                                               ROBERT K. AND JOAN L. PASCHALL, PETITIONERS v.
                                                   COMMISSIONER OF INTERNAL REVENUE,
                                                               RESPONDENT
                                               Docket Nos. 10478–08, 25825–08.1                           Filed July 5, 2011.

                                                 R determined sec. 4973, I.R.C., excise tax deficiencies and
                                               additions to tax under sec. 6651(a)(1), I.R.C., for Ps’ 2002
                                               through 2006 tax years. The determinations stem from R’s
                                               assertion that P–H made excess contributions to his Roth
                                               individual retirement account. Held: Ps are liable for the
                                               excise tax deficiencies and additions to tax to the extent
                                               decided herein.

                                        Howard S. Fisher, for petitioners.
                                        Ronald S. Collins, Jr., John A. Guarnieri, and Cindy Park,
                                      for respondent.
                                         WHERRY, Judge: These consolidated cases are before the
                                      Court on petitions for redetermination of respondent’s deter-
                                      minations, in notices of deficiency, that petitioners owe excise
                                      tax deficiencies and section 6651(a)(1) additions to tax for
                                      their 2002 through 2006 tax years as well as an income tax
                                      deficiency and a section 6662(a) accuracy-related penalty for
                                      their 2005 tax year. 2
                                         The issues for decision are: (1) Whether petitioner husband
                                      made an excess contribution to his Roth individual retire-
                                      ment account (Roth IRA) and is liable for section 4973 excise
                                      tax deficiencies for the 2002 through 2006 tax years; (2)
                                      whether petitioner husband is liable for additions to tax
                                      under section 6651(a)(1) for failure to file Forms 5329, Addi-
                                      tional Taxes on Qualified Plans (Including IRAs) and Other
                                      Tax-Favored Accounts, for the 2002 through 2006 tax years;
                                      and (3) whether the statute of limitations bars respondent
                                        1 The case at docket No. 10478–08 involves petitioners’ 2004 and 2005 tax years. The case at

                                      docket No. 25825–08 involves petitioners’ 2002, 2003, and 2006 tax years. The cases were con-
                                      solidated for trial, briefing, and opinion on Feb. 12, 2010.
                                        2 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986

                                      (Code), as amended and in effect for the years at issue, and all Rule references are to the Tax
                                      Court Rules of Practice and Procedure.


                                      8




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                                      (8)                           PASCHALL v. COMMISSIONER                                             9


                                      from assessing and collecting deficiencies for the 2002, 2003,
                                      and 2004 tax years. 3

                                                                           FINDINGS OF FACT

                                         Some of the facts have been stipulated, and the stipula-
                                      tions, with the accompanying exhibits, are incorporated
                                      herein by this reference. At the time they filed their peti-
                                      tions, petitioners resided in California.
                                         Petitioners filed timely joint Forms 1040, U.S. Individual
                                      Income Tax Return, for all relevant years. This case stems
                                      from petitioner husband Robert K. Paschall’s attempt to
                                      ‘‘convert a traditional IRA to a Roth IRA’’ (Roth restructure). 4
                                      The Roth restructure was designed and implemented by A.
                                      Blair Stover, Jr. (Mr. Stover), and his colleagues at the
                                      accounting firm of Grant Thornton, L.L.P. (Grant Thornton).
                                      I. Petitioners’ Background
                                        Mr. Paschall graduated from Massachusetts Institute of
                                      Technology with a bachelor of science degree in physics and
                                      from the University of Illinois with a master of science
                                      degree in physics. He also received a management certificate
                                      for technical personnel from the University of California Los
                                      Angeles.
                                        Mr. Paschall spent his entire career until his 1996 retire-
                                      ment working at North American Aviation, which eventually
                                      became Rockwell International. Petitioner wife, Joan L.
                                      Paschall, has a degree in secretarial science and from 1985
                                      through 2008 worked as a teacher’s assistant.
                                      II. Roth IRA Restructuring
                                            A. Introduction to Jim Patton
                                        As he was nearing retirement, Mr. Paschall attended semi-
                                      nars where Jim Patton, a financial adviser, was one of the
                                         3 Respondent’s $61,164 reduction in petitioners’ allowable itemized deductions is computa-

                                      tional and need not be addressed in this Opinion.
                                         4 The basic tax characteristics of a traditional IRA are (1) deductible contributions, (2) the ac-

                                      crual of tax-free earnings (except with respect to sec. 511 unrelated business income), and (3)
                                      the inclusion of distributions in gross income. See secs. 219(a), 408(a), (d)(1), (e). The basic tax
                                      characteristics of a Roth IRA are (1) nondeductible contributions, (2) the accrual of tax-free earn-
                                      ings, and (3) the exclusion of qualified distributions from gross income. Sec. 408A(a), (c)(1),
                                      (d)(1), (2)(A); Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202, 206 (2009).




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                                      10                 137 UNITED STATES TAX COURT REPORTS                                           (8)


