                               T.C. Memo. 2020-73



                        UNITED STATES TAX COURT



                    BURT KRONER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23983-14.                         Filed June 1, 2020.



      Barbara T. Kaplan, Scott E. Fink, and G. Michelle Ferreira, for petitioner.

      Carina J. Campobasso, for respondent.



           MEMORANDUM FINDINGS OF FACT AND OPINION


      MARVEL, Judge: In a notice of deficiency dated July 10, 2014, respondent

determined income tax deficiencies for taxable years 2005, 2006, and 2007 of

$1,635,206, $5,765,384, and $1,821,277, respectively, and accuracy-related
                                         -2-

[*2] penalties under section 66621 of $327,041, $1,153,077, and $364,255,

respectively. Respondent filed an amended answer to increase the deficiency and

accuracy-related penalty for 2006 to $5,821,198 and $1,164,239.60, respectively.

After concessions, the issues for decision are: (1) whether transfers of funds to

petitioner during the years at issue constitute gifts that petitioner properly

excluded from gross income under section 102 and (2) whether petitioner is liable

for accuracy-related penalties under section 6662.

                                FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts is incorporated herein by this reference. Petitioner resided in Florida when

he timely petitioned this Court for redetermination of his tax liabilities for the

years at issue.

      Throughout his career, petitioner has worked extensively in the discounted

cashflow industry. In the early 1990s, through his work, petitioner met and

developed a business relationship with David Haring. The business relationship

lasted until 2007 when petitioner repaid a loan that Mr. Haring, through an entity,

had made to fund petitioner’s credit counseling business. Mr. Haring is a high-

      1
        All section references are to the Internal Revenue Code (Code) in effect for
the relevant times, and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated. Some monetary amounts are rounded.
                                         -3-

[*3] net-worth British citizen, with residences and business interests in various

non-U.S. jurisdictions.

I.    Petitioner’s Entities and Trusts

      In late 2003 and into 2004 petitioner sought legal advice from Robert

Bernstein, an attorney who represented Mr. Haring, concerning asset protection.

Mr. Bernstein recommended an offshore trust to hold petitioner’s assets. On April

29, 2004, through Mr. Bernstein’s firm, petitioner established the Kroner Family

Trust in Nevis (Nevis trust). The beneficiaries of the Nevis trust were petitioner

and his son. Petitioner transferred his closely held business interests to the trust,

including his interest in the entity Private Capital Ventures (PCV).

      By 2007 petitioner had acquired substantial liquid assets that he did not feel

comfortable holding in the Nevis trust. On June 4, 2007, through Mr. Bernstein,

the Kroner Family 2007 Trust Settlement B (Bahamas trust) was established at

UBS in the Bahamas for the benefit of petitioner and his children. The Bahamas

trust owned KFT Holdings II (KFT).

II.   Mr. Haring’s Cash Transfers to Petitioner

      During tax years 2005, 2006, and 2007 petitioner received wire transfers

from Mr. Haring, or entities associated with Mr. Haring, in the aggregate amounts

of $4,425,000, $15,350,000 and $5,000,000, respectively. The transfers were
                                         -4-

[*4] coordinated by Mr. Haring’s associate, Antony Mitchell. Petitioner or a

related entity received the following transfers:

                        Date              Recipient         Amount
                      2/4/2005           Nevis Trust      $2,600,000
                     2/14/2005           Petitioner          700,000
                     2/25/2005           Petitioner          400,000
                     6/30/2005           Nevis Trust         475,000
                     8/15/2005           Nevis Trust         250,000
                     1/27/2006           Nevis Trust         600,000
                     4/20/2006           Petitioner        6,000,000
                    12/20/2006           PCV               8,750,000
                     7/16/2007           KFT               2,500,000
                     7/19/2007           KFT               2,500,000

III.   Petitioner’s Tax Reporting and Notice of Deficiency

       Mr. Bernstein advised petitioner that the transfers received from Mr. Haring

were excludable from income under section 102. Mr. Bernstein provided this

advice on the basis of: (1) a conversation with petitioner and (2) a note he and Mr.

Mitchell had drafted for Mr. Haring, stating that the transfers were gifts.

       Mr. Bernstein advised petitioner of the requirement to file Form 3520,

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain

Foreign Gifts, for each year that petitioner received a transfer from Mr. Haring
                                        -5-

[*5] into an account titled in his name. With respect to transfers routed to

petitioner’s trusts or related entities, however, Mr. Bernstein advised petitioner

that no reporting was required.

      Anthony DeQuino, a certified public accountant, prepared petitioner’s

Forms 1040, U.S. Individual Income Tax Return, for the years at issue. Mr.

Bernstein prepared petitioner’s Forms 3520 for the years at issue. Petitioner did

not report any of the transfers from Mr. Haring as income during the years at issue.

      Sometime after petitioner filed his 2005 through 2007 returns, the IRS

selected those returns for examination. Starting in March 2011 Revenue Agent

John C. Cox (RA Cox) conducted the examination of petitioner’s returns. On

August 6, 2012, RA Cox delivered Letter 915 and Form 4549, Income Tax

Examination Changes, to petitioner’s representatives during a closing conference.

