                       T.C. Memo. 2011-51



                     UNITED STATES TAX COURT



    JEFFREY S. AND MARY F. CHARLTON, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 19599-07, 19600-07,   Filed March 1, 2011.
                 19601-07, 19602-07,
                 19603-07, 19604-07,
                 19605-07.



     Harry Charles, for petitioners.

     James A. Kutten and Stephen A. Haller, for respondent.




     1
      Cases of the following petitioners are consolidated
herewith: Graphic Connections Group, LLC, Jeffrey S. Charlton,
Tax Matters Partner, docket Nos. 19600-07 and 19601-07; Wealth
Builders International, LLC, Jeffrey S. Charlton, Tax Matters
Partner, docket Nos. 19602-07 and 19603-07; Golf Links Display
Group, LLC, Jeffrey S. Charlton, Tax Matters Partner, docket Nos.
19604-07 and 19605-07.
                                - 2 -

              MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:    After concessions, the issues for decision

are whether respondent issued petitioners an affected items

notice of deficiency (notice) and notices of final partnership

administrative adjustments (FPAAs) within the applicable

limitations periods, and if so, whether petitioners are liable

for deficiencies and fraud penalties.

                           FINDINGS OF FACT

     In 1985, Jeffrey Charlton graduated from the University of

Missouri with a degree in civil engineering.    After college, he

worked for 3 years as an industrial engineer for Proctor & Gamble

and then began work as a salesman for his father-in-law’s

printing business.    In 1992, Jeffrey and his brother, Timothy

Charlton, started their own printing business, Graphic

Connections, Inc.    Jeffrey and Timothy hired Charles Moore, a

certified public accountant (CPA) with a bachelor’s degree in

accounting and a master’s degree in business administration, to

prepare their individual returns and Graphic Connections, Inc.’s

corporate returns.

     Throughout his career, Jeffrey pursued a myriad of income-

producing opportunities.    His desire to earn large amounts of

income with minimal effort led him to become involved with Amway,

Herbalife, and numerous other multilevel marketing businesses

(MLM).   These endeavors were unsuccessful.   In 1997, Jeffrey,
                               - 3 -

continuing his fervent quest for easy money, wrote and published

a book titled The Ultimate International Wealth Building System.

In the book, Jeffrey explained how to get out of debt, make and

invest money, reduce taxes, and protect assets.    Jeffrey compiled

this information from sources on the Internet and from his

experiences.   Jeffrey also created Wealth Builders International,

an MLM that promoted his International Wealth Building System and

combined his book, MLMs, and mail orders into one system.

Customers paid Jeffrey upon purchasing a book or joining an MLM

listed in the book.

     In 1997, Jeffrey and Timothy traveled to Phoenix, Arizona,

to meet with representatives of ProTec Services (ProTec), a

company that promoted trusts designed to protect assets and

reduce tax liability (ProTec plan).    During the meeting, ProTec

representatives explained the ProTec plan and assured Jeffrey and

Timothy that it was a legitimate planning technique.2   On October

10, 1997, Jeffrey and Timothy executed an installment agreement

to pay ProTec $27,940 for a variety of services.   These services

included the initial setup of the ProTec plan and two trusts,

Token International Trust (Token Trust) and Titan International



     2
      Representatives of ProTec routinely told potential clients
that the Internal Revenue Service had verified that the ProTec
plan complied with tax laws. In 2004, certain representatives of
ProTec pleaded guilty to a charge of conspiracy to defraud the
United States in connection with their activities related to the
promotion and marketing of fraudulent trust schemes.
                               - 4 -

Trust (Titan Trust) (collectively, the domestic trusts), to

implement the ProTec plan.

     In 1998, prior to implementing the ProTec plan, Jeffrey and

Timothy were informed that ProTec had ceased operations.    Jeffrey

immediately searched for another company promoting a similar

system and found the Aegis Co. (Aegis).   In August 1998, Jeffrey

contacted William Cover, a manager and promoter of Aegis, to

inquire about becoming an Aegis member.

