Trial Calendar: Reno, Nevada
Date: November 5, 2007
TRIAL MEMORANDUM FOR PETITIONER
NAME OF CASE DOCKET NO.
Ioane v Commissioner 9903-06
Petitioner: Pro Per Respondent: Wesley J. Wong
Tel. No.: (650) 679-2780 Tel. No.: (702) 868-5171
AMOUNTS IN DISPUTE:
Year(s) Deficiency: §6651(a)(1) §6662
2002 $2,104,868 314,754.30 $420,973.60
2003 $457,468 –0– 91,493.60
STATUS OF CASE:
Probable Settlement: ______ Probable Trial: Definite Trial: X
CURRENT ESTIMATE OF TRIAL TIME: 3 hours
MOTION YOU EXPECT TO MAKE: Motion for summary denial of Respondent’s claims that the income of the various trusts belongs to Petitioners in view of the fact that Respondent not only issued deficiency notices to those trusts for the very same income, but also made tax assessments against those trusts (Respondent is attempting to commit a fraud against Petitioners and this Court); motion in limine to exclude any evidence relating to any theory other than that stated in Respondent’s deficiency notice: the trusts are grantor trusts of petitioners; that Ioane received additional compensation from Acacia Corporate Management, Inc in 2003 which was not reported by Ioane; and disallowed deductions/credits. Petitioners are also considering a motion for sanctions.
STIPULATION OF FACTS: Completed ___________ In Process x
- Whether the income of the various entities identified in Respondent’s deficiency notice belongs to Petitioners under Respondent’s ‘grantor trust’ theory when Respondent (1) has no trust documents (and never even attempted to obtain any) to show any such thing, and (2) when Respondent not only issued deficiency notices to the trusts, but also assessed tax against them for the very same ‘unreported income’ it is now claiming against Petitioners.
- Whether Petitioners are liable for additional self-employment taxes.
- Whether Respondent has the burden of proof, including regarding denied deductions since it arbitrarily denied the deductions claimed in the returns without ever even requesting one single item for substantiating the deduction claims.
- Whether Respondent’s tax claims are just arbitrary numbers since the tax amounts asserted in each deficiency notice are not supported by any tax table in IRC §1 or any regulation; whether Respondent has “prescribed” any tax tables for each year as required by IRC §1(f), where any such tables have been ‘prescribed’, and whether Respondent used the correct data and followed the formula in §1(f) for ‘prescribing’ any tables (if any exist).
- Whether the penalty under IRC §6651(a)(1) is applicable for the years at issue.
- Whether the penalty under IRC §6662 is applicable for the years at issue.
WITNESS(ES) YOU EXPECT TO CALL:
Revenue agent Dennis Brown — the agent who made the alleged deficiency determinations; will provide testimony relating to some or all issues.
Michael Ioane — Petitioner; will provide testimony relating to some or all issues.
Rodney Reed — May provide testimony relating to some or all issues.
SUMMARY OF FACTS:
Petitioners filed timely returns for all years at issue, and included all income that should have been included therein. During Respondent’s audit of the years in question, the agent never asked for one single document relating to any income or expense item stated on the returns. Also, at no time since the filing of the petition in this case has Respondent requested any documentation relating to any items on the returns.
Without even a single trust document, Respondent has apparently ‘gone off the deep end’ with wild, groundless theories that Petitioners are somehow grantors of various trusts, and that income from other various entities belongs to Petitioners. These entities include Acacia Charitable Foundation, Charitable Scholarship Foundation, American Federal Trust, First Amendment Publishers Trust, Acacia Corporate Management, and Paradise Solutions Trust. Respondent continues to assert these groundless theories even though it issued deficiency notices asserting the exact same ‘unreported income’ claims made here to all the various trust and corporate entities (not including Acacia Charitable Foundation, Charitable Scholarship Foundation). Respondent has also admitted that it has assessed tax against the various trusts regarding the various ‘unreported income’ claims that it continues to make against Petitioners in this case. Petitioners submit this is an outrageous waste of everyone’s time for Respondent to continue pursuing this fraudulent scam against Petitioners under these circumstances.
Respondent’s deficiency notice alleges all the above entities are “grantor trusts within the meaning of sections 671-677”. Petitioners are no such thing. Respondent is apparently making this claim without one shred of evidence to back it up. To Petitioners’ knowledge, Respondent (even with its awesome summons power) has never even attempted to obtain any documents regarding any of the entities it claims belong to Petitioners. Without this fundamental evidence, and for reasons only known to it, Respondent is apparently engaging in nothing but sheer speculation and reckless claims on this issue, while it irresponsibly continues to pursue Petitioners for tax claims which it has already assessed against others.