The Letter 915 and its attachments proposed accuracy-related penalties under

section 6662 and provided petitioner with the opportunity to protest the proposed

changes with the Appeals Office. It was not until October 31, 2012, that RA

Cox’s supervisor, Supervisory Revenue Agent Diane Acosta, signed Workpaper

#300-1.1, titled Civil Penalty Approval Form. On that same day, RA Cox mailed

to petitioner Letter 950, enclosing Form 4549-A, Income Tax Discrepancy

Adjustments.
                                         -6-

[*6] Following that examination respondent mailed to petitioner a notice of

deficiency dated July 10, 2014. In that notice respondent determined, inter alia,

that Mr. Haring’s transfers to petitioner should be included as income and that

petitioner was liable for accuracy-related penalties under section 6662(a).

Petitioner timely petitioned this Court for redetermination. On April 20, 2016,

respondent filed an amended answer to increase the amounts of the deficiency and

the accuracy-related penalty for taxable year 2006. The increase resulted from a

correction to the transfer amount on December 20, 2006. Petitioner conceded at

trial that the correct amount of the December 20, 2006, transfer was $8.75 million

and not $8.6 million.

                                      OPINION

      Generally, the Commissioner’s determination of a deficiency is presumed

correct, and the taxpayer bears the burden of proving otherwise. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).2 If, however, a taxpayer produces

      2
        In a case appealable to the U.S. Court of Appeals for the Eleventh Circuit,
as this one is absent a stipulation to the contrary, this presumption attaches only
where there is a minimal “evidentiary foundation linking the taxpayer to the
alleged income-producing activity.” Blohm v. Commissioner, 994 F.2d 1542,
1549 (11th Cir. 1993) (quoting Weimerskirch v. Commissioner, 569 F.2d 358, 362
(9th Cir. 1979), rev’g 67 T.C. 672 (1977)), aff’g T.C. Memo. 1991-636.
Respondent has established this minimal evidentiary foundation, given that the
parties do not dispute the amount or receipt of the funds at issue for any year but,
                                                                         (continued...)
                                        -7-

[*7] credible evidence with respect to any factual issue relevant to ascertaining the

taxpayer’s liability for any tax imposed by subtitle A or B of the Code and satisfies

the requirements of section 7491(a)(2),3 the burden of proof on that factual issue

shifts to the Commissioner. Sec. 7491(a)(1). Petitioner does not contend that

section 7491(a) applies, nor has he introduced evidence to prove he meets the

requirements of section 7491(a)(2). The burden of proof remains on petitioner

with respect to the deficiencies determined in the notice of deficiency.

Respondent, however, bears the burden of proof with respect to the increase in the

deficiency for 2006, first asserted in his amended answer. See Rule 142(a).

Because the parties do not dispute the receipt or amount of the funds relating to

tax year 2006, respondent has met his burden of proof unless petitioner proves that

these transfers, including the transfer in tax year 2006, were nontaxable gifts under

section 102. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).



      2
        (...continued)
rather, dispute only the proper characterization of those funds as taxable income or
as nontaxable gifts.
      3
       Sec. 7491(a)(2) requires a taxpayer to demonstrate that he or she
(1) complied with the requirements under the Code to substantiate any item,
(2) maintained all records required under the Code, and (3) cooperated with
reasonable requests by the Secretary for witnesses, information, documents,
meetings, and interviews. See Higbee v. Commissioner, 116 T.C. 438, 440-441
(2001).
                                          -8-

[*8] I.         Gifts Under Section 102

          Gross income is income from whatever source derived unless otherwise

excluded. Sec. 61(a). Gross income, however, does not include the value of

property acquired by gift. Sec. 102(a). The United States Supreme Court has

defined a gift under section 102 as a transfer that proceeds from a detached and

disinterested generosity, out of affection, respect, admiration, charity or like

impulses. Commissioner v. Duberstein, 363 U.S. 278, 285 (1960). In so doing,

the Supreme Court stated that the most important consideration in ascertaining

whether a gift has been made is the intention of the donor. Id. The donor’s

characterization of his action is not determinative, however, and a court must

make an objective inquiry into whether what is characterized as a gift in fact meets

the Duberstein definition of a gift under section 102. Id. at 286.

          The Supreme Court in Duberstein was careful to distinguish a common law

gift from a section 102 gift. A common law gift requires only a voluntarily

executed transfer without consideration. Id. at 285. So long as the donor had no

legal obligation to pay, a transfer is a gift at common law. A section 102 gift, on

the other hand, is more narrowly defined and requires more--it requires detached

and disinterested generosity. Id. A transfer that proceeds from a moral duty or

other expectation does not proceed from detached and disinterested generosity and
                                         -9-

[*9] is not a section 102 gift. Id. When a donee has rendered services to a donor,

a payment for the services is not a gift even if the transferor had no legal

compulsion to pay the remuneration. Id.

      Viewing the Duberstein standard through the prism of the relevant burdens

of proof in this case, the ultimate issue for decision is whether petitioner has

persuaded this Court that transfers totaling $24,775,000 constituted gifts from Mr.

