SCOTUS Reports

Tag: Abusive Tax Shelter

  • Gardner v. Comm’r, 145 T.C. 161 (2015): Application of Penalties for Promoting Abusive Tax Shelters

    Gardner v. Commissioner, 145 T. C. 161 (2015)

    In Gardner v. Commissioner, the U. S. Tax Court upheld the IRS’s imposition of $47,000 penalties on Fredric and Elizabeth Gardner for promoting an abusive tax shelter involving corporations sole. The court found that the Gardners made false statements about tax benefits, leading to their liability under I. R. C. § 6700. The decision reinforces the IRS’s authority to penalize promoters of tax shelters and clarifies that such penalties are not dependent on the actions of the shelter’s purchasers.

    Parties

    Fredric A. Gardner and Elizabeth A. Gardner, petitioners, were the defendants in a prior action brought by the United States in the U. S. District Court for the District of Arizona. In the Tax Court, they were the petitioners challenging the IRS’s collection actions regarding the assessed penalties. The respondent was the Commissioner of Internal Revenue.

    Facts

    Fredric and Elizabeth Gardner, a husband and wife, operated Bethel Aram Ministries (BAM), an unincorporated association they formed in 1993. They promoted a plan involving corporations sole, claiming it could reduce federal income tax liabilities. The plan involved assigning personal income to a corporation sole, which they claimed would transform taxable income into nontaxable income. They also advised customers to create trusts and LLCs, asserting that income assigned to these entities would be tax-free and that donations to churches would generate charitable deductions. The Gardners solicited “donations” in exchange for their services, and they held seminars and retreats to promote their plan. In 2008, the U. S. District Court for the District of Arizona found that the Gardners had organized more than 300 corporations sole and made false statements regarding tax benefits, leading to an injunction against further promotion of the plan. The IRS subsequently assessed $47,000 penalties against each Gardner under I. R. C. § 6700 for their activities in 2003, which the Gardners did not pay, prompting the IRS to commence collection actions.

    Procedural History

    The U. S. District Court for the District of Arizona granted the United States’ motion for summary judgment and permanently enjoined the Gardners from promoting their corporation sole plan on March 24, 2008. This decision was affirmed by the Ninth Circuit Court of Appeals. Following the injunction, the IRS assessed $47,000 penalties against each Gardner under I. R. C. § 6700 for the year 2003. After the Gardners failed to pay these penalties, the IRS filed a notice of lien against Fredric Gardner and proposed levies against both Gardners. The Gardners separately challenged these collection actions before different IRS settlement officers, who sustained the IRS’s actions. The Gardners then sought judicial review in the U. S. Tax Court under I. R. C. § 6330(d)(1).

    Issue(s)

    Whether each petitioner is liable for the assessed $47,000 penalty under I. R. C. § 6700, and whether the IRS settlement officers abused their discretion in sustaining the IRS’s lien against Fredric Gardner and in determining that the IRS’s proposed levy actions against both Gardners could proceed?

    Rule(s) of Law

    I. R. C. § 6700 imposes a penalty on any person who organizes or participates in the sale of a tax shelter and makes or furnishes statements regarding the allowability of deductions or tax credits, the excludability of income, or the securing of other tax benefits, knowing or having reason to know that such statements are false or fraudulent as to any material matter. The penalty is $1,000 per violation unless the person establishes that the gross income derived from the activity was less than $1,000. I. R. C. § 6330 provides for a hearing before the IRS may proceed with a levy and allows the taxpayer to challenge the existence or amount of the underlying tax liability if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the liability.

    Holding

    The U. S. Tax Court held that the Gardners were liable for the $47,000 penalties under I. R. C. § 6700, as the IRS established that they had sold the corporation sole plan to at least 47 individuals. The court also held that the IRS settlement officers did not abuse their discretion in sustaining the lien against Fredric Gardner and in determining that the proposed levy actions against both Gardners could proceed.

    Reasoning

    The court applied the doctrine of collateral estoppel, finding that the issues in the Tax Court case were identical to those determined by the District Court, which had found the Gardners liable under I. R. C. § 6700. The court also considered the legislative history of I. R. C. § 6700, which indicates that the actions of the plan participants are not relevant to the application of the penalty. The court reviewed the IRS’s evidence, which included bank records and tax returns of 47 individuals who purchased the corporation sole plan, and found that the IRS had met its burden of proof in establishing the Gardners’ liability for the penalties. The court rejected the Gardners’ argument that the IRS did not prove that the purchasers used the plan to avoid taxes, emphasizing that the focus of I. R. C. § 6700 is on the promoter, not the recipient. The court also addressed the Gardners’ contention that the IRS improperly designated 2003 as the year of the penalty, finding that the designation was for administrative purposes and did not prejudice the Gardners. Finally, the court found no abuse of discretion in the IRS settlement officers’ determinations, as they verified the procedural requirements and considered the Gardners’ arguments.

    Disposition

    The U. S. Tax Court entered decisions for the respondent, sustaining the IRS’s lien against Fredric Gardner and allowing the IRS’s proposed levy actions against both Gardners to proceed.

    Significance/Impact

    The Gardner decision reinforces the IRS’s authority to penalize promoters of abusive tax shelters under I. R. C. § 6700, even if the purchasers of the shelter do not rely on the plan or underreport their taxes. The case clarifies that the penalty is assessed based on the promoter’s actions, not the purchaser’s actions, and that the IRS may designate a year for the penalty for administrative purposes without prejudicing the taxpayer. The decision also underscores the importance of the doctrine of collateral estoppel in tax litigation, preventing the relitigation of issues already decided by a court of competent jurisdiction. The case has implications for tax practitioners and promoters, emphasizing the need for accurate representations regarding tax benefits and the potential for significant penalties for promoting abusive tax shelters.

