T.C. Memo. 2004-142
UNITED STATES TAX COURT
ROY J. CHASE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17313-02. Filed June 17, 2004.
Roy J. Chase, pro se.
Willie Fortenberry, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies, additions
to tax, and penalties with respect to petitioner’s Federal income
tax as follows:
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Additions to Tax, I.R.C., Sections
Year Deficiency 6654 6653(b)(1)(A) 6653(b)(1)(B) 6651(f)
1987 $14,635 $785.65 $10,976.25 * --
1988 11,655 749.70 8,741.25 * --
1989 6,096 412.26 -- -- $4,572.00
1991 10,309 589.18 -- -- 7,731.75
1992 30,987 1,351.52 -- -- 23,240.25
1993 38,523 1,614.10 -- -- 28,892.25
1994 18,572 963.71 -- -- 13,929.00
1995 12,458 675.47 -- -- 9,343.50
1996 26,862 1,429.74 -- -- 20,146.50
1997 4,033 215.76 -- -- 3,024.75
* 50 percent of the interest on the deficiency.
Respondent also determined additions to tax under section 6663
for 1987 and 1988 but has now conceded that those additions to
tax are not due. Unless otherwise indicated, all section
references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure. The issues for decision are
whether petitioner’s underpayment of taxes and failure to file
tax returns for the years in issue were due to fraud and whether
a penalty should be awarded under section 6673 by reason of
petitioner’s groundless and frivolous positions maintained in
this proceeding.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in New Smyrna Beach, Florida, at the time that
he filed his petition.
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Petitioner is a computer software engineer, specializing in
software development, testing, and quality assurance. From 1975
through 1980, petitioner was employed by various companies in the
computer field. He was employed as a test technician, field
representative, engineering technician, test department manager
and supervisor, and software engineer. He taught hardware and
software courses for employees and customers of two companies.
Petitioner filed Federal income tax returns as a single
individual for 1972 through 1975 and jointly with his wife for
1976, 1977, and 1979 through 1981. From 1987 through 1997,
petitioner failed to file Federal income tax returns.
Petitioner did not maintain bank accounts in his name during
the years in issue because he refused to provide his Social
Security number to banking institutions. From 1987 through 1997,
petitioner received compensation as an independent contractor in
the field of software development and quality assurance. The
checks that he received in payment for his services were cashed
at the payers’ banks or through bank accounts maintained by his
wife, his mother, or his sister-in-law.
Petitioner received gross receipts from his occupation as
follows:
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Year Gross Receipts
1987 $41,011
1988 36,141
1989 22,866
1991 36,939
1992 101,159
1993 125,591
1994 64,118
1995 44,257
1996 84,656
1997 17,772
In addition, petitioner received minor amounts of interest income
during these years.
During the years in issue, petitioner accumulated cars,
boats, and motorcycles. In 1996, petitioner and his wife
purchased a home in Florida. The deed was recorded in the name
of petitioner’s wife.
In 1991, the Internal Revenue Service (IRS) commenced an
investigation of petitioner’s Federal income tax liability for
1987 and 1988. In a response to an administrative summons,
petitioner and his wife wrote a letter to the IRS that asserted
the following arguments:
We must, first of all, inform you that we have no
tax liability for the years in question. We must,
secondly, inform you that we possess a number of rights
and that we claim all of our rights at all times.
A question of jurisdiction arises in your claim
against us for the liability of any income tax. We are
now, and were during the years in question, citizens of
the State of New Hampshire. We do not now, and did not
during the years in question, work or reside in any
territory which is, or was, under exclusive federal
jurisdiction. We are not now, and have never been,
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operating under any privelege [sic] or engaging in any
activity which generates revenue taxable income.
Any tax on our property, the fruits of our labor,
must fall within the context of the apportionment
clauses of the United States Constituion [sic].
Furthermore, whereas we possess other
constitutionally protected rights, you lack any
authority to require us to testify before you, to
deliver to you any of our property or to provide you
with any information.
We do not wish to voluntarily confer jurisdiction
over us.
In a letter dated January 1, 1992, petitioner and his wife
asserted the following:
We are writing to inform you that the meeting
arranged for us on January 3, 1992 is cancelled.
As stated in our previous letter to you, we have
no tax liability to the United States or the Internal
Revenue Service; perhaps you do not understand our
status. Furthermore, we have opened no accounts with
respect to Title 26.
We remind you that you lack any authority to
“summons” us or to “seize” any of our property (see
Hale v. Henkel).
We have not voluntarily assesed [sic] ourselves
(Flora v. U.S.) nor opened any accounts with you nor
entered into any contractual agreement with you or the
United States.
Our status is such that we are not subject to the
provisions of Title 26.
Please provide proof of any such voluntary
assesment [sic] or the existance [sic] of any
“accounts” or that you have any proper jurisdiction
over us before bothering us again.