Haring within the meaning of section 102. See id. at 289. If petitioner cannot, he

will have failed to meet his burden with regard to the determinations in the notice

of deficiency and, conversely, respondent will have met his burden of proof as to

the amounts asserted in his amended answer because there is no dispute as to the

receipt of those amounts, only whether they are nontaxable gifts. The intention

with which Mr. Haring made the transfers is the most critical factor. See id. at

285. Although the Court granted petitioner’s motion in limine to preclude the

drawing of any adverse inference from Mr. Haring’s absence at trial, the Court

also warned the parties on multiple occasions of the importance of hearing Mr.

Haring’s testimony. The Court’s ruling on the motion in no way relieved

petitioner of his burden of proving Mr. Haring’s intention by a preponderance of

credible evidence.
                                        - 10 -

[*10] Notwithstanding the Court’s warnings, Mr. Haring did not testify.

Petitioner instead relies primarily on his own testimony, and that of Mr. Mitchell

and Mr. Bernstein, to establish Mr. Haring’s intent with respect to the transfers.

Our decision hinges on the credibility of these witnesses, to which we now turn.

II.   Credibility

      “The most important and most crucial action the courts take in * * * [a trial]

is to resolve facts.” United States v. Gainey, 380 U.S. 63, 88 (1965) (Black, J.,

dissenting). The fact-finding process often requires the Court as the fact finder to

first evaluate the credibility of witness testimony before making findings on the

basis of that testimony. This Court has stated that in determining credibility,

      [w]e observe the candor, sincerity, and demeanor of each witness in
      order to evaluate his or her testimony and assign it weight for the
      primary purpose of finding disputed facts. We determine the
      credibility of each witness, weigh each piece of evidence, draw
      appropriate inferences, and choose between conflicting inferences in
      finding the facts of a case. The mere fact that one party presents
      unopposed testimony on his or her behalf does not necessarily mean
      that the elicited testimony will result in a finding of fact in that
      party’s favor. We will not accept the testimony of witnesses at face
      value if we find that the outward appearance of the facts in their
      totality conveys an impression contrary to the spoken word.

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 84 (2000), aff’d,

299 F.3d 221 (3d Cir. 2002).
                                         - 11 -

[*11] As the trier of fact, we may credit evidence in full, in part, or not at all. We

may credit that part of a witness’ testimony that is not self-serving, while requiring

some form of corroboration before crediting the portion that is. See Stein v.

Commissioner, 322 F.2d 78 (5th Cir. 1963), aff’g T.C. Memo. 1962-19. For

example, in Stein4 the taxpayer introduced as evidence notebooks in which he

entered both his daily net gambling winnings and losses. Id. at 79. The Court of

Appeals affirmed our factual findings accepting as credible the entries that showed

net winnings, but not those that showed net losses--which were self-serving and

not otherwise corroborated. Id. at 82.

      “[C]redibility determinations are typically the province of the fact finder

because the fact finder personally observes the testimony and is thus in a better

position than a reviewing court to assess the credibility of witnesses.” Harnett v.

Commissioner, 496 F. App’x 963, 967 (11th Cir. 2012) (quoting United States v.

Ramirez-Chilel, 289 F.3d 744, 749 (11th Cir. 2002)), aff’g T.C. Memo. 2011-191.

In the context of section 102 the fact-finder’s role becomes even more critical.

The Supreme Court has said that the determination of whether a transfer


      4
       In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en
banc), the U.S. Court of Appeals for the Eleventh Circuit adopted as binding
precedent all decisions of the U.S. Court of Appeals for the Fifth Circuit handed
down before October 1, 1981.
                                        - 12 -

[*12] constitutes a gift “must be based ultimately on the application of the

fact-finding tribunal’s experience with the mainsprings of human conduct to the

totality of the facts of each case.” Commissioner v. Duberstein, 363 U.S. at 289.

“The nontechnical nature of the statutory standard, the close relationship of it to

the data of practical human experience, and the multiplicity of relevant factual

elements, with their various combinations, creating the necessity of ascribing the

proper force to each, confirm us in our conclusion that primary weight in this area

must be given to the conclusions of the trier of fact.” Id.; see also Anderson v.

City of Bessemer City, N.C., 470 U.S. 564, 573-574 (1985) (stating that if the trial

court’s view of the evidence is plausible in the light of the record, a reviewing

court may not disturb it absent clear error); United States v. Yellow Cab Co., 338

U.S. 338, 342 (1949) (stating that where there are two permissible views of the

evidence, the factfinder’s choice between them cannot be clearly erroneous);

United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948) (stating that clear

error is an extremely high standard that means the reviewing court is left with the

“definite and firm conviction that a mistake has been committed”). It is with this

framework in mind that we now turn to petitioner’s story.
                                        - 13 -

[*13] II.    Petitioner’s Story

      Petitioner, through his own and his witnesses’ testimony, presents a story

about his relationship with Mr. Haring to support his contention that the transfers

at issue constitute gifts.5 We summarize that story below.

