Swanson v. Comm'r

T.C. Memo. 2011-156

UNITED STATES TAX COURT

RONALD V. AND DONNA-KAY SWANSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 30714-08. Filed July 5, 2011.

R determined tax deficiencies and accuracy-related
penalties pursuant to sec. 6662(a), I.R.C., for Ps’ 2001
through 2007 tax years. The determinations stem from R’s
determination that P-H made excess contributions to his Roth
individual retirement account (Roth IRA). The parties
stipulated Ps’ tax deficiencies for the 2001 through 2006
tax years and R conceded all adjustments relating to the
2007 tax year, leaving only the accuracy-related penalties
for Ps’ 2001 through 2006 tax years in dispute.

Held: Ps’ are liable for sec. 6662(a), I.R.C.,
accuracy-related penalties for their 2001 through 2006 tax
years.

Howard S. Fisher, for petitioners.

Michael W. Tan and Cindy Park, for respondent
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition

for redetermination of respondent’s determination in a notice of

deficiency that petitioners owe tax deficiencies and section

6662(a) accuracy-related penalties for their 2001 through 2007

tax years.1 After concessions,2 the sole issue left for decision

is whether petitioners are liable for section 6662(a) accuracy-

related penalties for their 2001 through 2006 tax years.

FINDINGS OF FACT

Some of the facts have been stipulated, and the

stipulations, with the accompanying exhibits, are incorporated

herein by this reference. At the time they filed their petition

with this Court, petitioners resided in Nevada.

Petitioners filed joint Federal income tax returns for all

relevant years. This case stems from petitioner husband Ronald

V. Swanson’s attempt to “turn an IRA into a Roth IRA” (Roth

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the years at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
2
The parties stipulated that petitioners are liable for
excise tax deficiencies of $61,277.78, $45,207.79, $58,564.58,
$63,774.17, $65,637.06, and $73,911.11 for their 2001, 2002,
2003, 2004, 2005, and 2006 tax years, respectively. The parties
further stipulated that petitioners have no excise or income tax
deficiency for their 2007 tax year and are not liable for the
accuracy-related penalty for their 2007 tax year.
 - 3 -

restructure).3 The Roth restructure was designed and implemented

by A. Blair Stover, Jr. (Mr. Stover) and his colleagues at the

accounting firm of Grant Thornton, LLP (Grant Thornton). The

parties have stipulated that in 2000 Mr. Swanson made an excess

contribution into a Roth individual retirement account (Roth IRA)

of $1.61 million and that as of December 31, 2006, it remains in

his account.

I. Petitioners’ Background

Petitioner wife, Donna-Kay Swanson, was a homemaker for all

tax years in issue and relied on her husband to determine whether

to engage in the Roth restructure. Mr. Swanson attended college

at the University of Michigan where he graduated with a degree in

mechanical engineering and mathematics. After graduation, Mr.

Swanson began working for Hughes Aircraft (Hughes). Mr. Swanson

worked for Hughes or one of its subsidiaries for his entire

36-year career.

While working at Hughes, Mr. Swanson attended graduate

school at the University of California Los Angeles (UCLA) where

3
The basic tax characteristics of a traditional IRA are (1)
deductible contributions, (2) the accrual 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); see also Taproot Admin. Servs., Inc.
v. Commissioner, 133 T.C. 202, 206 (2009). The basic tax
characteristics of a Roth IRA are (1) nondeductible
contributions, (2) the accrual of tax-free earnings, and (3) the
exclusion of qualified distributions from gross income. See sec.
408A(a), (c)(1), (d)(1), and (2)(A); see also Taproot Admin.
Servs., Inc. v. Commissioner, supra at 206.
 - 4 -

he graduated with a degree in Applied Mechanics. Additionally,

Mr. Swanson finished a 2-year extension course at UCLA, where he

received a certificate in business management.

During his career, Mr. Swanson worked at Hughes as a part-

time master’s fellow and then held positions in various areas of

structural engineering. Eventually, he was promoted into

administrative management.

In approximately 1997 Mr. Swanson helped develop Hughes

Global Services, a 20-person company and eventual subsidiary of

Hughes. Mr. Swanson was appointed president of Hughes Global

Services, where he stayed until his retirement in October 2001.

As an employee of Hughes, Mr. Swanson was the beneficiary of a

thrift and savings plan (Hughes TSP) to help with retirement.

II. Introduction to the Roth Restructure

A. Initial Introduction

Mr. Swanson initially heard about the Roth restructure from

Fred Nardi (Mr. Nardi), a friend and coworker. Mr. Nardi told

Mr. Swanson that on the basis of his discussions with other tax

professionals, including his tax return preparer, Creal & Mather,

he understood they felt that the Roth restructure “was solid”.

