T.C. Memo. 2006-250
UNITED STATES TAX COURT
WILLIAM R. TINNERMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 18725-04, 4975-05.1 Filed November 14, 2006.
William R. Tinnerman, pro se.
Lauren B. Epstein, for respondent.
MEMORANDUM OPINION
WELLS, Judge: Respondent determined the following
deficiencies in income tax, additions to tax, and penalties for
petitioner’s taxable years 1999, 2000, 2001, and 2002:
1
These cases were consolidated by order of the Court and are
hereafter referred to as the instant case.
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Year Deficiency 6651(a)(1) 6651(a)(2) 6651(f) 6654(a)
1999 $75,888 - $18,972 $55,018.80 $3,672.67
2
2000 69,302 - 51,976.50 3,701.75
3
2001 52,823 - 39,617.25 2,111
2002 44,220 $11,055 - - 1,477.71
The issues we must decide are: (1) Whether the record in the
instant case should be reopened to receive new evidence; (2)
whether petitioner has a zero basis in his S corporation stock;
(3) whether petitioner is liable for deficiencies in income tax
for taxable years 1999 through 2002; (4) whether petitioner is
liable for the fraud penalty pursuant to section 6651(f)4 for
taxable years 1999, 2000, and 2001; (5) whether petitioner is
liable for an addition to tax pursuant to section 6651(a)(1) for
failure to file his 2002 tax return; (6) whether petitioner is
liable for an addition to tax pursuant to section 6654(a) for
failure to make estimated payments for tax years 1999 through
2002; and (7) whether petitioner is liable for a penalty pursuant
to section 6673.
2
To be calculated.
3
To be calculated.
4
Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
years in issue.
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Background
Some of the facts and certain exhibits have been stipulated.
The parties’ stipulations of fact are incorporated herein by
reference and are found as facts in the instant case.
Petitioner resided in St. Augustine, Florida, at the time the
petitions were filed in the instant cases.
Petitioner graduated from the University of Colorado in 1972
with a business degree, majoring in finance and minoring in
economics. Petitioner is a licensed commercial real estate
broker and has commercial real estate management experience.
Petitioner failed to file federal income tax returns, make
estimated payments, or pay the tax due for his 1999 through 2002
taxable years. During that time, petitioner was the sole
shareholder and president of St. Augustine Self Storage, Inc.
(company), an S corporation incorporated in 1986. When
incorporated, the company had three shareholders, including
petitioner.
The company owns property located at 5 Willard Drive, St.
Augustine, Florida (property). On August 6, 1986, the company
executed a note in the amount of $1,225,000 (note) and, to secure
the note, a mortgage encumbering the property. Petitioner did
not provide any evidence that he is or has ever been personally
liable to pay the note.
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Petitioner has been the sole shareholder of the company
since 1991, and president and treasurer since approximately 1988.
Petitioner had significant pass-through income from the company
and received distributions from the company for all taxable years
in issue in the instant case.
Petitioner’s certified public accountant, Jon Mazer (Mr.
Mazer), has prepared all the corporate income tax returns for the
company, including those for 1999 through 2002. Prior to 1999,
Mr. Mazer also prepared individual income tax returns for
petitioner. Petitioner reviewed, signed, and filed all the Forms
1120S, U.S. Income Tax Return for a Subchapter S Corporation, for
the company for all taxable years in issue.
When petitioner filed the Forms 1120S for the company for
taxable years 1999 through 2002 he was aware of the net income
reported on those returns. Petitioner understood the tax effects
of having an S corporation and specifically was aware during the
taxable years in issue that the net profits from an S corporation
are passed through and taxable to its shareholders. Prior to the
1999 taxable year, petitioner reported the net income of the
company on his individual income tax returns.
Petitioner told Mr. Mazer not to prepare petitioner’s
individual income tax returns starting with the 1999 taxable
year. Petitioner, however, still had Mr. Mazer prepare the Forms
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1120S for the company for years 1999 and thereafter. Beginning
with petitioner’s 1999 taxable year, petitioner stopped filing
returns or making estimated tax payments.
Mr. Mazer did not advise petitioner that he was not required
to file individual income tax returns for taxable years 1999
through 2002. Mr. Mazer did not advise petitioner that his
income from the company for taxable years 1999 through 2002 was
not taxable.
On the Schedule K-1 attached to the Form 1120S for the
company for year 1999, petitioner inserted the following
statement (statement):
“The corporation has determined the net income shown on
the Schedule K-1 (Form 1120S) does NOT constitute
‘gross income’ as determined by rules set forth in the
Treasury Regulations at 26 CFR (4-1-99) Parts 1.61-1(a)
and (b) and 1.931-1(b)(1)-(4). Therefore, since there
is NO gross income, the net income shown on the K-1 is
NOT reportable on your 1040 as taxable income.”
Petitioner placed the statement on the Schedule K-1 after Mr.
Mazer had prepared the Form 1120S. Petitioner added other
statements similar to the statement to the Forms 1120S for the
company’s years 2000, 2001, and 2002.
Mr. Mazer did not advise petitioner that placing the
statement on the Schedules K-1 relieved him of the requirement to
file an individual income tax return. Petitioner did not consult
an attorney, accountant, or other tax professional about whether
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his income was taxable or whether he was required to file an
individual income tax return.
