Too Good to be True Might Even Be Good Enough

My Exhibit A for this seemingly oxymoronic headline is Jeffrey S. and Mary F. Charlton, T.C. Memo. 2011-51, filed 3/1/11.  Jeffrey, a perpetual seeker of pots of gold at the ends of dubious rainbows, finally found his way to Aegis Co., marketer of tax-evasive business trusts (it was subsequently shut down, and its principals convicted of fraud). This Jeffrey achieved after voyaging through a Sargasso Sea of multi-level marketing schemes (reminiscent of my early days as an apprentice thief-catcher in our State’s Attorney General’s office),  get-rich-quick bookselling, and another phony tax dodge.

Jeffrey’s accountant Mr. Moore went with Jeffrey to meet with the Aegis promoters, and they came away converts to the legality of the Aegis offshore trust shellgame. As soon as IRS showed up at his door, Mr Moore of course rolled on Jeffrey, and, testifying for the IRS at trial, gave what Judge Foley (a jurist of superhuman patience) called “convincing testimony regarding the perceived legitimacy of the techniques and accuracy of the returns. His testimony relating to his advice to Jeffrey…, however, was inconsistent, incoherent, and at times incomprehensible.” T.C. Memo. 2011-51, at p. 11. Remind you of any tax advisers you know?

It was Mr. Moore who saved Jeffrey and Mary from deficiencies, interest, and the dreaded 75% fraud penalty. The three-year statute had run when IRS descended on the hapless Jeffrey, but frauds, like diamonds, are forever. So IRS asserted fraud, and trundled in the incoherent, incomprehensible Mr. Moore to prove it. With friendly witnesses like him, who needs adversaries?

Mr. Moore’s naïveté, coupled with his ineffable incomprehensibility, gave Jeffrey the wiggle room he needed. IRS has the burden of proof in a fraud case, and “clear and convincing” is there the standard, not just “tip the scales.” See Beaver v. Commissioner, 55 T.C. 85, 92 (1970).

Judge Foley said it best: “Simply put, respondent [IRS] has failed to meet his burden. See Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989) (providing that the existence of fraud may not be found under ‘circumstances which at the most create only suspicion.’).’’ T.C. Memo. 2011-51, at p. 11.

While Henry David Thoreau was right when he said, “Some circumstantial evidence is very strong, as when you find a trout in the milk,” even the best circumstantial evidence fails to win the day when you put an incoherent accountant on the stand.