Mr. Nardi showed Mr. Swanson an unsigned opinion letter from

Grant Thornton (Nardi letter) detailing the Roth restructure.

Mr. Swanson claimed he relied on the Nardi letter in deciding

whether to engage in the Roth restructure. Apparently, the Nardi
 - 5 -

letter discussed listed transactions, and because of this, Mr.

Swanson looked at the Internal Revenue Service (IRS) Web site.4

In addition to Mr. Nardi, Mr. Swanson also talked with Jim

Patton (Mr. Patton) and Bob Mather (Mr. Mather) before contacting

Grant Thornton. Mr. Patton is an investment adviser who began

advising Mr. Swanson in 2000 and is the only investment adviser

Mr. Swanson has ever consulted. Mr. Patton was also of the

impression that the Roth restructure “was above board”.

Mr. Mather was Mr. Nardi’s tax preparer. According to Mr.

Swanson, he contacted Mr. Mather, who had other clients doing

Roth restructures and apparently did not see any problems with

them.

B. Introduction to Mr. Stover

In approximately March 2000 Mr. Stover met Mr. Swanson while

he was on vacation in Las Vegas. Mr. Swanson asked Mr. Stover

4
A listed transaction is a transaction that is the same as,
or substantially similar to, one of the types of transactions
that the IRS has determined to be used for tax avoidance and has
identified by notice, regulation, or other form of published
guidance as a listed transaction. See McGehee Family Clinic,
P.A. v. Commissioner, T.C. Memo. 2010-202 (citing sec.
6707A(c)(2); sec. 1.6011-4, Income Tax Regs. (incorporating by
reference sec. 1.6011-4T(b)(2), Temporary Income Tax Regs., 65
Fed. Reg. 11207 (Mar. 2, 2000)); see also BLAK Invs. v.
Commissioner, 133 T.C. 431, 440-441 (2009)). Sec. 6707A became
effective Oct. 23, 2004, and imposed penalties on those who
failed to report a reportable transaction as required under sec.
6011. Sec. 6707 entitled “Failure to Furnish Information
Regarding Tax Shelter” was effective through Oct. 22, 2004, and
imposed penalties on those who failed to register a tax shelter
under sec. 6111(a).
 - 6 -

several questions, claiming his basic concern was that he “did

not want to do anything illegal”. Mr. Stover explained the Roth

restructure in detail and told Mr. Swanson that the transaction

was not only legal but had been “court tested”.5

After deciding to engage in the Roth restructure, Mr.

Swanson met with Mr. Stover on other occasions, again inquiring

at one or more of these meetings about the legality of the Roth

restructure and whether it was a listed transaction. He also

visited the IRS Web site and concluded the Roth restructure was

not a listed transaction.

C. Engagement Letter

On April 11, 2000, Mr. Swanson executed an engagement letter

with Grant Thornton. The engagement letter contained a clause

providing that Grant Thornton would represent and defend Mr.

Swanson or any related entity at no additional cost in case of

audit by the IRS. The engagement letter also contained an

indemnity clause providing that Grant Thornton would reimburse

and indemnify the Swansons and any related entity for any civil

negligence or fraud penalty assessed against them by Federal or

State tax authorities.

5
Mr. Stover told Mr. Swanson that the Roth restructure had
been approved in Swanson v. Commissioner, 106 T.C. 76, 78-81
(1996). The names are coincidental--the taxpayer in Swanson v.
Commissioner, supra, has no connection with petitioners. Mr.
Swanson read the case and thought that it was very similar to
what Mr. Stover was proposing for him.
 - 7 -

Petitioners paid $120,000 for the Roth restructure, the

engagement letter providing that the fee was to be split equally

between Grant Thornton and Nevada Corp. Associations (NCA), a law

firm. Mr. Swanson assumed NCA was an “outside legal firm

providing services to Grant Thornton”.

Mr. Swanson did not ask for a formal opinion letter, nor was

one ever issued. Mr. Swanson believed that since he and Mr.

Nardi were engaging in the same transaction, he did not need his

own opinion letter.

D. Kruse Mennillo and Individuals Other Than Mr. Stover

In addition to Mr. Stover, Mr. Swanson had contact with

other individuals at Grant Thornton, including Luther Oliver, a

tax lawyer, and Ruth Donovan, a certified public accountant. In

September 2001 Mr. Stover, along with other individuals he worked

with, left Grant Thornton for Kruse Mennillo, LLP (Kruse

Mennillo), another accounting firm. Neither party presented

evidence explaining the reason behind Mr. Stover’s abrupt move.