                                      speakers. At one of the seminars, Mr. Paschall gave Mr.
                                      Patton his name and telephone number.
                                        Mr. Patton would occasionally call Mr. Paschall. On one
                                      occasion he claimed that he had a client who was performing
                                      a transaction that was perfectly legal and would convert a
                                      traditional IRA to a Roth IRA and that met all the tax require-
                                      ments. He also contended that it was in full compliance with
                                      the tax laws and was a good investment. He recommended
                                      that Mr. Paschall pursue this transaction. The client Mr.
                                      Patton spoke of, Fred Nardi, eventually sent Mr. Paschall the
                                      notes he had taken on his own Roth restructure.
                                        Mr. Paschall assumed Mr. Patton ‘‘was a very knowledge-
                                      able financial adviser with considerable experience and
                                      knowledge of the taxes and the finances and the legality of
                                      anything that he would recommend’’. He further assumed
                                      Mr. Patton ‘‘would recommend legal things and investments
                                      that were to my advantage’’.
                                           B. Introduction to Mr. Stover
                                         Mr. Patton introduced Mr. Paschall to Mr. Stover. Mr.
                                      Paschall first met Mr. Stover in Mr. Patton’s office in early
                                      2000. At this time Mr. Stover was a partner at Grant
                                      Thornton.
                                         At the meeting Mr. Stover gave a presentation and
                                      explained the Roth restructure to Mr. Paschall who ‘‘did not
                                      fully understand it’’. Although he acknowledged that he did
                                      not understand the Roth restructure, Mr. Paschall believed
                                      it was ‘‘completely compliant with the tax law at that time’’
                                      and was not a tax shelter. 5 Mr. Paschall decided to engage
                                      in the Roth restructure, his stated purpose being to save
                                      money on taxes.
                                           C. Engagement Letter
                                        On March 17, 2000, Mr. Paschall executed an engagement
                                      letter with Grant Thornton for professional tax and financial
                                      consulting services, specifically the Roth restructure. The
                                      engagement letter contemplated a fee of $120,000 and con-
                                      tained a clause providing that Grant Thornton would rep-
                                        5 Mr. Paschall explained: ‘‘Grant Thornton was the fifth largest accounting company in the

                                      country, and I believed them to be completely legal and experts in this business of accounting
                                      and tax preparation, and I put complete faith in what they told me and did for me’’.




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                                      (8)                           PASCHALL v. COMMISSIONER                                            11


                                      resent and defend Mr. Paschall or any related entity at no
                                      additional cost in case of audit by the Internal Revenue
                                      Service (IRS). The engagement letter also contained an
                                      indemnity clause providing that Grant Thornton would
                                      reimburse and indemnify the Paschalls and any related
                                      entity for any civil negligence or fraud penalty assessed
                                      against them by Federal or State authorities.
                                         Mr. Paschall paid the $120,000 fee for the Roth restruc-
                                      ture. 6 The engagement letter provided that the fee was to be
                                      split equally between Grant Thornton and Nevada Corpora-
                                      tion Associations, Inc., a law firm. Mr. Paschall never asked
                                      for nor did he receive an opinion letter regarding the Roth
                                      restructure.
                                            D. Kruse Mennillo, L.L.P., and Individuals Other Than
                                               Mr. Stover
                                         In addition to Mr. Stover, Mr. Paschall had contact with
                                      other Grant Thornton employees including Ruth Donovan,
                                      Allen Davison, and Angela Parker.
                                         In September 2001 Mr. Stover left Grant Thornton for
                                      Kruse Mennillo, L.L.P. (Kruse Mennillo), another accounting
                                      firm. Neither party presented evidence explaining the rea-
                                      soning behind Mr. Stover’s abrupt move. When Mr. Stover
                                      moved to Kruse Mennillo, certain individuals he worked with
                                      at Grant Thornton went with him. At the time Mr. Stover
                                      moved to Kruse Mennillo, Mr. Paschall followed him and
                                      began using Kruse Mennillo instead of Grant Thornton.
                                         To Mr. Paschall’s knowledge Kruse Mennillo did not
                                      receive any of the $120,000 fee that was paid to Grant
                                      Thornton for the Roth restructure. Mr. Stover eventually
                                      stopped dealing with Mr. Paschall, and at that time Marc
                                      Sommers, a tax lawyer at Kruse Mennillo and a former IRS
                                      employee, took over Mr. Paschall’s Federal tax work. 7
                                        6 As explained further infra note 9, Mr. Paschall did not directly pay Grant Thornton $120,000

                                      to implement the Roth restructure. Rather, the fee was paid indirectly from Mr. Paschall’s IRA
                                      through a corporation.
                                        7 Petitioners request that we take judicial notice of a Feb. 21, 2008, Department of Justice

                                      Press Release and a Complaint for Permanent Injunction against Mr. Stover filed Feb. 21, 2008.
                                      This Court will grant petitioners’ request and has taken judicial notice of the documents re-
                                      quested and United States v. Stover, 731 F. Supp. 2d 887, 914–915 (W.D. Mo. 2010), holding
                                      that Mr. Stover had reason to know that various structures he promoted lacked any legitimate
                                      business purpose and granting injunctive relief against him. The case focused on ‘‘three multiple
                                      business entity structures sold and arranged by’’ Mr. Stover. The third structure, referred to
                                                                                                    Continued




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                                      12                 137 UNITED STATES TAX COURT REPORTS                                           (8)


                                           E. Independent Advice and Knowledge
                                         Despite the remarkable promised tax benefits of converting
                                      taxable IRA distributions to nontaxable Roth IRA distribu-
                                      tions, Mr. Paschall did not ask anyone else’s opinion on the
                                      viability of the Roth restructure. Mr. Paschall did not do any
                                      research on contribution limits to IRAs, taxation of excess
                                      contributions to IRAs, or taxation of distributions from IRAs.
                                         Mr. Paschall understood that contributions to traditional
                                      IRAs were made tax free and distributions from them were
                                      taxable. He also understood that Roth IRAs were different in
                                      that, while the contributions were not deductible, the dis-
                                      tributions were not taxed.
                                      III. The Roth Restructure
                                        Grant Thornton, specifically Mr. Stover, ‘‘orchestrated and
                                      oversaw’’ all of the steps in the Roth restructure. Papers
                                      were prepared and then sent to Mr. Paschall for his signa-
                                      ture. Mr. Paschall explained that he did not doubt anything
                                      they did and believed that the Roth restructure was a firm-
                                      sanctioned Grant Thornton transaction as opposed to a Mr.
                                      Stover individually conceived transaction. The Roth restruc-
                                      ture was implemented as follows:
                                        • March 14, 2000—The Paschalls maintained an invest-
                                      ment account with Calvert Group with account number
                                      ending in 8724 (Calvert account).
                                        • March 2000—In March 2000 Mr. Paschall opened a Self
                                      Directed Roth IRA at George K. Baum Trust Co. with account
                                      number ending in 2306 (Baum Roth IRA). On March 14, 2010,
                                      the Baum Roth IRA was funded with a $2,000 contribution
                                      made from the Calvert account.
                                        • March 20, 2000—Two corporations, Telesis Acquisition &
                                      Investment Co., Inc. (Telesis), and West Star Global
                                      Holdings, Inc. (West Star), were organized, in the State of
                                      Nevada, by Nevada Corporation Associations. Telesis and
                                      West Star had the same principal place of business, and Mr.