      A.     Petitioner and David Haring’s Business Ventures

      In 1992 petitioner sought capital from Bob Shapiro to purchase discounted

privately held mortgages. Mr. Shapiro was the owner of Dunewood Funding

(Dunewood), located in Florida. Mr. Shapiro in turn introduced petitioner to Mr.

Haring, who was an investor in Dunewood. As a result of this introduction,

Dunewood hired petitioner to buy privately held mortgages. Petitioner initially

worked as a contractor for Dunewood from his home in New Jersey, but after

Dunewood found its footing in the discounted-cashflow industry, petitioner moved

to Florida as an employee of Dunewood.


      5
        As discussed infra pp. 19-20, there is very little in the record to corroborate
the story told by petitioner and his witnesses, each of whom had ties to the
mysterious Mr. Haring. Consequently, we summarize the testimony only to
explain why we conclude as we do in this opinion. For the purposes of our
analysis, we do not adopt this story as a finding of fact and the elements of the
story recited here should not be construed as findings of fact. Even if we were to
assume that the story was sufficiently supported by the record to find either its
entirety or parts as facts, however, it would not support a conclusion that the
transfers in this case meet the standard for a detached and disinterested gift. See
Commissioner v. Duberstein, 363 U.S. 278 (1960).
                                       - 14 -

[*14] Shortly thereafter, Dunewood experienced financial troubles, which led Mr.

Haring to spend two weeks at Dunewood in an attempt to salvage his investment.

Petitioner and Mr. Haring spent time working together during this period. Mr.

Haring ultimately agreed to provide additional funding to alleviate Dunewood’s

financial difficulties. Mr. Haring also assigned Mr. Mitchell to work at Dunewood

in order to oversee operations and to protect Mr. Haring’s capital investment.

Petitioner and Mr. Mitchell developed a close relationship during their time

together at Dunewood.

      After recovering his investment in Dunewood in late 1992, Mr. Haring

dissociated himself from the business and Mr. Mitchell left the company.

Petitioner and Mr. Haring, however, continued to speak and meet when Mr.

Haring was in town. In March 1993 Dunewood ceased operations after suffering

additional financial problems.

      In the spring of 1993 petitioner and Mr. Haring formed Singer Asset

Finance Co. (Singer). Mr. Haring provided the financing for Singer and, in

exchange, received an option to acquire a 75% equity interest in the business.6




      6
       We assume that, under petitioner’s story, Duncan Property Development,
Ltd., Mr. Haring’s investment vehicle, at some point exercised its option and
acquired a 75% equity stake in Singer.
                                       - 15 -

[*15] Petitioner held the remaining 25% interest in Singer. Singer focused on

purchasing lottery winnings paid as annuities.

      Petitioner and Mr. Haring operated Singer between 1993 and 1997. During

this time petitioner and Mr. Haring purportedly developed a close personal

relationship. In 1995 Enhance Financial Services Group (Enhance) purchased

from petitioner and Mr. Haring a 50% interest in Singer for an undisclosed

amount. In March 1997 Mr. Haring sold his remaining interest in Singer to

Enhance for approximately $16 million. In December 1997 petitioner sold his

remaining interest in Singer to Enhance for approximately $5.3 million.7 As part

of this transaction petitioner signed a noncompete agreement that prevented him

from investing in or working for a company engaged in a business similar to that

of Singer for five years.

      Beginning in 1995 at Mr. Haring’s request, petitioner agreed to act as a

nominee for Mr. Haring by establishing and holding various financial interests

beneficially owned by Mr. Haring. In 1995 petitioner opened a nominee bank

account at Credit Suisse for Mr. Haring. In 2000 petitioner established a trust in


      7
        After petitioner sold his interest in Singer in 1997, he was unemployed for
approximately 2-1/2 years. During this time he met with Mr. Haring for lunch in
Nassau, Bahamas. At the lunch Mr. Haring reportedly took an interest in
petitioner’s personal life.
                                       - 16 -

[*16] Liechtenstein for Mr. Haring called the Waromi Trust. The Waromi Trust

was administered by LGT Trust Management Limited. Mr. Mitchell had a power

of attorney for the Waromi Trust and the Credit Suisse account. Petitioner was

reimbursed for his travel expenses in connection with opening the accounts and

establishing the trust for Mr. Haring, but he did not receive any compensation for

those services.

      In early 2000 petitioner started a credit counseling business called First

Mutual Financial (First Mutual). Petitioner operated First Mutual for

approximately six to seven years. Although Mr. Haring did not have an ownership

interest in First Mutual, he provided a loan facility through Avenger, an entity

under his control (Avenger loan). In 2007 petitioner paid off the Avenger loan

using some of the funds transferred to him, purportedly as gifts, by Mr. Haring.

      In 2000 while petitioner’s noncompete agreement was still in force, Mr.

Haring, through Skyline Technologies, Ltd. (Skyline), reentered the discounted-

cashflow-industry by providing emergency funding and loan guaranties to

Settlement Funding, LLC, doing business as Peachtree Settlement Funding

(Peachtree). Peachtree’s business, like that of Singer, focused on purchasing

structured settlements and life insurance settlements. In exchange for the funding

and loan guaranties, Mr. Haring acquired an estimated 70% equity stake in
                                       - 17 -

[*17] Peachtree. When asked at trial whether petitioner had any interest in

Peachtree, Mr. Bernstein testified only that petitioner’s name did not appear as that

of an owner in any of the paperwork for any transactions.

