1
T.C. Memo. 2024-24
JAMES ELBERT ALDRIDGE, JR. AND SHIRLEY LORRAINE ALDRIDGE, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
No. 13742-10
United States Tax Court
February 21, 2024
James Elbert Aldridge, Jr., and Shirley Lorraine Aldridge, pro sese.
Randall L. Eager, Christina L. Holland, and Shaina E. Boatright, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, JUDGE:
By notice of deficiency dated March 31, 2010, respondent determined deficiencies in petitioners' federal income tax and fraud penalties pursuant to section 6663[1] as follows:
-
-
Year
Deficiency
§ 6663 Penalty
1999
$72,896
$54,672.00
2000
92,891
69,668.25
-
-
-
2001
177,319
132,989.25
2002
190,472
142,854.00
2003
62,277
46,707.75
2004
50,547
37,910.25
-
The issues for decision are as follows:
1. Whether petitioners failed to report net business income dividend income, and interest income for tax years 1999 through 2004 in the following amounts
-
1999
2000
2001
2002
2003
2004
Net business income
$185,430
$121,207
$459,898
$502,412
$194,351
$153,593
Dividend income
30
46
62
200
200
200
Interest income
465
13,610
2,479
1,055
757
988
3. Whether petitioners are entitled to deductions for taxes paid and mortgage interest claimed on Schedule A, Itemized Deductions, attached to their 1999 tax return;
4. Whether petitioners are liable for civil fraud penalties pursuant to section 6663(a) for tax years 1999 through 2004;5. Whether the period of limitations on assessment remains open pursuant to section 6501(c)(1) with respect to petitioners' tax years 1999 through 2004.
Petitioners bear the burden of proof, see Rule 142(a), except that, with respect to the issue of fraud with intent to evade tax, the burden is on respondent, who must carry it by clear and convincing evidence, see § 7454(a); Rule 142(b).
FINDINGS OF FACT
Petitioners, James Aldridge and Shirley Aldridge, were married at all times during the years at issue and filed joint tax returns for 1999 through 2004.[2] At the time they filed the Petition, petitioners were incarcerated. Mr. Aldridge resided at the Englewood Federal Correctional Institution in Colorado, and Ms. Aldridge resided at the Carswell Federal Medical Center in Texas. Before and following their incarceration, petitioners resided in Missouri.[3]
I. Criminal Conviction
On June 27, 2006, following a lengthy criminal investigation by special agents within the Internal Revenue Service (IRS) Criminal Division,[4] a grand jury approved a five-count indictment against petitioners for filing false tax returns in violation of section 7206(1) and aiding and abetting the filing of false tax returns in violation of 18 U.S.C. § 2 for tax years 2000 through 2004.
On May 4, 2007, following a two-week trial, a jury found petitioners guilty on all five counts charged in the indictment. Mr. Aldridge served nine years in prison, and Ms. Aldridge served five years and three months in prison.
II. Petitioners' Background
Mr. Aldridge graduated from high school in 1975, after which he attended the University of Kansas, where he studied architectural engineering and received a certificate in structural drafting.
Beginning in 1979 Mr. Aldridge worked a series of sales jobs until joining Concept Marketing International (CMI) in 1989. Mr. Aldridge
obtained a real estate agent's license in 1980 and formed a real estate company called Lorbert & Co. Real Estate Investment and Management (Lorbert). Lorbert focused on buying and selling owner-financed homes and remained in operation through the 2000s.
Ms. Aldridge holds a bachelor's degree in engineering from the University of Kansas. From 1979 until 1999 she was employed by the Southwestern Bell Corp., where she held various positions in engineering, project design, and management. Ms. Aldridge left Southwestern Bell in 1999. In 2000, after leaving Southwestern Bell, Ms. Aldridge took a distribution of $97,921 from her Southwestern Bell pension benefit fund and deposited those funds into a money market account titled in the name of the Liberty Commerce Group Trust.
III. CMI
CMI was a corporation whose sole shareholders were Greg Rogers and Sherry Parrott. In 1989 Mr. Rogers recruited Mr. Aldridge to serve as head of sales, marketing, and training for CMI. CMI was a multilevel marketing structure that sold American Silver Eagle coins; its sales representatives would earn commissions not only on the sale of the coins, but also on recruitment of their customers to sell the coins. Mr. Aldridge, as sales manager, not only trained other sales representatives but also made presentations at seminars, focusing on investing in American Silver Eagle coins through CMI.