                                      by the District Court as the Roth/S structure ‘‘[skirted] the contribution limits applicable to Roth
                                      IRAs.’’ Id. at 900. Allen Davison has also been enjoined from organizing, establishing, pro-
                                      moting, and selling certain tax structures. United States v. Davison, 105 AFTR 2d 2010–2278,
                                      2010–1 USTC par. 50,406 (W.D. Mo. 2010), affd. as modified and remanded 407 Fed. Appx. 997
                                      (8th Cir. 2011).




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                                      (8)                           PASCHALL v. COMMISSIONER                                            13


                                      Paschall served as president, secretary, and treasurer of both
                                      corporations during all relevant periods. 8
                                         • March 20, 2000—Mr. Paschall opened a Roth IRA with
                                      First Union Securities, Inc., with account number ending in
                                      4078 (First Union Roth IRA).Telesis had any employees at
                                      any time.
                                         • March 22, 2000—As of this date, the Paschalls main-
                                      tained a traditional IRA account at Resources Trust with
                                      account number ending in 1977 (Resources Trust IRA). On
                                      March 22, 2000, Mr. Paschall opened a Self Directed Tradi-
                                      tional IRA at First National Bank of Onaga with account
                                      number ending in 3200 (FNBO IRA). On March 30, 2000, Mr.
                                      Paschall funded the FNBO IRA via a rollover of $1,391,941.64
                                      from the Resources Trust IRA.
                                         • March 27, 2000—The Baum Roth IRA purchased all of
                                      the shares of stock of Telesis for $2,000. On April 26, 2000,
                                      the FNBO IRA purchased all of the shares of stock in West
                                      Star for $1,392,801.96. On or about April 26, 2000, West Star
                                      transferred $1,272,801.96 to Telesis. 9 On April 28, 2000,
                                      $1,272,801.96 was transferred from Telesis to the Baum Roth
                                      IRA. Also on April 28, 2000, $1,272,801.96 was transferred
                                      from the Baum Roth IRA to the First Union Roth IRA. The
                                      money was invested in various publicly traded securities and
                                      mutual funds.
                                         • December 17, 2001—Telesis and West Star executed
                                      articles of merger with each share of West Star stock being
                                      converted into 1 share of Telesis stock and with Telesis being
                                      the surviving corporation. The articles of merger were filed
                                      with the Nevada secretary of state on December 31, 2001.
                                      West Star was dissolved as of December 31, 2001. Telesis
                                      was dissolved on March 28, 2006.
                                         • October 25, 2005—The Paschalls received a $41,900 dis-
                                      tribution from their First Union Roth IRA. On December 7,
                                      2006, the Paschalls received a $100,000 distribution from
                                        8 For 2000 and 2001, West Star filed Forms 1120, U.S. Corporation Income Tax Return, re-

                                      porting zero gross receipts and zero deductions for each year. West Star reported assets of
                                      $2,000 cash as of Dec. 31, 2000, and assets of $1,000 stock as of Dec. 31, 2001. For 2000 through
                                      2004, Telesis filed Forms 1120 reporting zero receipts and zero deductions for each year. Telesis
                                      reported assets of $2,000 cash as of Dec. 31, 2000; $1,900 cash as of Dec. 31, 2001 and 2002;
                                      and zero assets as of Dec. 31, 2003 and 2004. Neither West Star or
                                        9 The $120,000 difference between what the FNBO IRA purchased the stock in West Star for

                                      and the amount West Star transferred to Telesis was used to pay Grant Thornton’s fee.




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                                      14                    137 UNITED STATES TAX COURT REPORTS                                          (8)


                                      their First Union Roth IRA, which by that time had been
                                      renamed H&R Block Financial Advisors Roth IRA.
                                      IV. Reporting the Roth Restructure
                                        Mr. Paschall personally prepared and completed his and
                                      Mrs. Paschall’s income tax returns from 1959 until 1993.
                                      Stuart Jaeger prepared the Paschalls’ income tax returns
                                      from 1994 through 1999. Mr. Paschall did not ask Mr. Jaeger
                                      his opinion on the viability of the Roth restructure.
                                        As part of the fee Mr. Paschall paid for the Roth restruc-
                                      ture, Grant Thornton prepared the Paschalls’ tax returns for
                                      2000. Kruse Mennillo prepared the Paschalls’ tax returns
                                      beginning in 2001 and therefore prepared all of the returns
                                      for the tax years that are in issue before this Court. Mr.
                                      Paschall paid Kruse Mennillo to prepare the tax returns
                                      starting in 2001.
                                        In order to facilitate the preparation of the returns, Mr.
                                      Paschall would provide the information and copies of perti-
                                      nent documents asked for each year by either Grant
                                      Thornton or Kruse Mennillo. Because ‘‘They were prepared
                                      by reputable accounting firms’’, Mr. Paschall asserts that he
                                      thought that his 2000 through 2006 tax returns ‘‘were com-
                                      pletely accurate’’.
                                      V. The Result of the Roth Restructure and the Audit
                                        In 2003 the Paschalls’ returns were audited by the Cali-
                                      fornia Franchise Tax Board, with the California Franchise
                                      Tax Board concluding that the Paschalls did not owe any
                                      additional taxes. The Paschalls were defended in the audit by
                                      Michael Coopit of Kruse Mennillo, who told the Paschalls at
                                      that time that the Roth restructure ‘‘was completely legal
                                      and that there was no problem at all’’.
                                        In either 2003 or 2004 Mr. Paschall received a letter
                                      stating that Grant Thornton was turning over the names of
                                      people who had engaged in Roth restructures to the IRS. Mr.
                                      Stover at this time advised Mr. Paschall that the Roth
                                      restructure was legal but that he ‘‘might want to disclose on
                                      [his] income tax returns the structure’’. Mr. Paschall there-
                                      after attached to Telesis’ and his personal tax returns Forms
                                      8886, Reportable Transaction Disclosure Statement. 10 Some-
                                           10 The   Form 8886 contained little information, stating in the expected tax benefits section:




