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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20 137 UNITED STATES TAX COURT REPORTS (8)
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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(8) PASCHALL v. COMMISSIONER 21
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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(8) PASCHALL v. COMMISSIONER 23
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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24 137 UNITED STATES TAX COURT REPORTS (8)
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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