Petitioners incurred the various expense deductions which they claimed on the returns, as well as the net operating loss (NOL) carry-over from years 1998-2001. Although Respondent claims to have conducted an ‘examination’ of the returns, there never was any actual audit. During the examination, the revenue agent never asked Petitioners to supply one single piece of evidence to support any item whatsoever on the tax returns — NOT ONE! He simply arbitrarily denied them.
In addition, the source of the tax deficiency numbers in Respondent’s deficiency notices is unknown, as they do not come from any statute or regulation, and appear to be simple arbitrary numbers picked from thin air. They do not come from anything within the IRC. As discussed below, Petitioner contends the issue of just where Respondent got its tax numbers from is a triable issue of fact.
Respondent’s deficiency notice also asserts various penalties/additions to tax under IRC §6651(a)(1) and §6662, as well as self-employment taxes for each year. Petitioners deny they owe any such penalties or taxes.
BRIEF SYNOPSIS OF LEGAL AUTHORITIES
Burden Of Proof
Since most of the claims in this case involve alleged ‘unreported income’, Respondent clearly has the burden of proof. When faced with the presumption of correctness in the Commissioner’s determinations, and the taxpayer’s assertion that he or she did not receive the alleged income, the federal courts have consistently ruled that the presumption of correctness does not apply and it is the Commissioner that has the burden of proof. United States v. Janis, 428 US 433, 441-442 (1976); Hardy v. Commissioner, 181 F.3d 1002 (9th Cir., 1999); Erickson v. Comm’r, 937 F.2d 1548, 1551 (10th Cir. 1991); Portillo v. Commissioner, 932 F.2d 1128 (5th Cir., 1991); Weimerskirch v. Commissioner, 596 F.2d 358, 360 (9th Cir., 1979). Respondent also has the burden of production regarding any penalties or additions to tax. IRC §7491(c); Wheeler v. Commissioner, 127 T.C. 200 (2006).
Petitioners further assert that Respondent should have the burden of proof regarding its totally arbitrary denial of deductions and the NOL carry-over. These were summarily denied by Respondent without it ever even requesting a single document for substantiation. IRC §7491(a) shifts the burden of proof to the IRS when (i) credible evidence is introduced concerning any factual issue; (ii) the taxpayer has complied with the requirements under the code to substantiate any item; (iii) the taxpayer has maintained all records required under the code; and (iv) the taxpayer has cooperated with reasonable requests for witnesses, information, and documents. Here, Respondent never asked Petitioners to substantiate any item, and never asked for any records about the deductions or NOL. Since Respondent never made any requests for information about any item on the returns, there was no ‘cooperation’ to be given or denied by Petitioners. Therefore, other than possibly the introduction of credible evidence, Petitioners contend Respondent has waived all elements of §7491(a).
This court has held the term ‘credible evidence’ to mean ‘the quality of evidence, after critical analysis, the court would find sufficient to base a decision on the issue if no other evidence were introduced’. Baker v. Commissioner, 122 T.C. 143, 168 (2004). Petitioners will introduce credible evidence concerning their deduction claims.
Respondent Is Barred From Denying Any NOL’s From Other Years
Petitioners believe Respondent is barred from any denial of the NOL deductions. These losses originated in the years 1998- 2001. Since Respondent accepted those losses for those years, it cannot now deny them from being carried to other years. If Respondent wanted to challenge those losses, it was required to do so for the years in which they originated. Since it did not do so, it cannot do so now for carry-over years. Therefore, Respondent’s denial of NOL carry-overs should be rejected without trial.
Respondent’s deficiency notice asserts additional self-employment tax for both years. These claims are based on the groundless/frivolous claims that Petitioners had unreported income that belongs to them from various other entities. The income of the various entities belongs to each respective entity, not Petitioners.
Respondent’s Deficiency Claim Is Reckless, If Not Fraudulent
Petitioners realize this Court has held Respondent may take inconsistent positions in response to an inconsistent treatment by taxpayers of the same item in a transaction — sometimes called a ‘whipsaw’. However, Respondent “may not take such a position without good cause”. Maggie Management v. Commissioner of Internal Revenue, 108 T.C. 430, 446 (1997). Here, there is no ‘good cause’ because there is not even any identifiable ‘inconsistent’ position’ taken by Petitioners concerning any item or transaction with any other party. The Court should therefore disallow Respondent from attempting to pursue any claims against Petitioners where the same claims have already been assessed against others.