      Mr. Haring eventually liquidated his interest in Peachtree for approximately

$255 million in a series of transactions. The first liquidity event came when LLR

Partners, Inc., and Greenhill Capital Partners made a private equity investment in

Peachtree on February 4, 2005. In March 2006 Peachtree went public on the

London Stock Exchange, providing a second liquidity event for Mr. Haring.

Finally, in November 2006 Credit Suisse acquired Peachtree, resulting in the total

liquidation of Mr. Haring’s interest in Peachtree.

      B.     Mr. Haring’s Cash Transfers to Petitioner

      Petitioner last saw Mr. Haring in 2002.8 In 2005, however, around the time

Mr. Haring experienced the first liquidity event with respect to his Peachtree

investment, petitioner received a two-to-three-minute phone call from Mr. Haring.

Mr. Haring purportedly informed petitioner that he had a surprise for petitioner

and that he needed petitioner’s bank information. Immediately after the phone call

petitioner called Mr. Mitchell and the two agreed to meet in person to discuss the


      8
       Petitioner testified at trial that he did not know where Mr. Haring lives nor
did he know Mr. Haring’s telephone number.
                                        - 18 -

[*18] details of Mr. Haring’s “surprise”. During the meeting Mr. Mitchell told

petitioner that he would receive a series of gifts that would require petitioner’s

bank account information to enable wire transfers into petitioner’s account.

      In order to effect the purported gifts, Mr. Mitchell spoke to Mr. Haring’s

and petitioner’s tax attorney, Mr. Bernstein. Mr. Mitchell and Mr. Bernstein

drafted a note to petitioner from Mr. Haring stating that the transfers were gifts.9

Mr. Mitchell presented the note to Mr. Haring, and Mr. Haring signed it. The note

dated January 18, 2005, read:

      Dear Burt,

      As 2005 rolls around, I have been reflecting on my life and all things
      that are meaningful to me. It is apparent to me that true friends are
      very fleeting and our friendship has endured for quite some time.

      I have decided to share some of my wealth during my lifetime so I
      can see people enjoy themselves rather than wait until after my life
      has ended. Consistent with this I would like to make you a monetary
      gift. Can you please send me your transfer details so I can
      accomplish this.

             Your friend,

             David




      9
      Respondent objects to the admission of the note. As discussed infra p. 20,
respondent’s objection is overruled.
                                        - 19 -

[*19] After petitioner received the note, Mr. Haring began making transfers. Mr.

Haring would instruct Mr. Mitchell to transfer various amounts from Mr. Haring’s

personal account or from the account of Skyline, a company controlled by Mr.

Haring, to petitioner and to trusts for petitioner’s benefit. Mr. Haring determined

the amount and the source of each transfer to petitioner. Before making each

transfer, Mr. Mitchell would contact petitioner to obtain his wire transfer details,

and petitioner determined the account to which the funds would be transferred.

After receiving each transfer petitioner would confirm that he had received it, and

Mr. Mitchell would set up a phone call between petitioner and Mr. Haring for

petitioner to thank Mr. Haring. After the July 19, 2007, transfer, petitioner was

informed that it was the last transfer from Mr. Haring. Petitioner received total

transfers of $24.775 million from Mr. Haring.

IV.   Analysis

      A.     Petitioner’s Story Is Not Credible or Convincing.

      We find petitioner’s story unconvincing and the testimony provided by

petitioner, Mr. Mitchell, and Mr. Bernstein not credible. Petitioner’s testimony

was self-serving, and Mr. Mitchell’s and Mr. Bernstein’s testimony was simply not

credible. None of the testimony was supported by credible documentary evidence.

Mr. Mitchell, who was Mr. Haring’s close associate and petitioner’s friend, was
                                       - 20 -

[*20] not a disinterested witness. Similarly, Mr. Bernstein represented both

petitioner and Mr. Haring; he can hardly be considered disinterested. We found

Mr. Bernstein evasive in his answers and in his selective invocation of the

attorney-client privilege with regard to the legal advice provided to Mr. Haring

about the transfers. For example, when asked at trial whether petitioner held an

interest in Peachtree, Mr. Bernstein merely asserted that petitioner’s name as

owner did not appear on any documents.

      In an attempt to corroborate his story, petitioner sought to introduce a note

dated January 18, 2005, that purports to be from Mr. Haring regarding his desire to

transfer funds to petitioner as a “gift”. Respondent objects to the introduction of

this note on hearsay grounds. Rule 803(3) of the Federal Rules of Evidence

excludes from the rule against hearsay statements that describe a declarant’s then-

existing state of mind (such as motive, intent, or plan). Because we find that rule

803(3) applies, we admit the note over respondent’s objection.