CMI's business grew rapidly during those years. In its first year CMI's sales were minimal. In its second year its sales revenue increased to over $600,000, and by its third year its sales revenue exceeded $1.2 million.
IV. Reorganization of CMI and Creation of the Aldridge Family Trust System
A. National Trust Services Seminar
In 1992 petitioners attended a two-day seminar held by National Trust Services following customer suggestions that they might reorganize CMI as a trust. Petitioners convinced Mr. Rogers that reorganizing as a trust would benefit CMI, and Mr. Rogers agreed to provide the $9,500 tuition for the workshop. National Trust Services instructed attendees on how to devise a family trust system that would purportedly allow them to control the amount of tax they would pay and convert their living expenses to business expenses. The workshop
instructors walked petitioners through the preparation of documents to set up the trusts, and by the end of the workshop, petitioners had executed documents purporting to create trusts, transferring their property to the trusts, and applying for employer identification numbers.[5]
B. The Aldridge Family Trust System
Following the National Trust Services workshop, petitioners began to place all of their business and personal assets in a tiered trust arrangement (collectively, Aldridge Family Trust System). The trust system was established using several steps:
1. On March 25, 1993, Ms. Aldridge executed a bill of sale and quitclaim deed by which she conveyed to Mr. Aldridge all of her interests in all real and personal property, including all clothing, furniture, household items, personal effects, and her interest in their home, in exchange for $10 and other consideration.
2. Also on March 25, 1993, Mr. Aldridge, as grantor, executed a declaration of trust prepared by National Trust Services entitled "The Aldridge Family Trust". In the declaration of trust, Mr. Aldridge promised to convey to the trust all of his "rights, title, and interest" in all of his real and personal property, including "[t]he exclusive use of His [sic] lifetime services, including ALL of His [sic] earned remuneration accruing therefrom, from ANY current source whatsoever . . . ." In exchange, Mr. Aldridge received all 100 beneficial units in the Aldridge Family Trust. The declaration of trust was signed by Ms. Aldridge and a representative from National Trust Services, as trustees.
3. Between March 26 and April 17, 1993, Mr. Aldridge executed a bill of sale and quitclaim deeds which recited that he conveyed all of his interest in real and personal property to the Aldridge Family Trust in exchange for $10 and other consideration.
4. On March 25, 1993, petitioners executed a declaration of trust establishing the Concept Marketing International Trust (CMI Trust).
5. At some time between March 26 and April 3, 1993, Mr. Rogers contributed his ownership interest in CMI to the CMI Trust in exchange for 100 beneficial units of the CMI Trust.
6. Mr. Rogers conveyed 50 beneficial units of the CMI Trust to the Aldridge Family Trust.
At or around the same time, petitioners executed documents to establish two other trusts. Petitioners formed the Lorbert &Co. Trust (Lorbert Trust), to which Mr. Aldridge executed quitclaim deeds purporting to convey their personal residence and all of their rental properties from the Aldridge Family Trust. Mr. Aldridge served as trustee of the Lorbert Trust.
Petitioners also formed the Excalibur Trust and executed documents purporting to convey title to their personal vehicles to the trust. Petitioners named themselves trustees of Excalibur Trust and entered into lease agreements with the Aldridge Family Trust for the use of the vehicles under "terms to be determined." No rent or other payment was ever made for the use of the vehicles.
V. Liberty Commerce Group Trust
A. Formation
Around 1994 or 1995 Mr. Aldridge became a trust counselor for National Trust Services and Trust Educational Services, another entity promoting family trust schemes similar to those offered by National Trust Services. Mr. Aldridge worked as an independent contractor, and he formed a new trust, Liberty Commerce Group Trust, out of which he operated his trust counselor business. Mr. and Ms. Aldridge were trustees of Liberty Commerce Group Trust, and its sole beneficiary was the Aldridge Family Trust.
Around this time, petitioners also created Alliance Financial Trust as a vehicle for numismatic investment. Petitioners were the trustees of Alliance Financial Trust, and all of its income or loss flowed to Liberty...
