Swanson v. Commissioner

FILED
NOT FOR PUBLICATION JUN 15 2011
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
DAVID W. SWANSON and CONNIE L. No. 09-73770
SWANSON,
Tax Ct. No. 550-00
Petitioners,
v. MEMORANDUM*
COMMISSIONER OF INTERNAL
REVENUE,
Respondent.
Appeal from a Decision of the
United States Tax Court
Argued and Submitted June 8, 2011
Pasadena, California
Before: D.W. NELSON and IKUTA, Circuit Judges, and PIERSOL, Senior
District Judge.**
The Tax Court did not err in ruling that the burden of proof in this case did
not shift to the Commissioner under 26 U.S.C. § 7491. Section 7491’s burden-
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
**
The Honorable Lawrence L. Piersol, Senior District Judge for the U.S.
District Court for South Dakota, Sioux Falls, sitting by designation.
shifting framework did not apply to the 1994 deficiency, because the parties
stipulated that the IRS’s investigation of those deficiencies commenced prior to
July 22, 1998. Nor did the Tax Court err in determining § 7491’s burden shifting
framework did not apply to the 1993 and 1995 deficiencies due to the Swansons’
failure to introduce credible evidence and failure to cooperate with the
Commissioner. The Tax Court’s determination that the Swansons were not
credible was not clearly erroneous, given (among other things), the Swansons’
claim that clearly personal expenses were deductible “management expenses,” that
they relinquished their ownership interest in FSH “for nothing more than a
stranger’s promise of a loan,” and they claimed never to have discussed tax
avoidance with Evans and O’Brien, despite the fact that Evans and O’Brien were
both convicted of promoting tax evasion schemes. See Wood v. Comm’r, 338 F.2d
602, 605 (9th Cir. 1964). The Tax Court’s determination that certain personal
expenses were not business expenses was not contrary to the parties’ stipulation.
The Swansons did not identify any specific inconsistencies, and the stipulation
stated that the Commissioner did not agree with the Swansons’ characterization of
all of their personal expenses or stipulate to the accuracy of all their exhibits. Nor
did the Tax Court clearly err in determining that the Swansons were not
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cooperative with the Commissioner, given evidence that they brought a law suit
against one IRS agent and refused to answer questions posed by his successor.
The Tax Court did not err in holding that FSH Services lacked economic
substance. See Sparkman v. Comm’r, 509 F.3d 1149, 1155 (9th Cir. 2007); see
also Markosian v. Comm’r, 73 T.C. 1235, 1243–45 (1980). The Tax Court’s
conclusions that the Swansons’ relationship with FSH’s property did not materially
differ before and after the creation of the trust, that neither Evans nor O’Brien
functioned as an independent trustee, that economic benefits did not inure to other
beneficiaries of the trust, and that the Swansons failed to respect the rules and
restrictions of the trust were not clearly erroneous. Sparkman, 509 F.3d at 1155.
Though the Swansons offered evidence that Evans made loans in his capacity as a
trustee, such loan activity was de minimis. Moreover, when Evans was caught
misappropriating funds, the Swansons selected his replacement. Having
determined that FSH lacked economic substance, the Tax Court did not err in
attributing the income of the trust to the Swansons, rather than to Evans, because
Mr. Swanson was the primary source of FSH’s income. Id. at 1158.
The Tax Court did not err in declining to categorize various continuing
education expenses as Schedule C deductions because the Swansons did not carry
their burden of demonstrating why those deductions were business expenses. See
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New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Rockwell v.
Comm’r, 512 F.2d 882, 886 (9th Cir. 1975).
The Tax Court did not err in holding that the 1993, 1994, and 1995
deficiency actions were timely given that the Swansons omitted from their gross
income an amount in excess of 25 percent of the amount of gross income stated in
their tax returns. See 26 U.S.C. § 6501(e)(1)(A).
The Tax Court did not err in upholding the penalties imposed under 26
U.S.C. § 6662 on the ground that the Swansons substantially understated their tax
liability and failed to prove that they acted with reasonable cause and in good faith.
See 26 U.S.C. § 6664(c)(1). The Swansons did not carry their burden of proving
they acted with due care in setting up the trust and calculating their tax liability,
and the Tax Court’s determination that they were negligent and that their testimony
was not credible was not clearly erroneous. Sparkman, 509 F.3d at 1161.
Nor did the Tax Court abuse its discretion in imposing a penalty of $12,500
under 26 U.S.C. § 6673. Larsen v. Comm’r, 765 F.2d 939, 941 (9th Cir. 1986) (per
curiam). The Tax Court did not err in determining that the Swansons were
maintaining frivolous or groundless positions, given that the Swansons continued
to pursue litigation despite their knowledge that Evans and O’Brien (co-trustees of
FSH) were facing (and were eventually convicted of) criminal charges of tax fraud.
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Moreover, reasonable inquiry would have revealed that Evans, Cache Properties,
and Martha Doerr were involved in other trust transactions that were deemed
shams. Cf. Wolf v. Comm’r, 4 F.3d 709, 716 (9th Cir. 1993). The Tax Court did
not clearly err in finding that the Swansons’s evidence and arguments did not lead
to the agreed-upon reduction of their tax liabilities; rather, the reductions resulted
from concessions by the Commissioner that would have occurred during the course
of normal negotiations between the parties.
AFFIRMED.
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