.

v. Commissioner, 266 .F.2de601· (D. C. -CiÝ.a 1948) ; i and3Hatfried, Inc .

v. Commissioner,

While good faith reliancegon professi'onal advice based on al-1 the facts may, in many cases, provide a basis for a reasonable cause defenee, it is not absolute.

Freytag v. Coinmissioner, 89 T.C. at 888; LaPlante v. Commissioner, T.C.

*Memo. 2009-226; ,sec.

1.6664-4(b)(1), Income Tax Regs.

* * that the taxpayer meets each requirement of [F]or a taxpayer to rely reasonably upon advice so- as - possibly to negate a section 6662(a) accuracy-related penalty determined by the.Commissioner, * following three-prong test: professional who had sufficient expertise to justify reliance, information to the adviser, and (3) relied in good faith on the adviser's judgment.

the taxpayer provided necessary and accurate - (1) The adviser was a competent a the taxpayer must prove the taxpayer actually the (2) * * * Neonatology Associates, P.A. v. Commissioner, -115 T.C. 43, 99 (2000), affd.7299 F.3d 221 (3d Cir. 2002); see ,also Charlotte's Office Boutique Inc. v. Commissioner, 425 F.3d 1203, 1212 n-.8 (9the Cir. <2005) (quoting with approval the above three-prong ,2 test), affg. 121 T.C. 89 (2003).

The general rule in the Court of Appeals for.ther Ninth Circuit, to which this case would be appealable absent a stipulation to:thes contrary, is that "a taxpayer cannot negate the negligence penalty through reliance on a transaction's promoters or on other advisors who have a conflict of interest."

Hansen v.

Commissioner, supra at 1031; see also LaVerne v. Commissioner, 94 T.C. 637, 652-653 (1990), affd. without published opinion 956- F.2d 274 (9th Cir. 1992), affd. without published opinion-sub nom.

Cowles v. Commissioner,» 949 F.-2d 401 (10th Cir. s1991)::

"Courts = "This Court has held that a promoter is "an adviser who participated in structuring 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); Tigers Eve Trading, LLC v. Commissioner, T.C. Memo. 2009-121.

23 - have repeatedly held that it ià unreasonable fo a taxpayer to rely on a -tax advisereactively binvolved .in planning the transaction and tainted by an -inherent confliitct of interest" Canal Corp. v⁷ Cotrmissioner,6135 T.-C. 199,7 t218' (20~10) .

At a mïnimum, Mr. Stover ånd his colleagueš- had- a conflict of interest 'and were not independent . " E Mr . Stover set up the various entities and coordinatedIthe deal "from starte to ifinish".

106 e Ltd. v. Commissioner 136 T.C.*i⁶⁷ 80 (2011) .a"Grant Thornton and Mr Stover were-paid "a flat fée-for implementing"*"* * [the Roth restructure] sand wouldn' t have been compenãàted eat àll if *. * * [Mr . Swanson] dec ided .not to go through with it i " See id .

Therefore, pet i'tieners canriot tárgue hât thé^ir reltiance on Mr Stover and his colleagues establishes reasonable cause and good faith, TSee Hansen v. Commissioner," supra at -1027 (affirming Tax Court holding when; taxpayers relièd solely on the organisation promoting the transactiori and did not independently verify their tax returns despite warnængs by t he IRS) ; see alsó "LaVerne v:

Commissioner, supra at 652 "Independence distinguishes the case at hand from those Mr.

In Haywood Lumber & Mining Co. v.

Swanson attempts to rely on. Commissioner, 17E F.2d 769 (2 i Cir-.. 1950), modifying 12 T.C. 735 Irdr. (1949) , Orient 60'1 (D.C. Cir. 1948), and Hat-frï'ed, F.2d 628 (3d Cir. 1947) , there is no evidence that the tax advisers who the taxpayers rélied on in the cases were not independent. at 770-771; Oriertt Íny. & Fin. Co., at 602-603; Hatfried, Haywood Lumber Mïning Co. v. Commissioner, supra Inc.sv. Columissioner, supra at 631-632.

Inc. v. Commissioner, 166 F.2d Inc. v. Cominissioner, supra Inc. v. Commissioner, 162 Fin. Co While Mr. Swanson argues that he also relied on Mr. Nardi, Mr. Patton, and Mr. Mather, there is no evidence, sother than Mr.Q Swanson' s testimony,- that he talked with these three individuals nor what they talked about and the - advice he received.