     Jeffrey and Timothy highly valued Mr. Moore’s professional

judgment and, in October 1998, invited Mr. Moore to accompany

them to an Aegis seminar in Chicago, Illinois (Aegis seminar), to

evaluate the legitimacy of the Aegis trust system (Aegis system)

and to question Aegis representatives.    During the Aegis seminar,

Aegis representatives explained the Aegis system’s use of

business trusts to reduce income tax liability and protect

assets.   Aegis representatives readily acknowledged the

possibility of Internal Revenue Service (IRS) audits but assured

seminar participants of the Aegis system’s legitimacy and Aegis’

ability to successfully navigate clients through IRS audits.

     Jeffrey, Timothy, and Mr. Moore left the Aegis seminar

convinced that the Aegis system was a legitimate tax minimization

and asset protection plan.   Mr. Moore expressed his support for

the Aegis system and informed Jeffrey and Timothy that the system

appeared to be thorough and in compliance with relevant tax
                               - 5 -

rules.   Jeffrey and Timothy proceeded to use Aegis’ customized

forms and instructions to implement the Aegis system.   Pursuant

to the Aegis system, each brother’s wife conveyed all of her

lifetime services to her husband.   Jeffrey and Timothy each then

transferred all of their respective real property, personal

property, and lifetime services to Token Trust and Titan Trust,

respectively.   The domestic trusts’ beneficial interests were

then transferred to offshore trusts in Belize (Belize trusts).

     During 1998, Jeffrey and Timothy formed Graphic Connections

Group, LLC; Wealth Builders International, LLC; and Golf Links

Display Group, LLC (collectively, the partnerships).    Pursuant to

the partnerships’ operating agreements, Jeffrey and Timothy each

had a 1-percent interest, and the domestic trusts had a 98-

percent interest, in each of the partnerships.   The domestic

trusts paid the personal expenses of Jeffrey’s and Timothy’s

families and distributed income to the Belize trusts.   Jeffrey

and Timothy used foreign bank accounts in Belize and Antigua to

access the income.   On August 1, 1999, Token Trust purchased

Titan Trust’s and Timothy’s interests in the partnerships.

     On April 6, 2000, Michael Vallone, the executive director

and a founder of Aegis, sent Jeffrey a letter (April 2000 letter)

in which Mr. Vallone provided Jeffrey with audit defense

strategies, advised Jeffrey to retain certain attorneys, and
                                - 6 -

assured Jeffrey that Aegis was using “inside information” from

the IRS to successfully counter IRS audits.

     In 1999 and 2000 (years in issue), Jeffrey sold, through

direct mail solicitations, over 40,000 copies of his book.

During the years in issue, Jeffrey and Timothy maintained ledgers

of income and expenses relating to their respective trusts and

provided these ledgers to Mr. Moore to assist him in preparing

the domestic trusts’ returns.   Using the ledgers and the advice

of Aegis’ trust expert, Mr. Cover, Mr. Moore prepared and signed

Jeffrey’s, Timothy’s, the partnerships’, and the domestic trusts’

returns relating to the years in issue.   Jeffrey, as the

partnerships’ tax matters partner, signed each of the partnership

returns relating to the years in issue.   Minimal liability was

reported on the individual, partnership, and trust returns

relating to the years in issue.3   After the filing of these

returns, Mr. Moore, on July 15, 2001, became trustee of Jeffrey’s

trust (i.e., Token Trust).

     On January 8, 2002, respondent mailed Jeffrey and his wife,

Mary Charlton, a preliminary notice (i.e., relating to 1998,

1999, and 2000) in which respondent asserted that Jeffrey and


     3
      On Oct. 15, 2000, the partnerships each filed Forms 1065,
U.S. Partnership Return of Income, relating to 1999. On Oct. 17,
2000, Jeffrey and Timothy each filed 1999 joint Federal income
tax returns with their respective wives. On July 8, 2001,
Jeffrey and his wife, Mary Charlton, filed a 2000 joint Federal
income tax return. On July 11, 2001, the partnerships filed
Forms 1065, U.S. Return of Partnership Income, relating to 2000.
                                - 7 -

Mary’s trust arrangement was abusive and used for tax avoidance

purposes.    On January 22, 2002, Scott Gross, Jeffrey and Mary’s

attorney who had been recommended by Aegis, sent respondent a

letter in response to the preliminary notice.   In the letter, Mr.