Moreover, since Respondent has already assessed taxes against others for the very same ‘unreported income’ claims it is making against Petitioners, this case is nothing short of a fraud on Petitioners and the Court. In Bull v U.S., 295 U.S. 247, 259 (1935) the Supreme Court stated “once the tax is assessed the taxpayer will owe the sovereign the amount when the date fixed by law for payment arrives. … The assessment is given the force of a judgment….” Since these taxes have already been assessed against others and are given the ‘force of a judgment’, Petitioners submit Respondent is collaterally estopped (or estopped by res judicata) from pursuing the identical claims against Petitioners. There is simply no provision in the tax code for taxing the exact same income twice. Since this Court obviously cannot participate in fraud, it should summarily disallow Respondent’s bogus ‘unreported income’ claims against Petitioners concerning the income of the trusts.
Petitioners also note that while Respondent rambles on in its Pre-Trial Memorandum (p. 16-19) about whether or not the various trusts should be disregarded for tax purposes, it fails to address an extremely fundamental issue: the complete lack of evidence that Petitioners are grantors of any of the trusts at issue, or that the trusts are even grantor trusts at all. It also fails to address/identify any power whatsoever Petitioners allegedly might have had over any such trusts, and where any such powers may have come from. (Such powers would only be described in trust documents, something Respondent does not even have). However, this is not surprising since no such grantor relationship exists between Petitioners and the trusts, and Petitioners have no powers over the trusts. Even under Respondent’s own legal arguments, it is simply pursuing a reckless, even fraudulent, ‘grantor trust’ claim that lacks fundamental evidence.
In addition to the ‘grantor trust’ claims that were made in the deficiency notice, Respondent’s memorandum also argues about ‘assignment of income’ (p. 20-22). However, since this theory was not stated in the deficiency notice, and Respondent did not present it in its Answer to the Petition, it should not be allowed in this trial. Petitioners hereby object to any evidence concerning any theory by Respondent about any alleged ‘income assignment’.
Respondent’s deficiency notice also asserts various penalties/additions to tax under IRC §6651(a)(1) and §6662. IRC §7491(c) is quite clear that Respondent has the burden of production concerning any penalties or additions to tax. Petitioners do not believe Respondent can satisfy this burden.
Arbitrrary Tax Amounts
For each year at issue in this case, Respondent entered a certain amount as an alleged tax deficiency. However, these numbers do not come from any statute or regulation. The source of Respondent’s tax numbers are simply unknown. IRC §1(f) shows that congress stopped including any tax tables or figures whatsoever within IRC §1 for all years following 1992, and instead directed the Secretary of Treasury to ‘prescribe’ tax tables according to a particular formula. Although the direction to Respondent to ‘prescribe’ tax tables is clear, petitioner has been unable to find any such tables in any regulation. Therefore, a question exists as to whether any such tables have actually been ‘prescribed’, and if so, whether the formula was followed in §1(f) for making the tables. Petitioner contends these are factual issues subject to trial, and for which Respondent has the burden of proof. Otherwise, without any showing of a source in law or regulation for Respondent’s tax numbers, those numbers are baseless and arbitrary.
In Helvering v. Taylor, 293 US 507, 515 (1935) the supreme court held that when the government’s deficiency determination is shown to be “arbitrary”, no taxpayer would have any burden of showing the correct amount of tax, if any. Moreover, a court facing these circumstances should hold “the Commissioner’s determination invalid”. Id. When an assessment has no foundation whatsoever, it is considered to be “naked,” is one “without rational foundation and excessive”, and is not properly subject to the usual rule of the presumption of correctness and the burden of proof in tax cases. United States v. Janis, 428 US 433, 441 (1976), citing Helvering v. Taylor, 293 US 507, 514-15 (1935). Also see Cohen v. C.I.R.. 266 F.2d 5, 11-12 (9th Cir. 1959) (Commissioner determination is invalid when it is arbitrary or erroneous); Clinton Cotton Mills v. C.I.R., 78 F.2d 292, 295 (4th Cir. 1935) (where determination by Commissioner is grounded upon error of law, presumption of correctness no longer avails). Since Respondent’s tax numbers do not come from any statute or regulation, it would have the burden of proof in showing just where its numbers came from, and if/how they comply with §1(f). However, Respondent has made no pre-trial disclosures whatever on this issue, and has identified no witnesses or exhibits for it.