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                                      (8)                            PASCHALL v. COMMISSIONER                                             15


                                      time in 2004 Mr. Paschall received, via Mr. Coopit, a memo
                                      concluding that the Roth restructure ‘‘was legal and met with
                                      all tax laws’’.
                                         The Paschalls timely filed Forms 1040 for all years in
                                      issue. They did not file Form 5329 for any of the years in
                                      issue. On February 1 and July 23, 2008, respondent issued
                                      notices of deficiency showing the following deficiencies, addi-
                                      tions to tax, and penalties: 11
                                                                                            Addition to tax              Penalty
                                            Tax year                Deficiency              sec. 6651(a)(1)            sec. 6662(a)
                                                2002                $83,238.00                $20,809.50                   ---
                                                2003                 83,028.15                 20,757.00                   ---
                                                2004                 82,818.00                 20,704.00                   ---
                                                2005                 94,151.00                 20,637.00                  $2,320
                                                2006                 82,278.00                 20,569.50                   ---

                                         The Paschalls timely petitioned this Court. Trial was held
                                      on February 25, 2010, in Los Angeles, California. At that
                                      trial, the Paschalls’ attorney asked Mr. Paschall what advice
                                      he had received from professional advisers. Respondent
                                      objected to this testimony as hearsay, and the Court sus-
                                      tained those objections. The Paschalls later requested that
                                      the record be reopened to permit Mr. Paschall’s testimony
                                      regarding expert advice in the light of United States v.
                                      Moran, 493 F.3d 1002 (9th Cir. 2007). That request was
                                      granted and additional testimony was heard on June 3, 2010.
                                                                                    OPINION

                                      I. Whether Respondent’s Proposed Assessments of Excise Tax
                                         for the 2002, 2003, and 2004 Tax Years Are Barred by the
                                         Statute of Limitations
                                        Mr. Paschall argues that the statute of limitations bars
                                      respondent from assessing deficiencies for his 2002, 2003,
                                      and 2004 tax years. The deficiencies as determined by
                                      respondent for these years are excise tax deficiencies under
                                      section 4973 and additions to tax under section 6651(a)(1) for
                                      ‘‘THE POTENTIAL BENEFITS IF ANY COULD BE EITHER A TAX SAVINGS OR COST DE-
                                      PENDING ON THE TAXPAYERS RATE. THE COMPANY HAS HAD NO ACTIVITY FOR THE
                                      PAST THREE TAX YEARS’’.
                                         11 The notice of deficiency for the 2004 and 2005 tax years was issued on Feb. 1, 2008. The

                                      notice of deficiency for the 2002, 2003, and 2006 tax years was issued on July 23, 2008. The
                                      $94,151 deficiency for the 2005 tax year comprised (1) an excise tax deficiency of $82,548 and
                                      (2) an income tax deficiency of $11,603.




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                                      16                 137 UNITED STATES TAX COURT REPORTS                                           (8)


                                      failure to file Forms 5329, the tax form on which the section
                                      4973 excise tax is computed and disclosed.
                                        Section 6501(a) provides the general rule that the amount
                                      of any tax imposed by the Code shall be assessed within 3
                                      years of the filing of the return. However, in case of a failure
                                      to file a return, the tax may be assessed ‘‘at any time’’. Sec.
                                      6501(c)(3).
                                        Mr. Paschall did not file Form 5329 for any year at issue;
                                      however, he timely filed Forms 1040 for all years. He asserts
                                      that Form 5329 is not a separate tax return from Form 1040,
                                      that the statute of limitations started running when he filed
                                      the Forms 1040, and that the period of limitations had
                                      expired before respondent issued the notices of deficiency for
                                      the 2002, 2003, and 2004 tax years. Respondent asserts that
                                      Form 5329 is a separate tax return from Form 1040 and that
                                      since Mr. Paschall never filed Forms 5329, the section 4973
                                      excise tax may be assessed at any time.
                                        The resolution of this issue is governed by the Supreme
                                      Court’s decision in Commissioner v. Lane-Wells Co., 321 U.S.
                                      219, 223–224 (1944). Springfield v. United States, 88 F.3d
                                      750, 752 (9th Cir. 1996).
                                      [A] taxpayer does not start the statute of limitations running by filing one
                                      return when a different return is required if the return filed is insufficient
                                      to advise the Commissioner that any liability exists for the tax that should
                                      have been disclosed on the other return * * * the relevant inquiry is
                                      whether the return filed sets forth the facts establishing liability. * * *
                                      [Id., citing Commissioner v. Lane-Wells Co., supra at 223.]

                                      ‘‘Of crucial importance is whether the return, as filed,
                                      included sufficient information to allow the IRS to compute
                                      the taxpayer’s liability’’. Atl. Land & Improvement Co. v.
                                      United States, 790 F.2d 853, 858 (11th Cir. 1986).
                                         Section 4973 imposes an excise tax on excess contributions
                                      to Roth IRAs which is to be reported and disclosed on Form
                                      5329. Upon review of Mr. Paschall’s Forms 1040, respondent
                                      was not reasonably able to discern that Mr. Paschall was
                                      potentially liable for a section 4973 excise tax. While a line
                                      on each Form 1040, i.e., line 54 for 2000, line 55 for 2001,
                                      line 58 for 2002, line 57 for 2003, line 59 for 2004, and line
                                      60 for 2005 and 2006, states ‘‘Tax on qualified plans,
                                      including IRAs, and other tax-favored accounts. Attach 5329




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                                      (8)                           PASCHALL v. COMMISSIONER                                            17


