Tax Court In Brief | Fairbank V. Comm'r | Reporting Obligations For Foreign Trust Income And Ownership; Statute Of Limitations

• Published date: 01 March 2023
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Income Tax
• Law Firm: Freeman Law
• Author: Freeman Law

The Tax Court in Brief - February 20th - February 24th, 2023

Freeman Law's "The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of February 20th, 2022, through February 24th, 2023

• Avery v. Comm'r, T.C. Memo. 2023-18| February 21, 2023 | Lauber, J. | Dkt. No. 23237-18L (Collection Due Process and a Lawyer's Race Car Business Expense Deductions)
• Moore v. Comm'r, T.C. Memo. 2023-20| February 23, 2023 |Colvin, J. | Dkt. No. 18632-19

Fairbank v. Comm'r, T.C. Memo. 2023-19| February 23, 2023 |Weiler, J. | Dkt. No. 13400-18

Summary: At its core, this 31-page opinion regards married U.S. citizen taxpayers, Leigh Fairbank (Leigh) and Barbara Fairbank (Barbara), challenge to deficiency notices issued for the tax years in issue (2003 through 2009 and 2011) on statute of limitations grounds. The substantive tax issues concern deficiencies for failing to report income Barbara enjoyed or controlled via foreign banking institutions during the tax years. The backstory is long, but in TCIB fashion, a truncated version is below.

In about 1985, Barbara's former husband (H1) was "jeopardy assessed" some $15 million in taxes, additions to tax, and interest arising from sham transactions and transfers among foreign banks. In 1990, Barbara received innocent spouse relief from her joint and several liability for H1's tax liability. In Barbara's divorce from H1'which proceeded from 1983 through about 2001'H1 and Barbara entered into oral agreements, and as part of those, H1'through Barbara's attorney in Switzerland'paid about $600,000 to a "Swiss establishment, Xavana Establishment," a foundation formed by Barbara's Swiss attorney in 1983 for Barbara's benefit. Xavana had one asset: a UBS bank account, which had a sole beneficiary, Barbara. All correspondence from UBS was sent to Barbara's Swiss attorney. In 2004, UBS was informed that Barbara remarried to Leigh Fairbank and resided in Florida. Elsewhere, in the British Virgin Islands, Xong Services, Inc. was incorporated in 2009 by Barbara's Swiss attorney. Barbara was the sole shareholder. The attorney opened a Swiss account for Xong at another Swiss bank, and Barbara was the beneficial owner of that account. The attorney instructed UBS to transfer $500,000 to another account in Dubai and the remaining balance to the new Swiss bank account, which, as of May 2009, had a balance of about $1 million. The banks were instructed to not send correspondence to Barbara in the U.S. From 2007 through 2009, numerous transfers, debits, travel cash cards, checks, and other transactions were made among the foreign accounts and ultimately for Barbara's benefit or receipt.

For their tax returns filed for years in issue (2003-2009, 2011), the Fairbanks checked "No" to the question about foreign bank accounts. And, the Fairbanks did not make an election under either section 1295 or 1296, file Form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, or file Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, with respect to Xavana Establishment. And, the Fairbanks answered "No" to the questions of whether they had an interest in a financial account in a foreign country.

In 2008, the IRS discovered Barbara's UBS account. In 2010, the Fairbanks' returns in issue were examined, and the IRS used information received in the investigation from 2010 through 2014 to make proposed adjustments. The Fairbanks filed Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, reporting Xong Services for tax year 2009 through 2010. And, the Fairbanks filed FBARs for one foreign account for tax years 2009 through 2011.

In a notice of deficiency dated April 12, 2018. The IRS determined income tax deficiencies for taxable years 2003, 2004, 2005, 2006, 2007, 2008, 2009, and 2011 (years at issue), totaling about $200,000 and accuracy-related penalties under section 66621 of about $43,000, in...