Respondent has indicated it will offer tax return information relating to those other than Petitioners (i.e. trusts, etc) at trial. Petitioners believe Respondent would be violating the tax record confidentiality requirements of 26 U.S.C. §6103(a) by doing this, and the Court should not indulge in knowing violations of the law by a party.
Petitioners also believe Respondent will attempt to introduce alleged bank records without proper foundation/authentication. They will be met with objections.
Since Respondent has no entity/trust documents, it simply cannot provide any valid evidence of any grantor trusts. It may attempt to introduce alleged ‘grantor trust’ evidence from hearsay or purported circumstantial evidence. This will be met with objections. Petitioners also submit that since the trust documents would be the only place that specifically identifies any trust grantor (if any exist), and sets out the authority of all those holding positions of the trusts, any evidence other than the trust documents themselves would be a violation of the parol evidence rule. Further, since Respondent never even attempted to obtain any entity documents from those who might possess them, it should be barred from attempting to introduce any evidence whatever of any entities, or claims that any entity income belongs to Petitioners.
DATE: October 30, 2007 ___________________________________
Michael S. Ioane, Petitioner
Shelly Ioane, Petitioner
CERTIFICATE OF SERVICE
It is hereby certified that a copy of the foregoing document was served on respondent by mailing the same on the below date in a postage paid envelope addressed as follows:
110 CITY PARKWAY, STE. 301
LAS VEGAS, NV 89106
Date: ___________________ By:______________________________
 In addition to any facts stated here, the Court should also note that a Collection Due Process (CDP) case is pending concerning, inter alia, the year 2002. One of the issues in that case relates to Petitioner’s inability to address the underlying tax claims for the year 2002, and his attack on those underlying claims. To this extent, the instant case may be duplicative of the issue in the CDP case. Petitioner Michael Ioane first filed a case just to get Respondent to issue a Notice of Determination after the administrative hearing (Case #22376-06). The Court subsequently dismissed the case on Respondent’s motion to dismiss for lack of jurisdiction due to the lack of any Notice of Determination. But just before the dismissal order, Respondent issued the missing Notice of Determination, and Ioane filed another case in this Court (#19292-07), which again, included the year 2002.
 IRC § 1(f) (applicable to the years at issues) states the following:
(1) In general — Not later than December 15 of 1993, and each subsequent calendar year, the Secretary shall prescribe tables which shall apply in lieu of the tables contained in subsections (a), (b), (c), (d), and (e) with respect to taxable years beginning in the succeeding calendar year.
(2) Method of prescribing tables: The table which under paragraph (1) is to apply in lieu of the table contained in subsection (a), (b), (c), (d), or (e), as the case may be, with respect to taxable years beginning in any calendar year shall be prescribed–
(A) by increasing the minimum and maximum dollar amounts for each rate bracket for which a tax is imposed under such table by the cost‑of‑living adjustment for such calendar year,
(B) by not changing the rate applicable to any rate bracket as adjusted under subparagraph (A), and
(C) by adjusting the amounts setting forth the tax to the extent necessary to reflect the adjustments in the rate brackets.
(3) Cost‑of‑living adjustment: For purposes of paragraph (2), the cost‑of‑living adjustment for any calendar year is the percentage (if any) by which‑‑
(A) the CPI for the preceding calendar year, exceeds
(B) the CPI for the calendar year 1992.
(4) CPI for any calendar year: For purposes of paragraph (3), the CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12‑month period ending on August 31 of such calendar year.
(5) Consumer Price Index: For purposes of paragraph (4), the term “Consumer Price Index” means the last Consumer Price Index for all‑urban consumers published by the Department of Labor. For purposes of the preceding sentence, the revision of the Consumer Price Index which is most consistent with the Consumer Price Index for calendar year 1986 shall be used.
 Should Respondent contend that these tables are ‘prescribed’ via revenue procedures, the Court should note that such procedures are simply not law, and have no weight or binding effect on the Court. Lee Engineering Supply v CIR, 101 TC 189 (1993) (note 3) (rev. proc. is not law, just commissioner’s opinion); Phillips Petroleum Co., v CIR, 101 TC 78 (1993) [note 17] (same as above; rev. proc. not entitled to any deference in the court); Compaq Computer Corp. v CIR, 113 TC 363, 372 (1999) (well established that rev. proc. is not law binding on the court, but merely a statement of the commissioner’s position; citing Xerox, Helvering, and Casanova Co. v Commissioner, 87 TC 214, 223 (1986)).