      Even though we admit the note that Mr. Mitchell and Mr. Bernstein

prepared for Mr. Haring, we have serious doubts as to its authenticity and

credibility.10 Consequently, we assign it little weight in determining whether the


      10
        At trial Mr. Bernstein and Mr. Mitchell authenticated Mr. Haring’s
signature on the note by affirming that they recognized his handwriting.
                                        - 21 -

[*21] transfers were objectively gifts. Mr. Haring did not draft the note. It was

drafted by Mr. Mitchell and Mr. Bernstein, and there are no credible facts in the

record to suggest that they knew or accurately represented Mr. Haring’s intent or

that the transfers came from detached and disinterested generosity.

      B.     Petitioner Has Failed To Prove That the Transfers Were Made With
             Disinterested Generosity.

      Petitioner’s story confirms that he and Mr. Haring had a business

relationship starting in the early nineties and ending in 2007 with the repayment of

the Avenger loan. As a result of this business relationship, petitioner would have

us believe that he and Mr. Haring developed such a close personal relationship

that Mr. Haring decided to give petitioner gifts of $24.775 million. We do not

find petitioner’s and the witnesses’ testimony credible with respect to this close

personal relationship. Petitioner’s story is simply insufficient to prove that he and

Mr. Haring had anything more than a business relationship where occasionally

personal matters were discussed.

      Even if we were willing to find that petitioner and Mr. Haring had a close

personal relationship, the record is devoid of any credible evidence to prove that

Mr. Haring transferred the funds to petitioner with detached and disinterested

generosity. See Commissioner v. Duberstein, 363 U.S. at 285-286. Additionally,
                                        - 22 -

[*22] when we consider our “experience with the mainsprings of human conduct”

and the unconvincing record in this case, we cannot find facts that establish that

Mr. Haring and petitioner had the type of relationship that would result in gifts

this substantial. See id. at 289.

      The timing of the transfers, especially the strong correlation with liquidity

events experienced by Mr. Haring as a Peachtree investor, raises a question as to

whether Mr. Haring acted as a nominee for an investment by petitioner in

Peachtree. On Monday, February 7, 2005, the first liquidity event was reported in

a Philadelphia banking and financial services publication. Just a few days earlier,

on Friday, February 4, 2005, petitioner received the first transfer of $2.6 million

from Mr. Haring. In March 2006 Peachtree went public and in April 2006

petitioner received a $6 million transfer from Mr. Haring. Finally, in November

2006 Credit Suisse acquired Peachtree and in December 2006 petitioner received

an $8.75 million transfer from Mr. Haring.

      The question of whether Mr. Haring acted as a nominee for petitioner

becomes even more compelling when certain aspects of petitioner’s story are

considered. At the time of the Peachtree investment petitioner was barred by a

noncompete agreement from participating or investing directly in Peachtree.

Moreover, at the time of Mr. Haring’s investment in Peachtree, petitioner held
                                       - 23 -

[*23] assets belonging to Mr. Haring in a nominee account and a nominee trust,

suggesting a willingness on their parts to participate in nominee arrangements.

We need not answer the question, however; suffice it to say that petitioner failed

to meet his burden of proving that the transfers were gifts under section 102.11

Accordingly, he has failed to meet his burden regarding the determinations in the

notice, and respondent has met his burden regarding the increases asserted in his

amended answer.

      Petitioner cites Bogardus v. Commissioner, 302 U.S. 34 (1937), Runyon v.

Commissioner, T.C. Memo. 1984-623, Abdella v. Commissioner, T.C. Memo.

1983-616, and Brimm v. Commissioner, T.C. Memo. 1968-231, to support his

position that the transfers from Mr. Haring should be excluded as gifts under

section 102. Although the Court in those cases concluded that payments the

taxpayer received were gifts, those cases are distinguishable.




      11
        Additionally, even if we believed parts of petitioner’s story, we would
view the series of transfers and their abrupt end as odd. Many transfers were made
within days of each other. Petitioner repaid a loan from Mr. Haring with the
proceeds of the “gifts”. If Mr. Haring had truly wished to provide financially for
petitioner, why did he not begin by forgiving the outstanding Avenger loan rather
than making transfers far exceeding the loan balance and then expecting
repayment of the loan? While this may be consistent with Mr. Haring’s past
behavior, the record is simply devoid of credible evidence for us to draw any
conclusions.
                                        - 24 -

[*24] In Bogardus v. Commissioner, 302 U.S. at 38, the parties stipulated that

funds the taxpayer received were not intended to be payment or compensation for

any services rendered or to be rendered. No such stipulation is present here. In

two of the other cases petitioner cites, the donors appeared before the Court and

provided credible testimony evincing their donative intent. It was on the basis of

the donors’ testimony, not present in this case, that the Court found that the

transfers in those cases were gifts.12 In contrast, we did not hear from Mr. Haring,