At the time Mr. Stover left Grant Thornton, Mr. Swanson began

using Kruse Mennillo instead of Grant Thornton.6

6
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 shall grant petitioners’ request and has taken
judicial notice of the documents requested 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
(continued...)
 - 8 -

E. Independent Advice and Knowledge

Despite the remarkable promised tax benefits of converting

taxable IRA distributions to nontaxable Roth IRA distributions,

Mr. Swanson did not ask anyone who was completely independent of

the Mr. Patton and Mr. Stover groups for an opinion on the

viability of the Roth restructure. Mr. Swanson knew that there

were contribution limits to Roth IRAs, specifically that in 2000

the contribution limit was $2,000.

III. The Roth Restructure

Before the years in issue and before petitioners engaged

Grant Thornton, Mr. Swanson had opened a traditional IRA with

Charles Schwab with an account number ending in 6050 (Schwab

IRA). Grant Thornton (specifically, Mr. Stover) and NCA, oversaw

all of the steps in the Roth restructure. The Roth restructure

was implemented as follows:

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

6
(...continued)
multiple business entity structures sold and arranged by” Mr.
Stover. The third structure, referred to by the district court
as the Roth/S structure “[skirted] the contribution limits
applicable to Roth IRAs.” Id. at 900.
 - 9 -

so. Each corporation opened a bank account with an initial
deposit of $250 on May 4, 2000.7

• April 25, 2000--On or around April 25, 2000, Mr. Swanson
opened a Roth IRA account with First Union with an account
number ending in 0381 (FU Roth IRA).

• April 28, 2000--On or around April 28, 2000, Mr. Swanson
opened a Self-Directed Traditional IRA at the First Trust
Company of Onaga with an account number ending 0500 (FNBO
IRA). On May 5, 2000, the FNBO IRA was funded via a rollover
of $1,207,802.55 from the Hughes TSP. On May 19, 2000, Mr.
Swanson directed the FNBO IRA to purchase 100 percent of the
stock of Sierra West for $1,207,802.55. The purchase price
was deposited into the Sierra West account on May 19, 2000.

• May 1, 2000--On or around May 1, 2000, Mr. Swanson opened a
Self-Directed Roth IRA at the George K. Baum Trust Company
with an account number ending in 8305 (Baum Roth IRA) which
was funded with a $2,000 contribution from a personal
investment account Mr. Swanson maintained at Charles Schwab
(CS Investment Account). On May 2, 2000, Mr. Swanson
directed the Baum Roth IRA to purchase 100 percent of the
stock of Northstar for $2,000. The purchase price was
deposited into the Northstar account on June 6, 2000.

• May 16, 2000--Mr. Swanson deposited $150,000 into the
Northstar account from the CS Investment Account. On May
22, 2000, Mr. Swanson ordered $1,087,802.55 transferred from
the Sierra West account to the Northstar account. On May
22, 2000, Mr. Swanson ordered $1,238,000 transferred from
the Northstar account to the Baum Roth IRA under the guise
of a dividend declaration.8

7
For 2000 and 2001 Sierra West filed Forms 1120, U.S.
Corporation Income Tax Return, reporting zero gross receipts, it
had no employees and only nominal expenses, and because it saw no
need did not maintain books and records. For 2000 through 2007
Northstar filed Forms 1120 showing zero gross receipts, it had no
employees and only nominal expenses, and saw no reason to
maintain books or records. The claimed intention was for Mr.
Swanson to eventually perform consulting services through
Northstar after his retirement, but because of health reasons, he
never did.
8
The transfer was not a dividend because it did not come
from Northstar’s earnings and profits. The $1,238,000 can
(continued...)
 - 10 -

• June 8, 2000--Mr. Swanson wired $250,000 into the Northstar
account from the CS Investment Account. On June 9, 2000,
Mr. Swanson ordered $252,000 transferred from the Northstar
account to the Baum Roth IRA.9

• December 19, 2000--Mr. Swanson deposited $120,000 into the
Northstar account from a brokerage account under the name
Muchestly, Inc., that Mr. Swanson maintained at Charles
Schwab. On December 29, 2000, Mr. Swanson ordered $120,000
transferred from the Northstar account to the Baum Roth
IRA.10

• January 8, 2001--By January 8, 2001, $1,238,000, $252,000,
and $120,000, for a total of $1,610,000, had been
transferred into the Baum Roth IRA and from there had been
transferred to the FU Roth IRA and invested in various
mutual funds. As of December 31, 2001, the fair market
value of the FU Roth IRA was $1,021,296.28.

• December 2001--Merger documents were executed merging Sierra
West into Northstar, with Northstar being the surviving
corporation.