Gross, following the Aegis audit strategy and citing legal

precedent set forth in the April 2000 letter, requested

“clarification as to how your Privacy Act Notice applies to your

request to examine” certain information delineated in the

preliminary notice.

     On January 30, 2002, Jeffrey sought Mr. Moore’s advice

regarding the appropriate course of action and informed Mr. Moore

that, consistent with Mr. Cover’s and Mr. Gross’ recommendations,

Jeffrey planned to refuse to cooperate with IRS auditors and

would establish in the Tax Court the legitimacy of the Aegis

system.   Mr. Moore’s responses to Jeffrey’s inquiries were

ambiguous.

     On March 11, 2002, respondent mailed each of the

partnerships a notice of beginning of administrative proceeding

relating to 1999 and 2000.4   Soon thereafter, respondent issued

administrative summonses (i.e., relating to certain records,

documents, and testimony) to Jeffrey; Timothy; Graphic

Connections, Inc.; and the partnerships.   At the direction of


     4
      On Oct. 7, 2002, respondent mailed each partnership a
second notice of beginning of administrative proceeding relating
to 1999 and 2000.
                               - 8 -

Aegis and Mr. Gross, Jeffrey and Timothy resisted respondent’s

summonses; transferred the trusts’ records to newly appointed

trustees; and, using forms prepared by Aegis, filed criminal

complaints against IRS employees involved in the audit.

     In May 2002, the IRS Chief Counsel filed with the U.S.

District Court for the Eastern District of Missouri (District

Court) civil actions against Jeffrey and Timothy to enforce the

summonses, and in February 2003, the District Court found Jeffrey

and Timothy in contempt of court for failing to fully comply with

the summonses.   In March 2003, Jeffrey and Timothy complied with

the IRS’ summonses, and the District Court dismissed the summons

enforcement actions.

     On June 19, 2007, respondent issued Jeffrey and Mary the

notice relating to 1999 and 2000.   In the notice, respondent

determined that, in accordance with an examination of Token

Trust, income and expenses of Token Trust relating to the years

in issue were attributable to Jeffrey and therefore should have

been reflected on his individual returns relating to those years.

As a result, respondent determined that Jeffrey and Mary were

liable for deficiencies in tax and section 6663(a)5 fraud

penalties relating to the years in issue.



     5
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 9 -

     On June 20, 2007, respondent issued each of the partnerships

an FPAA relating to 1999 and an FPAA relating to 2000.    In the

FPAAs, respondent made adjustments and imposed fraud penalties in

accordance with the determinations that the domestic trusts were

sham entities and should be disregarded and that the domestic

trusts’ interests in the partnerships should be reallocated to

Jeffrey and Timothy.

     On August 29, 2007, Jeffrey and Mary, while residing in

Missouri, filed their petition with the Court.   That same day,

Jeffrey, as tax matters partner for the partnerships, filed

petitions seeking readjustment of respondent’s FPAAs.    On

December 10, 2007, the Court filed respondent’s motion to dismiss

and strike as to certain partnership and affected items relating

to 1999.   The Court, on December 17, 2007, granted respondent’s

motion.

     On May 19, 2008, Mr. Vallone, Mr. Cover, and four other

principals of Aegis were convicted of conspiracy to defraud the

United States in connection with their activities related to the

promotion and marketing of fraudulent trust schemes.

                              OPINION

     Section 6501(a) provides that, generally, the amount of any

tax must be assessed within 3 years of the filing of a return.

If, however, a taxpayer files a false or fraudulent return with

the intent to evade tax, the tax may be assessed at any time.
                                - 10 -

Sec. 6501(c)(1).   Similarly, section 6229(a) provides that,

generally, the amount of any tax with respect to any person which

is attributable to a partnership item or an affected item

relating to a partnership taxable year must be assessed within 3

years after the later of the date the partnership return is filed

or the last day for filing the return.    See also sec. 6501(n)(2).