which is surprising given his alleged close relationship with petitioner, and we

cannot find other credible evidence in the record to determine his intentions.13


      12
         In Brimm v. Commissioner, T.C. Memo. 1968-231, the donor was a
school, and a member of the board of trustees executive committee credibly
testified regarding the school’s intention. In Abdella v. Commissioner, T.C.
Memo. 1983-616, the donors were shareholders of a corporation that employed the
taxpayer. The donors told the taxpayer that the payment was a gift to him, but
then later claimed a deduction for the payment as compensation. Nonetheless, the
donors testified at trial that it was their intent to give the taxpayer a gift because
they had sold the corporation, and the Court concluded that the objective facts
indicated that the transfer was a gift when made. Id. The donors in Runyon v.
Commissioner, T.C. Memo. 1984-623, were the same donors involved in Abdella.
While the opinion in Runyon is not clear as to whether the donors testified, the
Court relied on its opinion in Abdella in reaching its conclusion.
      13
        The Court granted petitioner’s motion in limine, see supra p. 9, to preclude
the drawing of any adverse inference from Mr. Haring’s absence at trial, see
Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158 (1946), aff’d, 162
F.2d 513 (10th Cir. 1947). In reaching our conclusion, we draw no adverse
inference against petitioner as a result of Mr. Haring’s absence. We conclude,
                                                                      (continued...)
                                        - 25 -

[*25] The record consists largely of unsubstantiated and self-serving testimony

that we do not find credible. The record suffers from factual gaps and a

noteworthy lack of documentation regarding the story told by petitioner and his

witnesses. Because petitioner bears the burden of persuading this Court that the

transfers were gifts and not income, and has failed to carry that burden, the

deficiencies determined in the notice of deficiency are sustained. Moreover,

because petitioner does not dispute the receipt or amount of the 2006 transfer and

has failed to prove that it was a gift, respondent has met his burden of proof as to

as the increases asserted in his amended answer,14 which are sustained.

V.    Section 6662 Penalty

      Section 6662(a) and (b)(2) imposes a 20% penalty on the portion of an

underpayment that is attributable to, among other things, a substantial



      13
       (...continued)
however, that the evidence petitioner presented is insufficient for us to find that
Mr. Haring’s transfers during the years at issue were gifts. While petitioner could
have proved Mr. Haring’s intent with indirect, inferential evidence of intent if the
evidence was convincing and credible, see Alhadi v. Commissioner, T.C. Memo.
2016-74, the record does not contain sufficient credible evidence for us to
conclude that Mr. Haring’s transfers were the result of detached and disinterested
generosity, see Commissioner v. Duberstein, 363 U.S. at 285.
      14
       Petitioner does not dispute the increased December 20, 2006, transfer
amount that resulted in the increased deficiency and penalty in respondent’s
amended answer. See supra p. 7.
                                        - 26 -

[*26] understatement of income tax. The Commissioner bears the burden of

production with respect to the taxpayer’s liability for the section 6662(a) penalty.

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

the Commissioner meets this burden, the taxpayer must come forward with

persuasive evidence that the Commissioner’s determination is incorrect. See Rule

142(a); Higbee v. Commissioner, 116 T.C. at 447.

      Section 6751(b)(1) provides that, subject to certain exceptions not relevant

here, no penalty shall be assessed unless the initial determination of such

assessment is personally approved in writing by the immediate supervisor of the

individual making such determination or such higher level official as the Secretary

may designate. See Graev v. Commissioner, 149 T.C. 485, 492-493 (2017),

supplementing and overruling in part 147 T.C. 460 (2016); see also Clay v.

Commissioner, 152 T.C. 223, 249 (2019) (citing section 6751(b)). In Graev we

held that the Commissioner’s burden of production under section 7491(c) includes

establishing compliance with the supervisory approval requirement of section

6751(b). In Clay v. Commissioner, 152 T.C. at 249, we held that the initial

determination for purposes of section 6751(b) is made no later than when the

Commissioner issues a revenue agent’s report (RAR) to a taxpayer that proposes
                                       - 27 -

[*27] adjustments including penalties and gives the taxpayer the right to protest

those proposed adjustments with the Internal Revenue Service’s Appeals Office.15

      Trial of this case was held, and the record was closed, before we issued our

Opinions in Graev, Clay, and Belair Woods, LLC v. Commissioner, 154 T.C. ___,

___ (slip op. at 24-25) (Jan. 6, 2020). In the wake of Graev, we ordered

respondent to file a response addressing the effect of section 6751(b) on this case

and directing the Court to any evidence of section 6751(b) supervisory approval in

the record. Respondent was unable to direct the Court to any evidence in the

record that satisfies his burden of production with respect to section 6751(b)(1), so

he filed a motion to reopen the record to offer the following evidence: (1) a

declaration of Diane M. Acosta, the supervisor who approved the initial

determination to propose section 6662(b)(2) accuracy-related penalties in

connection with the examination and (2) the Civil Penalty Approval Form for the

years at issue, dated October 31, 2012. Petitioners objected to the introduction of

any additional evidence with respect to the penalties and requested that the Court


      15
        Since this Court’s Opinion in Clay v. Commissioner, 152 T.C. 223 (2019),
was published, this Court in Belair Woods, LLC v. Commissioner, 154 T.C. ___,
___ (slip op. at 24-25) (Jan. 6, 2020), held that “the ‘initial determination’ of a
penalty assessment * * * is embodied in the document by which the Examination
Division formally notifies the taxpayer, in writing, that it has completed its work
and made an unequivocal decision to assert penalties.”
                                         - 28 -

[*28] deny respondent’s motion. On August 6, 2018, we granted respondent’s

motion to reopen the record. The parties engaged in further discovery to develop

the record with respect to the written supervisory approval.