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Petitioner continued to maintain similar arguments through
investigation of his liability for subsequent years, during a
criminal case brought against him, through trial of this
proceeding in February 2004, and in his posttrial brief. The
criminal case that was commenced against petitioner was dismissed
in 2001 when the presiding judge indicated that the matter should
be pursued civilly rather than criminally.
In 1998, petitioner and his wife incorporated a business as
Strategic Computer Solutions. The corporation had employees,
including petitioner and his wife, and issued Forms W-2, Wage and
Tax Statement, at the end of each year. Federal income taxes and
Social Security taxes on the employees, including petitioner and
his wife, were withheld, and the withheld taxes were paid to the
IRS. Petitioner and his wife filed joint returns and reported
their wages for 1998 and subsequent years.
OPINION
Petitioner has not raised any nonfrivolous arguments
concerning the amount of deficiencies determined in the statutory
notice. He has asserted various arguments concerning procedural
matters and failures of the Government to prepare returns on his
behalf and to assess promptly the amounts owing. He rejects the
Court’s explanation that assessment cannot occur until the
decision in this case is final. See sec. 6213(a). He
acknowledged during his testimony that he did not consult with
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any tax professionals on the legality of his position on taxes in
1987 through 1997. He cites numerous cases out of context, while
ignoring those authorities contrary to his position. He
summarizes his position as follows:
It is my understanding that I’ve never been made
liable for a tax. I don’t understand how one is made
liable for a tax, but I have never received an
assessment for any of the years in question. Up until
the notice of deficiency, I’ve never received any
indication that the Government is asking me to pay
money; that the IRS is asking me to pay money.
Petitioner ignores the evidence concerning multiple notices to
him that he had failed to file required returns and the
investigation of his liability for 1987 and 1988 that commenced
in 1991 and resulted in criminal prosecution. Petitioner claims
that he won the criminal case and therefore believes that he was
correct. He also claims that his beliefs were reinforced by the
length of time that it took the IRS to proceed against him
civilly. As is usual, however, civil proceedings awaited the
conclusion of the criminal matter. See, e.g., Badaracco v.
Commissioner, 464 U.S. 386, 399 (1984); Taylor v. Commissioner,
113 T.C. 206, 212 (1999), affd. 9 Fed. Appx. 700 (9th Cir. 2001).
The notices of deficiency followed promptly after dismissal of
the criminal case.
Petitioner’s arguments concerning liability are stale and
have been uniformly rejected. No further discussion of them is
warranted. See Lonsdale v. United States, 919 F.2d 1440 (10th
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Cir. 1990); United States v. Ward, 833 F.2d 1538, 1539 (11th Cir.
1987); Biermann v. Commissioner, 769 F.2d 707 (11th Cir. 1985);
Waters v. Commissioner, 764 F.2d 1389 (11th Cir. 1985); Crain v.
Commissioner, 737 F.2d 1417 (5th Cir. 1984); Knighten v.
Commissioner, 702 F.2d 59 (5th Cir. 1983); Lonsdale v.
Commissioner, 661 F.2d 71, 72 (5th Cir. 1981), affg. T.C. Memo.
1981-122; Reading v. Commissioner, 70 T.C. 730 (1978), affd. 614
F.2d 159 (8th Cir. 1980).
In the criminal context, the Government was required to
prove petitioner’s guilt beyond a reasonable doubt. In this
case, respondent must prove, by clear and convincing evidence,
that petitioner had an underpayment of tax for 1987 and 1988 due
to fraud (sec. 6653(b)) and that his failure to file tax returns
for the other years in issue was fraudulent (sec. 6651(f)). Sec.
7454(a); Rule 142(b). Similar standards for proving fraud apply
under either statute. See Clayton v. Commissioner, 102 T.C. 632,
653 (1994); Niedringhaus v. Commissioner, 99 T.C. 202, 211-213
(1992). Fraud may be proved by circumstantial evidence, and the
taxpayer’s entire course of conduct may establish the requisite
fraudulent intent. Rowlee v. Commissioner, 80 T.C. 1111, 1123
(1983). Circumstantial evidence of fraud includes “badges of
fraud” such as those present here: A longtime pattern of failure
to file returns, failure to report substantial amounts of income,
failure to cooperate with taxing authorities in determining the
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taxpayer’s correct liability, implausible or inconsistent
explanations of behavior, concealment of assets, and failure to
make estimated tax payments. See, e.g., Bradford v.
Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.
Memo. 1984-601; Powell v. Granquist, 252 F.2d 56, 60 (9th Cir.
1958); Grosshandler v. Commissioner, 75 T.C. 1, 20 (1980);
Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. without
published opinion 578 F.2d 1383 (8th Cir. 1978).
Petitioner stipulated to the payments received from 1988
through 1997. He admitted during his testimony that he received
funds for work performed during each of the years in issue.