                                      if required’’, Mr. Paschall left these lines blank, giving
                                      respondent no indication of his excess contribution.
                                        We hold that the filing of the Forms 1040 did not start the
                                      statute of limitations running for purposes of the section
                                      4973 excise tax in the absence of accompanying Forms 5329.
                                      See, e.g., Springfield v. United States, supra at 752 (holding
                                      that because Form 1099 requests information about non-
                                      employee compensation and Form 941 requests information
                                      about employee compensation, filing Form 1099 does not
                                      start the statute of limitations running for purposes of Form
                                      941); Atl. Land & Improvement Co. v. United States, supra
                                      at 858 (holding that a payroll tax return (FICA) filed by an
                                      employer did not start the statute of limitations running for
                                      the employer’s railroad tax liability (RRTA) because the FICA
                                      return did not contain all the information necessary to com-
                                      pute the RRTA). Because Mr. Paschall failed to file Forms
                                      5329 for the years in issue, respondent may assess the excise
                                      tax deficiencies at any time.
                                      II. Section 4973 Excise Tax Deficiencies for the 2002 Through
                                          2006 Tax Years
                                            A. Burden of Proof
                                         As a general rule, the Commissioner’s determination of a
                                      taxpayer’s liability in the notice of deficiency is presumed
                                      correct, and the taxpayer bears the burden of proving that
                                      the determination is improper. See Rule 142(a); Welch v.
                                      Helvering, 290 U.S. 111, 115 (1933). However, pursuant to
                                      section 7491(a), in certain circumstances the burden of proof
                                      on factual issues that affect the taxpayer’s tax liability ‘‘for
                                      any tax imposed by subtitle A or B’’ may shift to the
                                      Commissioner.
                                         Mr. Paschall claims that pursuant to section 7491(a)
                                      respondent bears the burden of proof. However, section
                                      7491(a) applies only to subtitles A and B, which include
                                      income taxes and estate and gift taxes. The excise tax defi-
                                      ciencies determined by respondent were computed under sub-
                                      title D. Section 7491(a) is therefore inapplicable, and Mr.
                                      Paschall bears the burden of proof.




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                                      18                 137 UNITED STATES TAX COURT REPORTS                                           (8)


                                           B. Analysis
                                         The amount of contributions a taxpayer may make in any
                                      given year to a Roth IRA is limited. Sec. 408A(c)(2) and (3).
                                      Section 4973(f) defines an excess contribution to a Roth IRA
                                      as the excess of the amount contributed over the amount
                                      allowable as a contribution. There is imposed for each tax-
                                      able year an excise tax of 6 percent for excess contributions,
                                      computed on the lesser of (1) the amount of the excess con-
                                      tribution, and (2) the fair market value of the account as of
                                      the end of the taxable year. 12 Sec. 4973(a). The excise tax is
                                      imposed each year until the excess contribution plus
                                      earnings is eliminated.
                                         Mr. Paschall presented no evidence to establish that he did
                                      not make an excess contribution to his Roth IRA. However, he
                                      disputes respondent’s calculation of the section 4973 excise
                                      tax, stating that the issue is ‘‘How the excise tax is cal-
                                      culated under Code Section 4973(f), with regards to excess
                                      funding’’.
                                         Respondent asserts that the entire $1,272,801.96 contribu-
                                      tion from Telesis to the Baum Roth IRA on April 28, 2000,
                                      was an excess contribution. 13 Respondent further asserts
                                      that the excise tax calculations for the 2002 through 2006 tax
                                      years should be based on the value of the Baum Roth IRA at
                                      the end of each respective tax year because those amounts
                                      are less than the initial excess contribution. The value of the
                                      Baum Roth IRA at the end of each tax year was as follows: 14
                                         12 A taxpayer may convert an amount from an IRA to a Roth IRA if, before Jan. 1, 2010, (1)

                                      modified AGI is $100,000 or less; (2) the married taxpayer files jointly; and (3) the taxpayer
                                      reports the conversion amount in income. Sec. 408A(c)(3)(B); sec. 1.408A–4, Income Tax Regs.
                                      If these rules are not followed, the taxpayer has a failed conversion which triggers the sec. 4973
                                      excise tax on the amount transferred from the IRA to the Roth IRA. Sec. 1.408A–4, Q&A–3(b),
                                      Income Tax Regs. On or after Jan. 1, 2010, conversions may occur without consideration of the
                                      $100,000 modified AGI limitations. Mr. Paschall never argued that he converted an amount
                                      from his IRA to his Roth IRA. Nor did he report the conversion amount in income.
                                         13 Respondent has chosen not to assert a 2000 income tax deficiency arising from the conver-

                                      sion, against Mr. Paschall, because the period of limitations for assessment for that year has
                                      expired.
                                         The funds held in the Baum Roth IRA on Apr. 28, 2000, were transferred to the First Union
                                      Roth IRA. Because the parties on brief continue to refer to Mr. Paschall’s Roth IRA as the Baum
                                      Roth IRA, we do so as well.
                                         14 On brief, respondent provided the Court with the fair market value of the Baum Roth IRA

                                      at the end of each tax year. Apparently, Mr. Paschall had provided respondent with the fair
                                      market values immediately before trial but did not introduce them into the record. Respondent
                                      has accepted the fair market values as accurate and correct.