• December 2002--The fair market value of the FU Roth IRA as
of December 31, 2002, was $753,463.24. As of December 31,
2003, the fair market value was $976,078.04. As of December
31, 2004, the fair market value was $1,062,902.79.

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

8
(...continued)
apparently be traced to (1) $197.45 from the initial $250 capital
contribution; (2) a $150,000 transfer from Mr. Swanson’s
brokerage account on May 16, 2000; and (3) a $1,087,802.55
transfer from Sierra West on May 22, 2000.
9
The $252,000 transfer was made via another purported June
8, 2000, dividend declaration; however, once again the transfer
was not a dividend because it did not come from Northstar’s
earnings and profits. The transfer may be traced to (1) a $2,000
initial Roth IRA contribution and (2) a $250,000 transfer from
Mr. Swanson’s brokerage account on June 8, 2000.
10
The $120,000 transfer was yet again made as a purported
dividend but the transfer was also not a dividend because it did
not come from Northstar’s earnings and profits.
 - 11 -

• December 2005--By December 2005 all securities transferred
from the FU Roth IRA to the H&R Roth IRA had been liquidated
and invested in annuities at Lincoln National Life Insurance
Co., also known as American Legacy (American Legacy
Annuity). The fair market value of the H&R Roth IRA as of
December 31, 2005, was $1,093,951.07. The fair market value
of the H&R Roth IRA as of December 31, 2006, was
$1,231,851.75.

• December 2007--Mr. Swanson surrendered the American Legacy
Annuity and withdrew substantially all the funds from his
H&R Roth IRA.

IV. Reporting the Roth Restructure

With the exception of 1 or 2 years, Mr. Swanson prepared his

and Mrs. Swanson’s joint tax returns for 1965 through 1998.11

While Mr. Swanson had no formal study in taxation, he did “buy a

tax book each year to look at the highlights and see if there

[was] anything that was new that would affect” him.

As part of the fee Mr. Swanson paid for the Roth

restructure, Grant Thornton began preparing the Swansons’ tax

returns in 1999. This was because Mr. Swanson indicated he

“wanted to make sure that the people that had developed the [Roth

restructure] * * * continually followed it and knew exactly what

they should be doing”. Kruse Mennillo prepared the Swansons’ tax

returns beginning in 2001.12

11
During the period Mr. Swanson prepared his own return, it
consisted of a Form 1040, U.S. Individual Income Tax Return;
Schedule A, Itemized Deductions; and Schedule D, Capital Gains
and Losses.
12
The tax returns included Federal income tax returns and
Federal excise tax returns. Northstar’s 2000 tax return was
prepared by Grant Thornton, and Northstar’s 2001 through 2007 tax
(continued...)
 - 12 -

In order to facilitate the preparation of the returns, Mr.

Swanson would provide the information and copies of pertinent

documents asked for each year by either Grant Thornton or Kruse

Mennillo. Individuals including Mr. Stover, Mr. Oliver, and Ms.

Donovan presumably worked on the returns. None of these

individuals testified.

When Mr. Swanson received the returns, he reviewed them to

make sure that all the information he had given was transcribed

properly, that the deductions that were taken were proper, and

that each of the corporate entities had a tax return.

Petitioners’ tax returns showed excise tax on excess

contributions to a Roth IRA of $2,000 for the 2000, 2001, 2002,

2003, and 2007 tax years; $3,500 for the 2004 tax year; and $5000

for the 2005 and 2006 tax years.

V. The Result of the Roth Restructure and Audit

As a result of the Roth restructure, Mr. Swanson made an

excess contribution of $1,610,000 into his Baum Roth IRA through

three different transfers occurring in 2000.

In 2004 Grant Thornton sent Mr. Swanson a letter regarding

the Roth restructure (Grant Thornton letter) stating that the Roth

restructure was potentially a listed transaction pursuant to IRS

12
(...continued)
returns were prepared by Kruse Menillo. Sierra West’s 2000 tax
return was prepared by Grant Thornton, and its 2001 tax return
was prepared by Kruse Menillo. Even though the tax returns were
prepared by different firms, they were prepared by the same team
of people.
 - 13 -

Notice 2004-8, 2004-1 C.B. 333. Notice 2004-8, entitled “Abusive

Roth IRA Transactions”, states, in part, that taxpayers are using

transactions “to avoid the limitations on contributions to Roth

IRAs” and that “these transactions, as well as substantially

similar transaction” are listed transactions. The transactions

described in Notice 2004-8, supra, involve the taxpayer, a Roth

IRA, and a corporation substantially all the shares of which are

owned or acquired by the Roth IRA.