      While discovery was ongoing, we issued our Opinion in Clay; we then

ordered respondent to file a response addressing its effect on this case.

Respondent’s response attached two letters sent to petitioner. The first was Letter

915, dated August 6, 2012, and the second was Letter 950, dated October 31,

2012. Each letter enclosed either Form 4549 or Form 4549-A proposing accuracy-

related penalties, and each letter offered petitioner the opportunity to file a protest

of the proposed adjustments with the IRS Appeals Office. The parties filed a

supplemental stipulation of facts and attached the Letter 915 and the Letter 950 as

exhibits. On April 2, 2020, we issued an order admitting the stipulated exhibits

and closing the record in this case.

      The debate surrounding section 6751(b) focuses on the Letter 915 and the

Letter 950. The penalty approval form in the record was signed after the Letter

915 was delivered to petitioner and before the Letter 950 was mailed to him. If we

find that the Letter 915 was the initial determination to assert accuracy-related

penalties, then respondent cannot meet his burden of production under section

6751 because the date on which the initial determination was communicated
                                        - 29 -

[*29] would predate the date on which the civil penalty approval form was signed.

See, e.g., Clay v. Commissioner, 152 T.C. at 249-250.

      Respondent contends that the Letter 915 dated August 6, 2012, cannot be an

initial determination because: (1) Clay is inapplicable in that Letter 915 is not the

colloquially termed “30-day letter” and (2) the Letter 915 was meant to invite

petitioner to submit additional information, at a time when it was understood that

petitioner would not yet pursue an administrative appeal. We find these

contentions unconvincing. First, Clay v. Commissioner, 152 T.C. at 249, held that

a letter offering the taxpayer a right to pursue an administrative appeal and

enclosing an RAR that proposed a section 6662 penalty constituted the initial

determination within the meaning of section 6751(b).16 Second, we have


      16
         Even if we were to adopt respondent’s limited reading of Clay, which we
do not, the Court in Belair Woods, LLC v. Commissioner, 154 T.C. at ___, (slip
op. at 15), noted that the “‘initial determination’ of a penalty may occur earlier in
the administrative process”. Specifically, the critical question under Belair Woods
is whether a document “embodies” an initial determination because it “formally
notifies the taxpayer, in writing, that * * * [the Examination Division] has
completed its work and made an unequivocal decision to assert penalties.” Id. at
__ (slip op. at 24-25). While Clay involved a 30-day letter that included a right to
appeal, the right to appeal is not always necessary for a communication to meet the
Belair Woods standard. See Carter v. Commissioner, T.C. Memo. 2020-21
(holding that a communication which did not include an appeal right constituted
an initial determination). In this case, the Letter 915 did include an appeal right
and provided the requisite formal notification. Respondent’s subjective intent in
sending the Letter 915 is of no moment.
                                        - 30 -

[*30] repeatedly held that the content of a document and not its label is

controlling. See Wilson v. Commissioner, 131 T.C. 47 (2008) (holding that a

taxpayer is not entitled to judicial review after an equivalent hearing regarding a

proposed collection action merely because the Appeals Office mistakenly sent its

determination to the taxpayer using the wrong form letter); Craig v.

Commissioner, 119 T.C. 252, 263 (2002) (“The form on which a notice of

assessment and demand for payment is made is irrelevant as long as it provides the

taxpayer with all the information required[.]” (citing Elias v. Connett, 908 F.2d

521, 525 (9th Cir. 1990))). Third, regardless of the subjective intent with which

respondent mailed the August 6, 2012, Letter 915, it is indisputable that the letter

objectively provided petitioner the right to file a protest with the Appeals Office.

Thus, respondent’s contentions are unavailing.

      We conclude that respondent made his initial determination no later than

August 6, 2012, when he delivered the Letter 915, which was the first letter to

petitioner proposing the accuracy-related penalties and providing petitioner with

the opportunity to file a protest to the adjustments with the Appeals Office. See

Clay v. Commissioner, 152 T.C. at 249. Because the initial determination to

impose the section 6662 accuracy-related penalties was made no later than August

6, 2012, before the Civil Penalty Approval form was signed on October 31, 2012,
                                       - 31 -

[*31] respondent cannot satisfy his initial burden of production under section

6751(b). See id. We, therefore, hold that petitioner is not liable for the accuracy-

related penalties under section 6662(a).17

      We have considered the parties’ remaining arguments, and to the extent not

discussed above, conclude those arguments are irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                Decision will be entered for

                                       respondent as to the deficiencies and for

                                       petitioner as to the accuracy-related

                                       penalties under section 6662(a).




      17
       Respondent amended his answer to assert increased penalties for tax year
2006. Respondent has failed to introduce sufficient evidence demonstrating
compliance with his burden of production as to these increases. See Dynamo
Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 238 (2018).