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                                      (8)                             PASCHALL v. COMMISSIONER                                                    19


                                                                                                                                Fair market
                                                 As of Dec. 31                                                                     value
                                                         2002   .............................................................     $764,200
                                                         2003   .............................................................      919,173
                                                         2004   .............................................................      991,675
                                                         2005   .............................................................    1,245,804
                                                         2006   .............................................................    1,037,275

                                         Mr. Paschall asserts that the excise tax should be based on
                                      the $2,000 he used to initially fund the Baum Roth IRA and
                                      which was contributed to Telesis when the Baum Roth IRA
                                      purchased all of the stock of Telesis. 15 In arguing this, he
                                      places significance on the merger of West Star and Telesis,
                                      which occurred on December 17, 2001, months after the April
                                      28, 2000, transfers moving the $1,272,801.96 initially in Mr.
                                      Paschall’s traditional IRA to the Baum Roth IRA occurred.
                                         We find Mr. Paschall’s assertion unavailing. It is well set-
                                      tled that the substance of a transaction controls tax liability.
                                      Gregory v. Helvering, 293 U.S. 465, 469–470 (1935); Lazarus
                                      v. Commissioner, 58 T.C. 854, 864 (1972), affd. 513 F.2d 824
                                      (9th Cir. 1975). Where a series of transactions, taken as a
                                      whole, shows either that the transactions themselves are
                                      shams or that the transactions have no ‘‘purpose, substance,
                                      or utility apart from their anticipated tax consequences’’, the
                                      transactions are nullified and not recognized. Goldstein v.
                                      Commissioner, 364 F.2d 734, 740 (2d Cir. 1966), affg. 44 T.C.
                                      284 (1965).
                                         The substance of what happened in the instant case is that
                                      approximately $1.3 million began the year in Mr. Paschall’s
                                      traditional IRA and was transferred to his Roth IRA by the
                                      end of the year with no taxes being paid. Mr. Paschall did
                                      not attempt to provide a nontax business, financial, or
                                      investment purpose for what he did, and this Court cannot
                                      ascertain one. Instead, Mr. Paschall, incited by and at the
                                      urging of Mr. Stover, used corporate formations, transfers,
                                      and mergers in an attempt to avoid taxes and disguise excess
                                      contributions to his Roth IRA.
                                         Mr. Paschall states that ‘‘The excise tax should be based
                                      upon the contribution to the Roth-IRA’’. We agree. The April
                                        15 As stated supra, the allowable amount of contributions to Roth IRAs is limited under the

                                      Code. This limit was $2,000 for the 2000 tax year. Secs. 219(b), 408A(c)(2). Hence, as respondent
                                      has acknowledged, the $2,000 initially contributed to the Baum Roth IRA generated no tax con-
                                      sequences.




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                                      28, 2000, contribution to the Baum Roth IRA via a transfer
                                      from Mr. Paschall’s traditional IRA to West Star to Telesis to
                                      the Baum Roth IRA was an excess contribution.
                                        As respondent contends, Mr. Paschall ‘‘sought to have [his]
                                      cake and eat it too, contributing the funds tax-free into the
                                      traditional IRA and withdrawing them tax-free from the Roth
                                      IRA, paying no tax on the conversion stratagem.’’ Accordingly,
                                      we sustain respondent’s determination and hold that Mr.
                                      Paschall is liable for section 4973 excise tax deficiencies for
                                      his 2002 through 2006 tax years. These deficiencies are to be
                                      calculated upon the fair market value of the Baum Roth IRA
                                      at the end of each tax year.
                                      III. Section 6651(a)(1) Additions to Tax for Failure To File
                                           Forms 5329
                                           A. Burden of Proof
                                         Respondent bears the burden of production with regard to
                                      the section 6651(a)(1) additions to tax. See sec. 7491(c);
                                      Higbee v. Commissioner, 116 T.C. 438, 446–447 (2001). To
                                      meet his burden, respondent must produce sufficient evi-
                                      dence that it is appropriate to impose the determined addi-
                                      tions to tax. See Higbee v. Commissioner, supra at 446. How-
                                      ever, respondent does not have to produce evidence of reason-
                                      able cause, substantial authority, or lack of willful neglect.
                                      See id.
                                           B. Analysis
                                         Section 6651(a)(1), in the case of a failure to file on time
                                      any return required under section 6011(a), imposes an addi-
                                      tion to tax of 5 percent of the tax required to be shown on
                                      the return for each month or fraction thereof for which there
                                      is a failure to file, not to exceed 25 percent in the aggregate.
                                      Generally, ‘‘any person made liable for any tax * * * shall
                                      make a return or statement according to the forms and regu-
                                      lations prescribed by the Secretary.’’ Sec. 6011(a). The addi-
                                      tion to tax will not apply if it is shown that such failure is
                                      due to reasonable cause and not due to willful neglect.
                                         Taxpayers who have made excess contributions to an IRA
                                      are required to file Form 5329 each year that they have
                                      excess contributions. Hellweg v. Commissioner, T.C. Memo.
                                      2011–58; Frick v. Commissioner, T.C. Memo. 1989–86, affd.




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                                      without published opinion 916 F.2d 715 (7th Cir. 1990); sec.
                                      54.4972–1(a), Excise Tax Regs. Form 5329 is a tax return
                                      within the meaning of section 6011, and failure to file Form
                                      5329 can result in section 6651 additions to tax. Frick v.
                                      Commissioner, supra. Further, as discussed supra part I,
                                      Form 5329 is a separate tax return from Form 1040. See also
                                      Martin Fireproofing Profit-Sharing Plan & Trust v. Commis-
                                      sioner, 92 T.C. 1173, 1192 (1989) (concluding that the same
                                      requirements apply in deciding both whether a return is
                                      sufficient for statute of limitations purposes and whether a
                                      return is considered filed for section 6651(a)(1) purposes).
                                         Mr. Paschall stipulated that he did not file Form 5329 for
                                      any of the years at issue. Respondent has therefore met his
                                      burden of production. We now turn to the question of
                                      whether Mr. Paschall has proven that his failure to file was
                                      due to reasonable cause and not due to willful neglect.
                                         The failure to timely file a tax return is considered due to
                                      reasonable cause where a taxpayer is unable to file the
                                      return within the prescribed time despite exercising ‘‘ ‘ordi-
                                      nary business care and prudence.’ ’’ Jackson v. Commissioner,
                                      86 T.C. 492, 538 (1986) (quoting section 301.6651–1(c)(1),
                                      Proced. & Admin. Regs.), affd. 864 F.2d 1521 (10th Cir.
                                      1989). ‘‘[W]illful neglect’’ is defined as ‘‘a conscious, inten-
                                      tional failure or reckless indifference’’. United States v. Boyle,
                                      469 U.S. 241, 245 (1985). Mr. Paschall, citing United States
                                      v. Boyle, supra at 249–251, argues that his reliance on tax
                                      advisers ‘‘constitutes reasonable cause for avoiding a failure
                                      to file penalty under’’ section 6651.
                                         Generally, circumstances considered to constitute reason-
                                      able cause arise as a result of factors beyond a taxpayer’s
                                      control and include situations such as unavoidable postal
                                      delays, timely filing of a return with the wrong office, death
                                      or serious illness of the taxpayer or a member of his imme-
                                      diate family, the taxpayer’s unavoidable absence from the
                                      United States, destruction by casualty of the taxpayer’s
                                      records or place of business, and reliance on the erroneous
                                      advice of an IRS officer or employee. McMahan v. Commis-
                                      sioner, 114 F.3d 366, 369 (2d Cir. 1997), affg. T.C. Memo.
                                      1995–547; see also Gagliardi v. Commissioner, T.C. Memo.
                                      2008–10. Reliance on a mistaken legal opinion of a competent
                                      tax adviser that it was unnecessary to file a return also con-