Mr. Swanson asserts that he discussed the Grant Thornton

letter with tax lawyers at Kruse Mennillo, including Mr. Stover,

and was told that his transaction was not covered by the notice,

he would not be penalized for nondisclosure, and that it was up to

him whether he disclosed. Mr. Swanson did not discuss the Grant

Thornton letter or attempt to discern whether he had engaged in a

listed transaction with anyone else. Mr. Swanson decided to

disclose the transaction anyway “just to make sure * * * [he]

wasn’t violating anything * * * [and because he wanted to take]

the safest route”. To disclose, Mr. Swanson attached a Form 8886,

Reportable Transaction Disclosure Statement, to Northstar’s 2003,

2004, and 2006 tax returns.13

13
While Mr. Swanson explained that Form 8886 was used to
disclose his Roth restructure, this Court notes that there was
little explanation on Form 8886. Under the Facts section of the
form, petitioners typed “THE TAXPAYER WAS FORMED TO PERFORM
SERVICES FOR MULTIPLE BUSINESSES IN THE FIELD OF CONSULTING. THE
BUSINESS REASONS FOR ITS EXISTENCE INCLUDE, BUT ARE NOT LIMITED
TO: ASSET PROTECTION, SUCCESSION PLANNING, AND RETIREMENT
(continued...)
 - 14 -

In 2006 the Swansons’ returns were audited by the California

Franchise Tax Board. According to Mr. Swanson, this was the first

time that he suspected that the Roth restructure was not 100

percent viable. Mr. Stover and his colleague, Marc Sommers,

indicated to Mr. Swanson that their opinion was “that the audit

would not show any shortcoming of taxes paid”. The audit was

concluded in 2007 with “no change”. Mr. Swanson “felt that the

clearance by the California Tax Board was a further indication

that the structure was viable and proper”.

The Swansons timely filed Forms 1040, U.S. Individual Income

Tax Return, and Forms 5329, Additional Taxes on Qualified Plans

(Including IRAs) and Other Tax-Favored Accounts, for all years in

issue. On October 6, 2008, respondent issued three notices of

deficiency collectively showing the following deficiencies and

section 6662(a) accuracy-related penalties:

13
(...continued)
PLANNING. THIS PROTECTIVE DISCLOSURE IS BEING FILED BECAUSE IT
IS NOT CLEAR WHETHER THE GOVERNMENT WOULD VIEW THE TRANSACTION AS
SUBSTANTIALLY SIMILAR TO THOSE IDENTIFIED IN NOTICE 2004-8”. In
the Expected Tax Benefits section, Mr. Swanson typed “THE
POTENTIAL BENEFIT IF ANY COULD BE EITHER A TAX SAVINGS OR COST
DEPENDING ON THE TAXPAYERS RATE”.
 - 15 -

Penalty
Tax Year Deficiency Sec. 6662(a)
2001 $96,495 $19,299.00
2002 96,111 19,222.20
2003 96,091 19,218.20
2004 95,984 19,196.80
2005 95,879 19,175.80
2006 95,863 19,172.60
2007 614,627 122,925.40

The deficiencies for tax years 2001 through 2006 were excise

tax deficiencies based upon respondent’s determination that Mr.

Swanson had made an excess contribution of $1.61 million to his

Roth IRA in 2000 and a portion of the excess contribution remained

in the account through December 31, 2006. The deficiency for 2007

was an income tax deficiency based upon respondent’s determination

that Mr. Swanson had unreported income of $1,803,900 and a

computational adjustment of $3,168 to itemized deductions. The

Swansons timely petitioned this Court. A trial was held on March

5, 2010, in Los Angeles, California.

OPINION

I. Burden of Proof

We first address the Swansons’ contention that the burden of

proof has shifted to respondent. They contend that

Where a petitioner has introduced credible evidence relevant
to ascertaining the petitioner’s liability, the burden of
proof in court proceedings shifts so that the Service has the
burden of proof with respect to factual issues related to
income tax issues (Code Section 7491). The Petitioner in
 - 16 -

this case had introduced the requisite credible evidence, an
[sic] had maintained all of the required records, and
cooperated during the audit process with the Service. Hence,
in this proceeding the burden had shifted to the Respondent.

Petitioner has confused the burden of proof for penalties,

see sec. 7491(c), with the burden of proof for income tax

liability, see sec. 7491(a). Pursuant to section 7491(a), the

burden of proof on factual issues that affect the taxpayer’s

income and estate or gift tax liability (imposed by subtitles A

and B of title 26 United States Code) may shift to the

Commissioner in certain circumstances. There is no underlying

income, estate, or gift tax liability at issue. Accordingly,

section 7491(a) is not applicable.