  • Gardner v. Commissioner, 145 T.C. No. 6 (2015): Application of Section 6700 Penalties for Promoting Abusive Tax Shelters

    Gardner v. Commissioner, 145 T. C. No. 6 (2015)

    The U. S. Tax Court upheld $47,000 penalties against Fredric and Elizabeth Gardner for promoting an abusive tax shelter involving corporations sole. The court applied collateral estoppel based on a prior injunction, confirming the Gardners’ liability under Section 6700 for making false statements about tax benefits. The decision clarifies that Section 6700 penalties are based on the promoter’s actions, not the purchaser’s reliance, and can be assessed across multiple years for administrative convenience.

    Parties

    Fredric A. Gardner and Elizabeth A. Gardner, petitioners, v. Commissioner of Internal Revenue, respondent. The Gardners were the petitioners at the trial level before the U. S. Tax Court, having previously been defendants in a related case before the U. S. District Court for the District of Arizona.

    Facts

    The Gardners, a husband and wife, operated Bethel Aram Ministries (BAM) and promoted a tax avoidance scheme using corporations sole, trusts, and limited liability companies (LLCs). They marketed these arrangements as a means to reduce federal income tax liability, asserting that income assigned to a corporation sole would become nontaxable. The Gardners advised their clients to form an LLC to operate a business, with a trust as the majority member, and to donate a significant portion of the LLC’s income to a church for a charitable deduction. They promoted these plans through seminars, a website, and a book written by Mrs. Gardner. The Internal Revenue Service (IRS) investigated the Gardners’ activities, which led to the U. S. District Court for the District of Arizona enjoining them from further promoting the scheme. The IRS assessed $47,000 penalties against each Gardner under Section 6700 for promoting an abusive tax shelter, and they challenged these penalties in the Tax Court.

    Procedural History

    The U. S. District Court for the District of Arizona found that the Gardners had engaged in conduct violating Section 6700 by making false statements about tax benefits and enjoined them from further promotion of their plan. The Gardners failed to pay the assessed penalties, leading the IRS to file a notice of federal tax lien and issue notices of intent to levy. The Gardners requested Collection Due Process (CDP) hearings under Section 6330, where they attempted to challenge the underlying liability. The settlement officers sustained the IRS’s collection actions, and the Gardners appealed to the U. S. Tax Court. The Tax Court consolidated the cases for trial and conducted a de novo review of the underlying liability, reviewing the settlement officers’ determinations for abuse of discretion.

    Issue(s)

    Whether each petitioner is liable for the assessed $47,000 penalty under Section 6700 for promoting an abusive tax shelter?

    Whether the IRS settlement officers abused their discretion in sustaining the collection actions against the Gardners?

    Rule(s) of Law

    Section 6700 of the Internal Revenue Code imposes a penalty on any person who organizes or participates in the sale of an entity, plan, or arrangement and makes a false or fraudulent statement regarding tax benefits. The penalty is $1,000 per violation unless the promoter can establish that the gross income derived from the activity was less than $1,000. The legislative history of Section 6700 clarifies that the penalty can be imposed without regard to the purchaser’s reliance or actual underreporting of tax. Section 6330 allows taxpayers to request a hearing regarding the filing of a notice of federal tax lien or a proposed levy, and the settlement officer must consider relevant issues raised by the taxpayer, including the underlying liability if the taxpayer did not have a prior opportunity to dispute it.

    Holding

    The Tax Court held that the Gardners were liable for the $47,000 Section 6700 penalties, as the IRS established that they sold the corporation sole plan to at least 47 individuals. The court applied collateral estoppel based on the District Court’s prior determination that the Gardners had engaged in conduct violating Section 6700. The court also found that the IRS settlement officers did not abuse their discretion in sustaining the collection actions against the Gardners.

    Reasoning

    The Tax Court’s reasoning was based on the application of the doctrine of collateral estoppel, which precluded the Gardners from relitigating the issue of their liability under Section 6700. The court found that the issues in the Tax Court case were identical to those decided by the District Court, and all elements required for collateral estoppel were met. The court also relied on the legislative history of Section 6700, which states that the penalty can be imposed without regard to the purchaser’s reliance or actual underreporting of tax. The court rejected the Gardners’ argument that the IRS had to prove that their clients used the plan to avoid taxes, emphasizing that the focus of Section 6700 is on the promoter’s actions. The court also found that the IRS’s designation of 2003 as the tax period for the penalty assessments was for administrative convenience and did not prejudice the Gardners, who had a full opportunity to contest the penalties in the Tax Court. The court concluded that the settlement officers did not abuse their discretion in sustaining the collection actions, as they properly verified the procedural requirements and considered the Gardners’ arguments.

    Disposition

    The Tax Court sustained the IRS’s lien against Mr. Gardner and held that the IRS’s proposed levy actions against both Gardners could proceed. Decisions were entered for the respondent.

    Significance/Impact

    This case clarifies the application of Section 6700 penalties for promoting abusive tax shelters, emphasizing that the penalty is based on the promoter’s actions and not the purchaser’s reliance or actual tax avoidance. The decision also confirms that Section 6700 penalties can be assessed across multiple years for administrative convenience, as long as the taxpayer is not prejudiced and has a full opportunity to contest the penalty. The case demonstrates the IRS’s ability to use collateral estoppel to establish a promoter’s liability for Section 6700 penalties based on prior judicial determinations. The decision has practical implications for tax practitioners and promoters of tax shelters, reinforcing the importance of compliance with tax laws and the potential consequences of promoting abusive tax schemes.