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                                      22                 137 UNITED STATES TAX COURT REPORTS                                           (8)


                                      stitutes reasonable cause. 16 McMahan v. Commissioner,
                                      supra at 369. However, while good-faith reliance on profes-
                                      sional advice may provide a basis for a reasonable cause
                                      defense, it is not absolute. 17 Freytag v. Commissioner, 89
                                      T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990),
                                      affd. 501 U.S. 868 (1991); LaPlante v. Commissioner, T.C.
                                      Memo. 2009–226.
                                         ‘‘The advice must be from competent and independent par-
                                      ties, not from promoters of the investment’’ or advisers who
                                      have a conflict of interest. Swanson v. Commissioner, T.C.
                                      Memo. 2009–31 (citing LaVerne v. Commissioner, 94 T.C.
                                      637, 652–653 (1990), affd. without published opinion 956
                                      F.2d 274 (9th Cir. 1992)); see Hansen v. Commissioner, 471
                                      F.3d 1021, 1031 (9th Cir. 2006), affg. T.C. Memo. 2004–269.
                                      ‘‘Courts have repeatedly held that it is unreasonable for a
                                      taxpayer to rely on a tax adviser actively involved in plan-
                                      ning the transaction and tainted by an inherent conflict of
                                      interest’’. Canal Corp. v. Commissioner, 135 T.C. 199, 218
                                      (2010); see also Pasternak v. Commissioner, 990 F.2d 893,
                                      902–903 (6th Cir. 1993), affg. Donahue v. Commissioner, T.C.
                                      Memo. 1991–181; LaVerne v. Commissioner, supra at 652–
                                      653.
                                         A promoter is ‘‘ ‘an adviser who participated in structuring
                                      the transaction or is otherwise related to, has an interest in,
                                      or profits from the transaction.’ ’’ 18 106 Ltd. v. Commissioner,
                                      136 T.C. 67, 79 (2011) (quoting Tigers Eye Trading, LLC v.
                                      Commissioner, T.C. Memo. 2009–121). ‘‘A promoter’s self-
                                        16 While the Supreme Court has indicated that reliance on a tax adviser as to whether a tax-

                                      payer needs to file can constitute reasonable cause, reliance on a tax adviser to prepare the re-
                                      turn does not constitute reasonable cause. United States v. Boyle, 469 U.S. 241, 251 (1985);
                                      Jackson v. Commissioner, 86 T.C. 492, 539 (1986), affd. 864 F.2d 1521 (10th Cir. 1989).
                                        17 We have held that for a taxpayer to rely reasonably upon advice, ‘‘the taxpayer must prove

                                      * * * that the taxpayer meets each requirement of the following three-prong test: (1) The ad-
                                      viser was a competent professional who had sufficient expertise to justify reliance, (2) the tax-
                                      payer provided necessary and accurate information to the adviser, and (3) the taxpayer actually
                                      relied in good faith on the adviser’s judgment.’’ Neonatology Associates, P.A. v. Commissioner,
                                      115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002); see also Charlotte’s Office Boutique,
                                      Inc. v. Commissioner, 425 F.3d 1203, 1212 & n.8 (9th Cir. 2005) (quoting with approval the
                                      above three-prong test), affg. 121 T.C. 89 (2003).
                                        18 We have held that a tax adviser was not a promoter of a transaction when he had a long-

                                      term and continual relationship with his client, did not give unsolicited advice regarding the
                                      tax shelter, advised only within his field of expertise (and not because of his regular involvement
                                      in the transaction being scrutinized), followed a regular course of conduct in rendering his ad-
                                      vice, and had no stake in the transaction besides what he bills at his regular hourly rate. 106
                                      Ltd. v. Commissioner, 136 T.C. 67, 80 (2011) (citing Countryside Ltd. Pship. v. Commissioner,
                                      132 T.C. 347, 352–355 (2009)).