Under section 7491(c), respondent bears the burden of

production with respect to Mr. Swanson’s liability for the section

6662(a) accuracy-related penalty. This means that respondent

“must come forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty.” See Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). However, respondent does

not have the additional burden of producing evidence of reasonable

cause, good faith, substantial authority, or lack of willful

neglect, except as may be necessary to rebut evidence introduced

by petitioners. See id.

II. Analysis

Section 6662(a) imposes an accuracy-related penalty of 20

percent on any underpayment of tax that is attributable to causes
 - 17 -

specified in subsection (b). Respondent asserts negligence or

disregard of the rules and regulations as the justification for

the imposition of the penalty. See sec. 6662(b)(1). More

specifically, respondent urges that Mr. Swanson was negligent in

failing to report his excess contributions to a Roth IRA for the

2001 through 2006 tax years.

“[N]egligence”, for this purpose, is “any failure to make a

reasonable attempt to comply with the provisions of * * * [the

Internal Revenue Code]”.14 Sec. 6662(c). Under caselaw,

“‘Negligence is a lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.’” Freytag v. Commissioner, 89 T.C. 849, 887 (1987)

(quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir.

1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo. 1964-

299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868

(1991). “Negligence is “strongly indicated” when ‘[a] taxpayer

fails to make a reasonable attempt to ascertain the correctness of

a deduction, credit, or exclusion on a return which would seem to

a reasonable and prudent person to be ‘too good to be true’ under

the circumstances.’” Hansen v. Commissioner, 471 F.3d 1021, 1029

(9th Cir. 2006), affg. T.C. Memo. 2004-269; sec. 1.6662-

3(b)(1)(ii), Income Tax Regs.

14
Disregard of the rules and regulations “includes any
careless, reckless, or intentional disregard of rules or
regulations.” Sec. 1.6662-3(b)(2), Income Tax Regs.
 - 18 -

In determining a taxpayer’s liability for a negligence

penalty, courts generally look both to whether the underlying

investment was legitimate and whether the taxpayer exercised due

care in the position taken on the return. Sacks v. Commissioner,

82 F.3d 918, 920 (9th Cir. 1996), affg. T.C. Memo. 1994-217. When

an investment has such obviously suspect tax claims as to put a

reasonable taxpayer under a duty of inquiry, a good faith

investigation of the underlying viability, financial structure,

and economics of the investment is required. Roberson v.

Commissioner, T.C. Memo. 1996-335, affd. without published opinion

142 F.3d 435 (6th Cir. 1998); see also Mortensen v. Commissioner,

440 F.3d 375, 386-387 (6th Cir. 2006), affg. T.C. Memo. 2004-279;

Pasternak v. Commissioner, 990 F.2d 893, 903 (6th Cir. 1993),

affg. Donahue v. Commissioner, T.C. Memo. 1991-181 (stating “A

reasonably prudent person would have asked a qualified tax adviser

if this windfall was not too good to be true”), affd. without

published opinion 959 F.2d 234 (6th Cir. 1992).

Petitioners’ education and experience with business and

financial decisionmaking will be considered in determining whether

they were negligent in blindly accepting the advice of adviser

promoters who charged large fees. Respondent has introduced

sufficient evidence that Mr. Swanson negligently failed to report

excess contributions to his Roth IRA and therefore has met his
 - 19 -

burden of production with regards to the section 6662(a) accuracy-

related penalty.

III. Reasonable Cause Exception

There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate: (1) Reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment. Sec. 6664(c)(1); sec. 1.6664-4(a),

Income Tax Regs. Regulations promulgated under section 6664(c)

provide that the determination of reasonable cause and good faith

“is made on a case-by-case basis, taking into account all

pertinent facts and circumstances.” Sec. 1.6664-4(b)(1), Income

Tax Regs.

Mr. Swanson bears the burden of proving that he meets the

reasonable cause and good faith exception. He asserts that he

meets it because he: (1) Investigated the Roth restructure before

engaging in it; (2) read and relied on Swanson v. Commissioner,

106 T.C. 76 (1996); (3) consulted with numerous people including

accountants and tax attorneys; and (4) received a “no-change”

letter after his returns were audited by the State of California.

To begin, we do not determine whether Mr. Swanson’s alleged

reliance on the “no-change” letter issued by the State of

California helps to establish reasonable cause and good faith.

Importantly, the issues in this case are the accuracy-related

penalties for his 2001 through 2006 tax years, the 2007 year
 - 20 -

having already been conceded by respondent in full. According to

Mr. Swanson’s testimony, he received the “no-change” letter in

2007. That means the “no-change” letter could not have had

anything to do with the justification for petitioners’ failure to

act properly with the tax years 2001 through 2005. We recognize

that Mr. Swanson’s 2006 tax return could have been timely filed in

2007 after the receipt of the “no-change” letter. But, Mr.