Proof of gross receipts is sufficient to satisfy respondent’s
burden of showing an underpayment for 1987 and 1988 in the
absence of evidence of offsetting deductions. See, e.g.,
Greenwood v. Commissioner, T.C. Memo. 1990-362. Petitioner has
neither argued nor shown that he had any offsetting deductions
not allowed in respondent’s determination.
In defending the charge of fraud, petitioner attempts to
rely on his letters openly stating his position to the IRS.
Those letters, however, commenced only after his failure to
comply with his obligations had been discovered. They are not
persuasive evidence negating fraud. See Rowlee v. Commissioner,
supra at 1124.
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Respondent cites petitioner’s resumption of filing returns
for 1998 and later years, after the investigation of him had
commenced, as evidence that petitioner was well aware of his
Federal tax obligations. Petitioner argues that he filed returns
for 1998 and subsequent years because different laws apply to
corporations. It appears, however, that petitioner continued to
receive compensation for services that he personally performed
and reported that compensation on his tax returns for 1998 and
subsequent years. Notwithstanding his attempt to justify his
prior delinquencies, we believe that petitioner was knowledgeable
about his tax-paying responsibilities but “‘consciously decided
to unilaterally opt out of our system of taxation’” until the IRS
commenced its investigation of him. Niedringhaus v.
Commissioner, supra at 212-213 (quoting Miller v. Commissioner,
94 T.C. 316, 335 (1990)).
We are convinced that petitioner’s refusal to file tax
returns was willful and with knowledge that he was obligated to
file them and pay tax on his income. His sudden “discovery” of
his frivolous positions after many years of apparent compliance,
his failure to consult any professionals or authorities on the
subject, and his refusal to acknowledge his errors through the
time of trial of this case undermine his claims of good-faith
belief. Similar evidence has been held sufficient to support a
criminal conviction in other cases. See, e.g., United States v.
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Sloan, 939 F.2d 499 (7th Cir. 1991); United States v. Collins,
920 F.2d 619 (10th Cir. 1990); United States v. Ward, supra;
United States v. Schiff, 801 F.2d 108 (2d Cir. 1986); United
States v. Karlin, 785 F.2d 90 (3d Cir. 1986); United States v.
Bressler, 772 F.2d 287 (7th Cir. 1985); United States v. Romero,
640 F.2d 1014 (9th Cir. 1981); United States v. Buras, 633 F.2d
1356 (9th Cir. 1980).
When, as here, accompanied by evidence of intent to conceal
income and assets, the longtime pattern of failing to file tax
returns is sufficient to sustain the civil penalties. See, e.g.,
Niedringhaus v. Commissioner, supra at 212-213; Rowlee v.
Commissioner, supra; Marsh v. Commissioner, T.C. Memo. 2000-11,
affd. 23 Fed. Appx. 874 (9th Cir. 2002); Houser v. Commissioner,
T.C. Memo. 2000-111; Harrell v. Commissioner, T.C. Memo.
1998-207, affd. without published opinion 191 F.3d 456 (7th Cir.
1999); Dunham v. Commissioner, T.C. Memo. 1998-52. The penalties
for fraud in this case will be sustained.
As indicated above, our conclusion that petitioner’s
underpayment of taxes and failure to file returns was due to
fraud is based on the objective facts and rejection of his claims
of good faith. Our reasoning is supported in part by his refusal
to acknowledge that his positions are contrary to law, as he was
advised by the IRS, relevant authorities, and the Court in this
case. Petitioner persists in his frivolous and groundless
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arguments through his posttrial brief. Apparently petitioner
expects that, if he feigns sincere belief, he will avoid
penalties. Petitioner is obviously intelligent and articulate,
but he has persevered too long to have any credibility. Serious
sanctions are necessary to deter him and others similarly
situated. Under these circumstances, section 6673 provides in
relevant part:
SEC. 6673(a). Tax Court Proceedings.--
(1) Procedures instituted primarily for
delay, etc.--Whenever it appears to the Tax Court
that--
(A) proceedings before it have been
instituted or maintained by the taxpayer
primarily for delay,
(B) the taxpayer’s position in such
proceeding is frivolous or groundless, or
(C) the taxpayer unreasonably failed to
pursue available administrative remedies,
the Tax Court, in its decision, may require the
taxpayer to pay to the United States a penalty not
in excess of $25,000.
Petitioner was specifically warned by respondent and by the Court
of the likelihood of a penalty under section 6673 if he persisted
in his frivolous arguments, and he has persisted. He did so even
when the Court ordered briefs limited to the question of fraud.
See Granado v. Commissioner, 792 F.2d 91, 94 (7th Cir. 1986),
affg. T.C. Memo. 1985-237. A penalty will be awarded to the
United States in the amount of $20,000.
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To reflect the foregoing,
An appropriate order and
decision will be entered for
respondent.