If, however, any partner has, with the intent to evade tax,

signed or participated directly or indirectly in the preparation

of a partnership return which includes a false or fraudulent

item, the tax may be assessed at any time.    Sec. 6229(c)(1).

     Respondent contends that the period to assess Jeffrey and

Mary’s 2000 tax liability is open because Jeffrey and Mary’s

underpayment of tax is due to fraud and thus is not subject to

the 3-year limitation period.    See sec. 6501(c)(1).   Respondent

also contends that the FPAAs were timely because the

partnerships’ returns were false or fraudulent and thus not

subject to the applicable 3-year limitation period.     See sec.

6229(c)(1).   Respondent must establish by clear and convincing

evidence that Jeffrey and Mary filed false or fraudulent returns

with the intent to evade tax.    See sec. 7454(a); Rule 142(b);

Botwinik Bros. of Mass., Inc. v. Commissioner, 39 T.C. 988, 996

(1963).   This burden is met where respondent proves that the

taxpayer intended to evade taxes known to be owing by conduct
                               - 11 -

intended to conceal, mislead, or otherwise prevent the collection

of taxes.   See Parks v. Commissioner, 94 T.C. 654, 661 (1990).

     Simply put, respondent has failed to meet his burden.    See

Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989) (providing that

the existence of fraud may not be found under “‘circumstances

which at the most create only suspicion.’” (quoting Davis v.

Commissioner, 184 F.2d 86, 87 (10th Cir. 1950), remanding a

Memorandum Opinion of this Court)); Beaver v. Commissioner, 55

T.C. 85, 92 (1970).    To the contrary, Jeffrey did not intend to

evade tax but wrongfully believed that the ProTec plan and the

Aegis system were legitimate tax avoidance techniques.    Indeed,

Jeffrey, Timothy, and Mr. Moore all believed that the Aegis

system was legitimate and that the returns were accurate.    See

Gajewski v. Commissioner, 67 T.C. 181, 199 (1976) (stating that

the existence of fraud is a question of fact to be determined

upon consideration of the entire record), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978).    Mr. Moore, respondent’s

primary witness, provided convincing testimony regarding the

perceived legitimacy of the techniques and accuracy of the

returns.    His testimony relating to his advice to Jeffrey and

Timothy, however, was inconsistent, incoherent, and at times

incomprehensible.    Nevertheless, Jeffrey, through his credible

testimony, established that Mr. Moore did not express any doubt

regarding the legitimacy of the tax planning arrangements.    In
                                - 12 -

fact, Mr. Moore was so comfortable with the tax planning

arrangements that, after preparing the domestic trusts’ returns

relating to the years in issue, he became a trustee of Jeffrey’s

domestic trust (i.e., Token Trust).

     Jeffrey, who undoubtedly had a penchant for fast and easy

money, foolhardily followed the Aegis system (i.e., structuring

the transactions and resisting the IRS audit).    See Niedringhaus

v. Commissioner, 99 T.C. 202, 211 (1992); Gajewski v.

Commissioner, supra.     Nevertheless, Jeffrey maintained adequate

records and made all pertinent information available to Mr.

Moore, his longtime trusted, yet imprudent, CPA.    See

Niedringhaus v. Commissioner, supra at 211.     To his detriment,

Jeffrey relied on the professional judgment of Mr. Moore, who

inexplicably believed in and acquiesced to an elaborate scheme

designed by con artists.    See Estate of Temple v. Commissioner,

67 T.C. 143, 162 (1976) (holding that reliance upon an accountant

to prepare accurate returns may negate fraudulent intent if the

accountant was supplied with all the information necessary to

prepare the returns); Marinzulich v. Commissioner, 31 T.C. 487,

490 (1958) (holding that a taxpayer’s reliance upon his

accountant to prepare an accurate return may indicate an absence

of fraudulent intent).

     Accordingly, the extended limitations periods set forth in

sections 6501(c)(1) and 6229(c) are not applicable, and
                             - 13 -

respondent’s determinations and adjustments relating to 1999 and

2000 are barred.

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,


                                        Decisions will be entered

                                   for petitioners.
