                                                                              FILED
                             NOT FOR PUBLICATION                               JUN 15 2011

                                                                           MOLLY C. DWYER, CLERK
                     UNITED STATES COURT OF APPEALS                         U.S. COURT OF APPEALS



                             FOR THE NINTH CIRCUIT


DAVID W. SWANSON and CONNIE L.                   No. 09-73770
SWANSON,
                                                 Tax Ct. No. 550-00
              Petitioners,

  v.                                             MEMORANDUM*

COMMISSIONER OF INTERNAL
REVENUE,

              Respondent.


                             Appeal from a Decision of the
                               United States Tax Court

                        Argued and Submitted June 8, 2011
                              Pasadena, California

Before: D.W. NELSON and IKUTA, Circuit Judges, and PIERSOL, Senior
District Judge.**

       The Tax Court did not err in ruling that the burden of proof in this case did

not shift to the Commissioner under 26 U.S.C. § 7491. Section 7491’s burden-


        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
       **
             The Honorable Lawrence L. Piersol, Senior District Judge for the U.S.
District Court for South Dakota, Sioux Falls, sitting by designation.
shifting framework did not apply to the 1994 deficiency, because the parties

stipulated that the IRS’s investigation of those deficiencies commenced prior to

July 22, 1998. Nor did the Tax Court err in determining § 7491’s burden shifting

framework did not apply to the 1993 and 1995 deficiencies due to the Swansons’

failure to introduce credible evidence and failure to cooperate with the

Commissioner. The Tax Court’s determination that the Swansons were not

credible was not clearly erroneous, given (among other things), the Swansons’

claim that clearly personal expenses were deductible “management expenses,” that

they relinquished their ownership interest in FSH “for nothing more than a

stranger’s promise of a loan,” and they claimed never to have discussed tax

avoidance with Evans and O’Brien, despite the fact that Evans and O’Brien were

both convicted of promoting tax evasion schemes. See Wood v. Comm’r, 338 F.2d

602, 605 (9th Cir. 1964). The Tax Court’s determination that certain personal

expenses were not business expenses was not contrary to the parties’ stipulation.

The Swansons did not identify any specific inconsistencies, and the stipulation

stated that the Commissioner did not agree with the Swansons’ characterization of

all of their personal expenses or stipulate to the accuracy of all their exhibits. Nor

did the Tax Court clearly err in determining that the Swansons were not




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cooperative with the Commissioner, given evidence that they brought a law suit

against one IRS agent and refused to answer questions posed by his successor.

      The Tax Court did not err in holding that FSH Services lacked economic

substance. See Sparkman v. Comm’r, 509 F.3d 1149, 1155 (9th Cir. 2007); see

also Markosian v. Comm’r, 73 T.C. 1235, 1243–45 (1980). The Tax Court’s

conclusions that the Swansons’ relationship with FSH’s property did not materially

differ before and after the creation of the trust, that neither Evans nor O’Brien

functioned as an independent trustee, that economic benefits did not inure to other

beneficiaries of the trust, and that the Swansons failed to respect the rules and

restrictions of the trust were not clearly erroneous. Sparkman, 509 F.3d at 1155.

Though the Swansons offered evidence that Evans made loans in his capacity as a

trustee, such loan activity was de minimis. Moreover, when Evans was caught

misappropriating funds, the Swansons selected his replacement. Having

determined that FSH lacked economic substance, the Tax Court did not err in

attributing the income of the trust to the Swansons, rather than to Evans, because

Mr. Swanson was the primary source of FSH’s income. Id. at 1158.

      The Tax Court did not err in declining to categorize various continuing

education expenses as Schedule C deductions because the Swansons did not carry

their burden of demonstrating why those deductions were business expenses. See


                                          -3-
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Rockwell v.

Comm’r, 512 F.2d 882, 886 (9th Cir. 1975).

      The Tax Court did not err in holding that the 1993, 1994, and 1995

deficiency actions were timely given that the Swansons omitted from their gross

income an amount in excess of 25 percent of the amount of gross income stated in

their tax returns. See 26 U.S.C. § 6501(e)(1)(A).

      The Tax Court did not err in upholding the penalties imposed under 26

U.S.C. § 6662 on the ground that the Swansons substantially understated their tax

liability and failed to prove that they acted with reasonable cause and in good faith.

See 26 U.S.C. § 6664(c)(1). The Swansons did not carry their burden of proving

they acted with due care in setting up the trust and calculating their tax liability,

and the Tax Court’s determination that they were negligent and that their testimony

was not credible was not clearly erroneous. Sparkman, 509 F.3d at 1161.

      Nor did the Tax Court abuse its discretion in imposing a penalty of $12,500

under 26 U.S.C. § 6673. Larsen v. Comm’r, 765 F.2d 939, 941 (9th Cir. 1986) (per

curiam). The Tax Court did not err in determining that the Swansons were

maintaining frivolous or groundless positions, given that the Swansons continued

to pursue litigation despite their knowledge that Evans and O’Brien (co-trustees of

FSH) were facing (and were eventually convicted of) criminal charges of tax fraud.


                                          -4-
Moreover, reasonable inquiry would have revealed that Evans, Cache Properties,

and Martha Doerr were involved in other trust transactions that were deemed

shams. Cf. Wolf v. Comm’r, 4 F.3d 709, 716 (9th Cir. 1993). The Tax Court did

not clearly err in finding that the Swansons’s evidence and arguments did not lead

to the agreed-upon reduction of their tax liabilities; rather, the reductions resulted

from concessions by the Commissioner that would have occurred during the course

of normal negotiations between the parties.

      AFFIRMED.




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