Swanson never provided any evidence as to exactly when in 2007 he

received the “no-change” letter or filed the joint Federal income

tax return and attached Form 5329. Further, by failing to

introduce the “no-change” letter into evidence, Mr. Swanson has

failed to provide this Court with proof as to the exact issues

California audited and its reasons for concluding the audit with a

“no-change” letter.

We now turn the Swansons’ asserted reliance on Swanson v.

Commissioner, supra. Mr. Swanson states that the Swanson case

“approved the holding of 100% of the stock of a company by a

pension”. While the Court in Swanson did implicitly approve the

holding of stock by an IRA, that was not the central issue in

Swanson. Swanson v. Commissioner, supra at 87-90. Rather the

Court was called upon to determine whether the IRS was

substantially justified in its litigation position in order to

determine whether the taxpayer was entitled to an award of

reasonable litigation costs.
 - 21 -

We cannot find that the Swansons’ claimed reliance on the

Swanson decision was reasonable. The issue and facts of Swanson

are easily distinguishable from the transaction Mr. Swanson

engaged in. Respondent is not contending that an IRA cannot own

stock, rather that Mr. Swanson made excess contributions to his

Roth IRA. Importantly, there is no evidence other than Mr.

Swanson’s testimony that he ever even read the case or personally

analyzed it as opposed to simply taking Mr. Stover’s word for what

it held. See, e.g., Hansen v. Commissioner, 471 F.3d at 1032

(noting that even though the taxpayer read a previous decision,

there was no evidence that the taxpayer understood or relied on

the decision independently of what the promoter told the taxpayer

the decision meant).

Next, we turn to the Swansons’ argument that they relied on

Mr. Stover and other professionals. To support this argument,

petitioners cite United States v. Boyle, 469 U.S. 241 (1985);

Haywood Lumber & Mining Co. v. Commissioner, 178 F.2d 769 (2d Cir.

1950), modifying 12 T.C. 735 (1949); Orient Inv. & Fin. Co., Inc.

v. Commissioner, 166 F.2d 601 (D.C. Cir. 1948); and Hatfried, Inc.

v. Commissioner, 162 F.2d 628 (3d Cir. 1947).

While good faith reliance on professional advice based on all

the facts may, in many cases, provide a basis for a reasonable

cause defense, it is not absolute. Freytag v. Commissioner, 89
 - 22 -

T.C. at 888; LaPlante v. Commissioner, T.C. Memo. 2009-226; sec.

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

[F]or a taxpayer to rely reasonably upon advice so as
possibly to negate a section 6662(a) accuracy-related penalty
determined by the Commissioner, the taxpayer must prove
* * * that the taxpayer meets each requirement of the
following three-prong test: (1) The adviser was a competent
professional who had sufficient expertise to justify
reliance, (2) the taxpayer 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).

The general rule in the Court of Appeals for the Ninth

Circuit, to which this case would be appealable absent a

stipulation to the contrary, is that “a taxpayer cannot negate the

negligence penalty through reliance on a transaction’s promoters

or on other advisors who have a conflict of interest.”15 Hansen v.

Commissioner, supra at 1031; see also LaVerne v. Commissioner, 94

T.C. 637, 652-653 (1990), affd. without published opinion 956 F.2d

274 (9th Cir. 1992), affd. without published opinion sub nom.

Cowles v. Commissioner, 949 F.2d 401 (10th Cir. 1991). “Courts

15
This Court has held that a promoter is “an adviser who
participated in structuring the transaction or is otherwise
related to, has an interest in, or profits from the transaction.”
106 Ltd. v. Commissioner, 136 T.C. 67, 79 (2011); Tigers Eye
Trading, LLC v. Commissioner, T.C. Memo. 2009-121.
 - 23 -

have repeatedly held that it is unreasonable for a taxpayer to

rely on a tax adviser actively involved in planning the

transaction and tainted by an inherent conflict of interest”.

Canal Corp. v. Commissioner, 135 T.C. 199, 218 (2010).

At a minimum, Mr. Stover and his colleagues had a conflict of

interest and were not independent.16 Mr. Stover set up the various

entities and coordinated the deal “from start to finish”. 106

Ltd. v. Commissioner, 136 T.C. 67, 80 (2011). 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. Swanson] decided not to go through with it.” See id.

Therefore, petitioners cannot argue that their reliance on Mr.

Stover and his colleagues establishes reasonable cause and good

faith. See Hansen v. Commissioner, supra at 1027 (affirming Tax

Court holding when taxpayers relied solely on the organization

promoting the transaction and did not independently verify their

tax returns despite warnings by the IRS); see also LaVerne v.

Commissioner, supra at 652.

