T.C. Memo. 2006-157
UNITED STATES TAX COURT
JOHN M. AND THELMA SMOLL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14204-05, 14205-05. Filed July 31, 2006.
John M. and Thelma Smoll, pro sese.1
A. Gary Begun and Elizabeth Procter, for respondent.
1
David B. Carter, Jr. petitioned the Court on behalf of
petitioners but was permitted to withdraw on June 19, 2006, prior
to trial.
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MEMORANDUM OPINION2
LARO, Judge: These cases were consolidated for purposes of
trial, briefing, and opinion. In a notice of deficiency dated
April 28, 2005, respondent determined the following deficiencies
and additions to tax with respect to John M. Smoll’s
(petitioner’s) 1999, 2002, and 2003 Federal income taxes:
Additions to Tax
Year Tax Sec. 6651(f) Sec. 6654
1999 $30,620 $22,966 $1,482
2002 118,533 88,900 3,961
2003 85,312 63,984 2,233
In a second notice of deficiency dated April 28, 2005,
respondent determined the following deficiencies, additions to
tax, and penalties with respect to petitioners’ 2000 and 2001
Federal income taxes:
Addition to Tax Penalty
Year Tax Sec. 6651(a)(1) Sec. 6663
2000 $21,930 $5,482 $16,447
2001 24,890 6,222 18,667
Respondent filed a motion to dismiss this case for lack of
prosecution, and we are left to decide the propriety of
2
We found the facts of this case from matter that was
deemed stipulated under Rule 91(f) and from testimony that was
elicited at trial. For convenience, we have incorporated our
findings of fact with our opinion. Section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Dollar amounts are rounded. When their petitions were filed,
petitioners resided in Sturgis, Michigan.
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respondent’s determinations of the additions to tax and
penalties.3 We sustain those determinations in full.
I. Background
Petitioners were previously before the Court for taxable
years 1997 and 1998 in the cases of God’s Helping Hands Living
Estate Plan Trust, John M. & Thelma Smoll, Trustees v.
Commissioner, docket No. 8468-01, and John M. & Thelma Smoll,
Trustees v. Commissioner, docket No. 8489-01. Those cases were
resolved with a Closing Agreement on Final Determination Covering
Specific Matters (closing agreement). That litigation involved a
dispute between the parties as to whether God’s Helping Hands
Living Estate Plan Trust should be recognized for Federal income
tax purposes. God’s Helping Hands Living Estate Plan Trust had
been established by petitioners and purported to operate a
farming business, holding title to the Smoll family residence,
vehicles, and other personal assets, along with deducting the
personal living expenses of the taxpayers. The closing agreement
provided the following:
NOW IT IS HEREBY DETERMINED AND AGREED FOR FEDERAL
INCOME TAX PURPOSES THAT:
1. The God’s Helping Hands Living Estate Plan shall
be disregarded for federal income tax purposes;
2. The taxpayers agree that there was no substantial
change in the manner in which they transacted their
3
At trial, the Court informed the parties that it would
grant respondent’s motion with respect to the deficiencies in
Federal income tax.
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business and personal matters before and after the
formation of the trust.
3. The taxpayers agree that the trusts are alter egos
of themselves and that all assets held in the name of
the trust are the assets of the taxpayers.
4. The taxpayers agree that all income, expenses,
deductions and credits, as allowed under the
Internal Revenue Code, will be reported on the
individual returns of the taxpayers for taxable years
1997 and 1998 and for all subsequent years. [Emphasis
added.]
5. The taxpayers will be liable for any additional
taxes, civil penalties, and interests on those
individual returns, which may arise because of the non-
recognition of the trust arrangement.
Despite entering into the agreement, petitioners continued
to use the trust in 2000 and 2001 and failed to report the
income, expenses, deductions, and credits on their individual
returns for those years, which returns they filed after the time
permitted by law. Petitioner did not file a Federal income tax
return for 1999, 2002, and 2003. Petitioners underpaid their
income tax for 2000 and 2001. Petitioner underpaid his income
tax for 1999, 2002, and 2003.
Petitioners were uncooperative during the audit process, and
respondent had to engage in summons enforcement. On April 27,
2006, the Court, pursuant to Rule 91(f), granted respondent’s
motion to show cause why proposed facts should not be accepted as
established and made that order absolute after petitioners failed
to file a response as ordered.
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II. Discussion
1. Additions to Tax Under Section 6651(a)(1)
Section 6651(a)(1) imposes an addition to tax for failure to
file a return when due “unless it is shown that such failure is
due to reasonable cause and not due to willful neglect”. The
addition equals 5 percent for each month that the return is late,
not to exceed 25 percent in total. The Commissioner has the
burden of production with respect to the liability of an
individual for an addition to tax under section 6651(a)(1). Sec.
7491(c). The burden of showing reasonable cause under section
6651(a) remains on the taxpayer. Higbee v. Commissioner, 116
T.C. 438, 446-448 (2001). “Reasonable cause” requires
petitioners to demonstrate that they exercised ordinary business
care and prudence and nevertheless were unable to file their 2000
and 2001 Federal income tax returns by the due date. United
States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c),
Proced. & Admin. Regs. Willful neglect is defined as a
“conscious, intentional failure or reckless indifference.”
United States v. Boyle, supra at 245.