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                                      interest makes * * * ‘advice’ inherently unreliable.’’ Tigers
                                      Eye Trading, LLC v. Commissioner, supra.
                                         At a minimum, Mr. Stover and his colleagues charged a
                                      $120,000 flat fee. Mr. Stover set up the various entities and
                                      coordinated the deal ‘‘from start to finish.’’ 106 Ltd. v.
                                      Commissioner, supra at 80. Grant Thornton and Mr. Stover
                                      were paid a flat fee for ‘‘implementing * * * [the Roth
                                      restructure] and wouldn’t have been compensated at all if
                                      * * * [Mr. Paschall] decided not to go through with it’’. See
                                      id. Mr. Paschall blindly followed Mr. Stover to Kruse
                                      Mennillo without questioning the reasons for his departure
                                      from Grant Thornton. Hence, Mr. Paschall cannot argue this
                                      alleged reliance on Mr. Stover and/or Grant Thornton estab-
                                      lishes reasonable cause and good faith. See Hansen v.
                                      Commissioner, supra at 1027–1031 (affirming the Tax Court
                                      holding when the taxpayers relied solely on the organization
                                      promoting the transaction and did not independently verify
                                      their tax returns despite warnings by the IRS) (citing Neely
                                      v. United States, 775 F.2d 1092, 1095 (9th Cir. 1985)); see
                                      also LaVerne v. Commissioner, supra at 652.
                                         To support his argument, Mr. Paschall cites Haywood
                                      Lumber & Mining Co. v. Commissioner, 178 F.2d 769, 771
                                      (2d Cir. 1950), modifying 12 T.C. 735 (1949), Orient Inv. &
                                      Fin. Co. v. Commissioner, 166 F.2d 601 (D.C. Cir. 1948), and
                                      Hatfried, Inc. v. Commissioner, 162 F.2d 628 (3d Cir. 1947).
                                      Unlike the case at hand, in those Mr. Paschall relies on there
                                      is no evidence that the tax advisers were not independent.
                                      See Haywood Lumber & Mining Co. v. Commissioner, supra
                                      at 770–771; Orient Inv. & Fin. Co. v. Commissioner, supra at
                                      602–603; Hatfried, Inc. v. Commissioner, supra at 631–632.
                                         While Mr. Paschall argues that he also relied on Mr.
                                      Patton, there is no evidence, other than Mr. Paschall’s testi-
                                      mony, what the two talked about. 19 Mr. Patton is not com-
                                      petent in tax matters; he introduced Mr. Paschall to Mr.
                                      Stover; and Mr. Paschall did not seek Mr. Patton out for an
                                      independent review of the Roth restructure; rather, Mr.
                                      Paschall contacted Mr. Stover.
                                        19 Mr. Paschall also appears to rely on individuals who signed his individual and corporate

                                      tax returns, including Angela Parker, Kelly Webb, and Jennifer Swearinger. However, there is
                                      no evidence that he ever spoke to any of these individuals about the Roth restructure. In any
                                      event, they also have conflicts of interest because they worked with Mr. Stover on the Roth re-
                                      structure and were employees of Grant Thornton and/or Kruse Mennillo.




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                                         Only Mr. Paschall testified. Mr. Paschall appears to believe
                                      that his own self-serving testimony is enough to establish
                                      reasonable cause. We disagree. We have ‘‘found reliance to be
                                      unreasonable where a taxpayer claimed to have relied upon
                                      an independent adviser because the adviser either did not
                                      testify or testified too vaguely to convince us that the tax-
                                      payer was reasonable in relying on the adviser’s advice’’.
                                      Swanson v. Commissioner, supra; see also Heller v. Commis-
                                      sioner, T.C. Memo. 2008–232 (in upholding a penalty stating
                                      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). Mr. Paschall’s failure to introduce evidence
                                      ‘‘which, if true, would be favorable to [him], gives rise to the
                                      presumption that if produced it would be unfavorable.’’
                                      Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,
                                      1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).
                                         Mr. Paschall should have realized that the deal was too
                                      good to be true. See LaVerne v. Commissioner, supra at 652–
                                      653. Mr. Paschall is a highly educated and successful
                                      businessman. He explained to this Court that because he
                                      grew up in the Depression, he was conservative with his
                                      investments and worried ‘‘about having enough money’’ to
                                      last through retirement. Yet he paid $120,000 for a trans-
                                      action that he ‘‘did not fully understand’’.
                                         Mr. Paschall had doubts, repeatedly asking whether the
                                      Roth restructure was legal. Despite these doubts, he never
                                      asked for an opinion letter or sought the advice of an inde-
                                      pendent adviser, including Mr. Jaeger, who was preparing
                                      his tax returns at the time he met Mr. Stover. This was even
                                      after he received a letter warning him that there might be
                                      problems with the Roth restructure and that his name was
                                      being turned over to the IRS.
                                         Mr. Paschall has failed to establish that he meets the
                                      reasonable cause and not willful neglect exception to the sec-
                                      tion 6651(a)(1) addition to tax. 20 Therefore, we sustain
                                      respondent’s imposition of the section 6651(a)(1) additions to
                                      tax for the Paschalls’ 2002 through 2006 tax years.
                                        20 Mr. Paschall also stated that he relied on the audit by the California Franchise Board and

                                      resulting ‘‘no-change’’ letter issued by that entity. Because of Mr. Paschall’s lack of evidence,
                                      we attribute little significance to his alleged reliance on the California Franchise Board.




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                                      (8)                           PASCHALL v. COMMISSIONER                                            25


                                      IV. Income Tax Deficiency and Section 6662(a) Accuracy-
                                         Related Penalty for Petitioners’ 2005 Tax Year
                                         In 2005 petitioners received a $41,900 distribution from
                                      Mr. Paschall’s Roth IRA which they did not report on their
                                      2005 Form 1040. To guard against a whipsaw, respondent
                                      determined an income tax deficiency and a section 6662(a)
                                      accuracy-related penalty for petitioners’ 2005 tax year that
                                      were based on petitioners’ possible argument that the Baum
                                      Roth IRA should be deemed a traditional IRA. Respondent has
                                      stipulated that he would concede the income tax deficiency
                                      and the related section 6662(a) accuracy-related penalty for
                                      petitioners’ 2005 tax year if this Court held that Mr. Paschall
                                      was liable for section 4973 excise tax deficiencies. As we have
                                      found Mr. Paschall liable for excise tax deficiencies, the issue
                                      of whether petitioners are liable for an income tax deficiency
                                      and a section 6662(a) accuracy-related penalty for the 2005
                                      tax year is conceded.
                                         The Court has considered all of petitioners’ contentions,
                                      arguments, requests, and statements. To the extent not dis-
                                      cussed herein, we conclude that they are meritless, moot, or
                                      irrelevant.
                                         To reflect the foregoing,
                                                                         Decisions will be entered under Rule 155.

                                                                                f




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