Taxpayer did not have fraudulent intent.

• Author: Beavers, James A.
• Position: 2014 Tax Court memorandum decision in Carreon v. Commissioner

The Tax Court held that a taxpayer who used an "agent-principal" scheme to avoid paying taxes on income from his business was not liable for a civil fraud penalty because the IRS had failed to prove that the taxpayer had fraudulent intent.

Background

David Carrcon and his wife were equal owners of a credit card processing business, originally as Bancard Solutions LLC and later as Merchants Payment Proeess-ing Inc. (collectively. Merchants Inc.). In 1999, pursuant to the advice of a financial adviser, the Carreons began using an asset management protection and financial strategy referred to as the "agent-principal" relationship. Under this scheme, the Carreons took net gross receipts from rhcir credit card processing business after business expenses including their salaries and put those funds into various trusts. One of the trusts, designated the management trust, was managed for a fee by a company named Builders.

The Carreons employed a CPA, referred to them by the financial adviser, to prepare their business and personal income tax returns. The financial adviser told the CPA about the "agent-principal" relationship. The CPA accepted the advisers assurances that the scheme was valid and prepared the returns for the Carreons in accordance with the scheme.

During the years in question, the Carreons transferred Merchants Inc.'s net income after expenses to Builders' bank accounts. Mr. Carreon kept a Quick-Books file with detailed records of the transfers. However, Merchants Inc. did not report the amounts that it transferred to the Builders' bank accounts as income.

The Carreons also opened several bank accounts not directly related to Merchants Inc. Either Mr. Carreon or the couple jointly had signature authority. The Carreons had money transferred from the Builders' accounts to these accounts. Although Mr. Carrcon kept careful records of the transfers from Merchants Inc. to the Builders* accounts in his QuickBooks files, he did not keep any records of the transfers from the Builders* accounts to these other accounts, and the checks themselves (which were signed by the financial adviser) were labeled in a way that made them appear to be charitable contributions of some type. The Carreons also deposited income from rental properties in these accounts, and they used funds transferred to these accounts to pay personal expenses. However, they did not report any of the funds transferred to these accounts as income on their federal income tax...