Neither Mr . Nardi nor Mr . Pat ton is compe tent in, tax matters . y While .Mr .

Swanson testified -that Mr. Mather was a tax preparer, there is no - evidence he is competent in complicated tax matters .

Mr. Swanson appears to believe that his own self-serving testimony is enough to establish reasonable cause and good faith.

We disagree .

. We have "found reliance to be unreasonable where a taxpayer claimed to shave relied upon an independent. adviser because the . adviser either . did not testify or testif ied too vaguely to convince us that the taxpayer was reasonable in relying on the adviser ' s advice" .

, Swanson . v . Commis s ioner , T . C . Memo 2009-31; see also Heller v. 'Commissioner, T.C. Memo. 2008-232 (noting in upholding a penalty based on negligence that aside from 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) . Petitioners' failure to introduce evidence "which, if Mr. Swanson also appears "to rely on individuals who slgr e his individual and corporate tax returns such as Angela K. » Parker, Kelly Murphy, Duanette Thompson, Ruth Donovan, and Kelly Webb. with any of, these individuals or if, so, what was discussed. any event,« they .also have conflicts of worked with Mr. Stover on the Roth restructure and were employ es of Grant Thornton and/or Kruse Mennillo.

There is no evidence -that Mr. or Mrs. Swanson ever spoke In interest because they 25 -- true, would be favorable to * * * [them] gives rise to the presumption that if produced it would be unfgvorable." Wichita Terminal Elevator Co . v. Commi sioner ,

Petitioners must surely have realized that the deal was too good to be true.

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

Mr. Swansons is a successful businessman who knew that ,there ,were contribution limits to Roth IRAs and who had bought a tax book each year he prepared his own tax return. His sophisticat-ion is further evidenced in a memo and November 9, 2000, followup memo he wrote to Mr'. Stover~ an M . Do ovan where he listed the topics he wanted to discuss witih them àÜa"June 30, 2000, meeting, including stock options, tax avoidance strategies, avoidance of California taxes, and future deposits andirollovers of his Roth IRA.

IV. Conclusion Mr.

Swanson had doubts, repeatedly asking whether the Roth restructure was legal. Yet, despite these doubts, he never asked for a written opinion letter or sought the advice of an independent adviser, even after receiving a letter from.Grant Thornton warning, him that he may have engaged in a listed transaction and-receiving notice that his returns, were being audited by the State of California. * Petitioners have failed to isWe further not e that "M . wanson wâs made awaže of Notice 2004-8, which is entitled "AÑÙsive Roth IRA Transactions" and described transactions design d "to avoid the limitations ori (continued. .

.

) establish that they meet the reasonable cause and good faith exception to the 'section 6662 (a) accuracy-related penalty Therefore, we sustain respondent' s imposition of section 6662 (a) accuracy-related penalties for petitioners' 2001 through 2006 tax years .

The Court has considered all of petitioner's contentions arguments, requests, and statements.

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

To reflect the oregoing, Decision will be entered under Rule 155.

.

" ( 2 The notice stated that the We find it notable that Mr. Swanson continued to e . continued) contributions to Roth IRAs" . transactions described in the -notîce "as well as substantially similar transactions" were listed transactions and required , disclosure. rely on Mr. Stover and related tax advisers and did not seek independent advice after being notifiéd not 'only of Notice 2004-8 but also that his returns were being audited by -the State of California. Cir. 1985) plan is required, advice when it is common knowledge that the -plan is questiionable . " ) ("Reasonable inquiry as to the legality of including the procurement of See Neely v. United States, 775 F.2d 1092, 1095 (9th independent the -tax legal .

6. T . C. . 1158, 71165 (1946) , af fd. 162 -F.2d 513 , (10th Cir . 1947) .
62. F.2d .628 (3d Cír. 21947) .
82. F.3d 918,, 920 (9th Cir. 1996) ;; affg. T.C. Memo. 1994-217. When an investment has such obviously suspect tax claims as to put a e reasonable taxpayer under a duty of inquiry, a good faith investigation of the underlying viability,- financia-l structure, and economics of the investment is required.