16
Independence distinguishes the case at hand from those Mr.
Swanson attempts to rely on. In Haywood Lumber & Mining Co. v.
Commissioner, 178 F.2d 769 (2d Cir. 1950), modifying 12 T.C. 735
(1949), Orient Inv. & Fin. Co., Inc. v. Commissioner, 166 F.2d
601 (D.C. Cir. 1948), and Hatfried, Inc. v. Commissioner, 162
F.2d 628 (3d Cir. 1947), there is no evidence that the tax
advisers who the taxpayers relied on in the cases were not
independent. Haywood Lumber & Mining Co. v. Commissioner, supra
at 770-771; Orient Inv. & Fin. Co., Inc. v. Commissioner, supra
at 602-603; Hatfried, Inc. v. Commissioner, supra at 631-632.
 - 24 -

While Mr. Swanson argues that he also relied on Mr. Nardi,

Mr. Patton, and Mr. Mather, there is no evidence, other than Mr.

Swanson’s testimony, that he talked with these three individuals

nor what they talked about and the advice he received.17 Neither

Mr. Nardi nor Mr. Patton is competent in tax matters. While Mr.

Swanson testified that Mr. Mather was a tax preparer, there is no

evidence he is competent in complicated tax matters.

Mr. Swanson appears to believe that his own self-serving

testimony is enough to establish reasonable cause and good faith.

We disagree. We have “found reliance to be unreasonable where a

taxpayer claimed to have relied upon an independent adviser

because the adviser either did not testify or testified too

vaguely to convince us that the taxpayer was reasonable in relying

on the adviser’s advice”. Swanson v. Commissioner, T.C. Memo.

2009-31; see also Heller v. Commissioner, T.C. Memo. 2008-232

(noting in upholding a penalty based on negligence that aside from

the taxpayer’s “self-serving testimony, there * * * [was] no

evidence in the record as to the specific nature of * * * [the

professional’s] advice”), affd. 403 Fed. Appx. 152 (9th Cir.

2010). Petitioners’ failure to introduce evidence “which, if

17
Mr. Swanson also appears to rely on individuals who signed
his individual and corporate tax returns such as Angela K.
Parker, Kelly Murphy, Duanette Thompson, Ruth Donovan, and Kelly
Webb. There is no evidence that Mr. or Mrs. Swanson ever spoke
with any of these individuals or if so, what was discussed. In
any event, they also have conflicts of interest because they
worked with Mr. Stover on the Roth restructure and were employees
of Grant Thornton and/or Kruse Mennillo.
 - 25 -

true, would be favorable to * * * [them], 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).

Petitioners must surely have realized that the deal was too

good to be true. See LaVerne v. Commissioner, supra at 652-653.

Mr. Swanson is a successful businessman who knew that there were

contribution limits to Roth IRAs and who had bought a tax book

each year he prepared his own tax return. His sophistication is

further evidenced in a memo and November 9, 2000, followup memo he

wrote to Mr. Stover and Ms. Donovan where he listed the topics he

wanted to discuss with them at a June 30, 2000, meeting, including

stock options, tax avoidance strategies, avoidance of California

taxes, and future deposits and rollovers of his Roth IRA.

IV. Conclusion

Mr. Swanson had doubts, repeatedly asking whether the Roth

restructure was legal. Yet, despite these doubts, he never asked

for a written opinion letter or sought the advice of an

independent adviser, even after receiving a letter from Grant

Thornton warning him that he may have engaged in a listed

transaction and receiving notice that his returns were being

audited by the State of California.18 Petitioners have failed to

18
We further note that Mr. Swanson was made aware of Notice
2004-8, which is entitled “Abusive Roth IRA Transactions” and
described transactions designed “to avoid the limitations on
(continued...)
 - 26 -

establish that they meet the reasonable cause and good faith

exception to the section 6662(a) accuracy-related penalty.

Therefore, we sustain respondent’s imposition of section 6662(a)

accuracy-related penalties for petitioners’ 2001 through 2006 tax

years.

The Court has considered all of petitioner’s contentions,

arguments, requests, and statements. To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

Decision will be entered

under Rule 155.

18
(...continued)
contributions to Roth IRAs”. The notice stated that the
transactions described in the notice “as well as substantially
similar transactions” were listed transactions and required
disclosure. We find it notable that Mr. Swanson continued to
rely on Mr. Stover and related tax advisers and did not seek
independent advice after being notified not only of Notice 2004-8
but also that his returns were being audited by the State of
California. See Neely v. United States, 775 F.2d 1092, 1095 (9th
Cir. 1985) (“Reasonable inquiry as to the legality of the tax
plan is required, including the procurement of independent legal
advice when it is common knowledge that the plan is
questionable.”).