Petitioners stipulated they did not file tax returns for
2000 and 2001 within the time required by law. Respondent has
thus satisfied his burden of production with regard to the
section 6651(a)(1) addition to tax. See Higbee v. Commissioner,
supra. Petitioners have neither offered an explanation for their
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failure to file nor produced evidence to establish any reasonable
cause for their failure to file the returns. We sustain
respondent’s determination of the addition to tax under section
6651(a)(1).
2. Additions to Tax Under Section 6654
Respondent determined that petitioner underpaid his
estimated income tax and is liable for an addition to tax under
section 6654 for 1999, 2002, and 2003. Where payments of tax,
either through withholding or by making estimated tax payments,
do not equal the percentage of the total liability required under
the statute, imposition of an addition to tax under section 6654
is automatic, absent a showing that the taxpayer has met one of
the exceptions contained therein. See Recklitis v. Commissioner,
91 T.C. 874, 913 (1988). Because petitioner has not shown that
any of the exceptions apply, we sustain respondent’s
determination on this issue.
3. Additions to Tax and Penalty Under Sections 6651(f) and
6663
Section 6651(f) imposes an addition to tax of up to 75
percent of the amount required to be shown on the tax return when
the failure to file a Federal income tax return is due to fraud.
Section 6663 imposes a 75-percent penalty on the portion of any
underpayment due to fraud. Because these sections are construed
similarly as to a determination of a fraudulent intent, we
consolidate our discussion of respondent’s fraud determinations.
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See Clayton v. Commissioner, 102 T.C. 632, 653 (1994); see also
Temple v. Commissioner, T.C. Memo. 2000-337, affd. 62 Fed. Appx.
605 (6th Cir. 2003).
To establish fraud, the Commissioner must show by clear and
convincing evidence that there is an underpayment and that a
portion of the underpayment is attributable to fraud. See sec.
7454(a); Rule 142(b); Hagaman v. Commissioner, 958 F.2d 684, 696
(6th Cir. 1992), affg. and remanding T.C. Memo. 1990-655;
Petzoldt v. Commissioner, 92 T.C. 661, 669 (1989). If the
Commissioner establishes that any portion of an underpayment is
attributable to fraud, the entire underpayment shall be treated
as attributable to fraud, except to the extent the taxpayer
establishes otherwise. See sec. 6663(b); Hagaman v.
Commissioner, supra at 696; Marretta v. Commissioner, T.C. Memo.
2004-128, affd. 168 Fed. Appx. 528 (3d Cir. 2006).
The existence of fraud is a question of fact established by
consideration of the entire record. Petzoldt v. Commissioner,
supra at 699. Fraud is established through proof “that the
taxpayer intended to evade tax believed to be owing by conduct
intended to conceal, mislead, or otherwise prevent the collection
of such tax.” Recklitis v. Commissioner, supra at 909; see also
Hagaman v. Commissioner, supra at 696. Because direct proof of
fraud is seldom available, fraud may be proved by circumstantial
evidence and reasonable inferences from the facts. United States
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v. Walton, 909 F.2d 915 (6th Cir. 1990); Petzoldt v.
Commissioner, supra at 699. Courts have recognized numerous
indicia of fraud, including (1) a pattern of underreporting
income, (2) the maintenance of inadequate records, (3) the giving
of implausible or inconsistent explanations of behavior, and (4)
the establishment of a pattern of inaction and delay during
pretrial and trial proceedings. Spies v. United States, 317 U.S.
492, 499 (1943); Conti v. Commissioner, 39 F.3d 658, 663 (6th
Cir. 1994), affg. and remanding on other grounds T.C. Memo. 1992-
616. Although no single factor is necessarily sufficient to
establish fraud, the existence of several indicia constitutes
persuasive circumstantial evidence of fraud. Petzoldt v.
Commissioner, supra at 700.
At trial and by facts deemed stipulated, respondent
established by clear and convincing evidence that petitioners
understated their 2000 and 2001 Federal income tax with the
intent to commit fraud and that petitioner failed to file his
1999, 2002, and 2003 returns with the same intent.4 See secs.
6651(f), 6663(a); Petzoldt v. Commissioner, supra at 699.
Petitioners have a pattern of failing to file tax returns and
understating their income when they do file income tax returns.
Petitioners also failed to maintain adequate records or cooperate
4
We also note that the record establishes clearly and
convincingly that petitioner had an underpayment for 1999, 2002,
and 2003.
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with respondent, and they consistently provided respondent’s
representatives with implausible or inconsistent explanations for
their behavior. See Bradford v. Commissioner, 796 F.2d 303, 307
(9th Cir. 1986) (stating that the failure to report income,
maintain adequate records, and cooperate with the Commissioner
are “badges of fraud” from which fraudulent intent may be
inferred), affg. T.C. Memo. 1984-601. Petitioners conducted
transactions in cash during the years at issue and failed to
substantiate the sources of their cash; their failure to classify
their cash transactions and expenses in a manner consistent with
applicable law for the taxable years at issue was fraudulent with
the intent to evade tax. Accordingly, petitioner is liable for
the 6651(f) addition to tax, and petitioners are both liable for
the section 6663 penalty.
To reflect the foregoing,
An order of dismissal and decisions
will be entered for respondent.