On May 4, 2000, petitioner personally prepared and filed
Forms 1040X, Amended U.S. Individual Income Tax Return, for the
1996, 1997, and 1998 taxable years reporting zero income and
claiming refunds. In addition to the amended individual income
tax returns that petitioner filed, petitioner also sent letters
to his payors on April 14, 2000, stating that they had
erroneously reported income to the Internal Revenue Service (IRS)
and directing that they file corrected information returns with
the IRS reflecting that he had no gross income.
Petitioner also filed Forms 4852, Substitute for Form W-2,
Wage and Tax Statement, or Form 1099R, Distributions from
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA’s,
Insurance Contracts, Etc., with the amended individual income tax
returns he filed on May 4, 2000. On those Forms 4852 petitioner
reported that he had zero income from each payor for the 1996,
1997, and 1998 taxable years.
On May 19, 2000, the IRS sent petitioner a letter informing
him that the amended individual income tax returns he filed for
the 1996, 1997, and 1998 taxable years were determined to be
frivolous documents, that the positions taken on the amended
income tax returns were frivolous, and that his refund claims
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were denied. On June 22, 2000, petitioner responded by sending
the IRS a letter making frivolous arguments. Petitioner’s
frivolous arguments included, among others, that he derived none
of his income from sources outside the United States and
therefore his income was not taxable under section 861 and
various associated regulations. On August 11, 2000, the IRS sent
petitioner notice that his refund claims for the 1996, 1997, and
1998 taxable years were disallowed, informed him that the Tax
Court and other Federal courts have repeatedly rejected his
position, and again informed him that a penalty of $500 may be
assessed under section 6702. On September 4, 2000, the IRS
assessed the Frivolous Return Penalty under section 6702 against
petitioner for his 1996, 1997, and 1998 taxable years.
During 1999, petitioner purchased a package of documents for
$9,000 from John P. Ellis (Mr. Ellis) and Jeff Pollard (Mr.
Pollard). Petitioner used the package of documents to establish
a sham trust under the name of Bay Point Enterprises (Bay Point).
When petitioner purchased the package, petitioner knew that
Messrs. Ellis and Pollard were being investigated by a grand jury
for promoting the sham trusts.
Petitioner transferred to Bay Point his limited partnership
interest in Winthrop Venture Capital that he had acquired in 1997
for $100,000. Petitioner directed Winthrop Venture Capital to
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pay significant dividends to Bay Point, which petitioner used to
open a bank account in Bay Point’s name.
Petitioner appointed Mr. Ellis as the sole “trustee” of Bay
Point. Mr. Ellis was incarcerated for contempt approximately 1
month after petitioner purchased the Bay Point “trust” and Mr.
Ellis was indicted shortly afterwards. Petitioner was the only
person with control over the assets of Bay Point. Petitioner was
the only person with signature authority over Bay Point’s bank
account, and petitioner managed all of Bay Point’s property.
In 2002, Mr. Ellis was sentenced to serve 10 and a half
years in prison for marketing sham trusts. Petitioner
nonetheless continued to use Bay Point. Bay Point has never
filed an income tax return and has never paid any taxes.
Petitioner repeatedly told IRS agents that he had no taxable
income or gross income and was not required to file income tax
returns for his 1999 through 2002 taxable years. Throughout the
examination of petitioner’s 1999 through 2002 taxable years,
petitioner sent multiple documents to the IRS containing
frivolous arguments.
On August 14, 2003, the IRS’s revenue agent informed
petitioner of the IRS’s authority to enforce income tax laws and
examine books and records, provided petitioner with a document
titled “The Truth about Frivolous Tax Arguments,” and provided
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petitioner with another opportunity to provide requested books
and records. The document titled “The Truth about Frivolous Tax
Arguments” provided petitioner with specific legal citations
showing why such frivolous tax arguments have been rejected.
Petitioner failed to comply with reasonable requests of the
IRS to provide books and records. Petitioner continued taking a
frivolous position throughout his IRS appeals proceedings.
Discussion
Before we address the substantive issues in the instant
case, we must decide whether the record should be reopened to
receive new evidence. After briefs were due in the instant case,
petitioner filed a motion requesting a reopening of the record
for the introduction of new evidence to support his indebtedness
and subsequent contribution of the note proceeds to the capital
of the company.
Reopening the record for the submission of additional
evidence lies within the discretion of the Court. Zenith Radio
Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331 (1971). A
court will not grant a motion to reopen the record unless, among
other requirements, the evidence is material to the issues
involved and probably would change the outcome of the case. See
Coleman v. Commissioner, T.C. Memo. 1989-248, affd. without
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published opinion 991 F.2d 795 (6th Cir. 1993)(citing Edgar v.
Finley, 312 F.2d 533 (8th Cir. 1963)).
Despite repeated requests for documents by respondent before
and at the trial of the instant case, petitioner failed to
substantiate his contention that he had basis in the company’s
stock through the contribution of cash he obtained from a
refinancing of the note.5 Indeed, petitioner refused to address
that issue, preferring to rely on frivolous arguments.
We deny petitioner’s motion to reopen the record because,
among other reasons, it is prejudicial to respondent, but note
that, even if we were to admit the documents petitioner wishes to
submit, the documents fail to support petitioner’s contention
that he is personally liable on a refinancing of the note, that
the company was relieved of its debt pursuant to the note, and
that he actually contributed the proceeds of the refinancing of
the note to the capital of the company.
We do not address with somber reasoning and copious
citations of precedent petitioner’s arguments that he is not
required to file tax returns or pay income tax, as to do so might
suggest that petitioner’s arguments possess some degree of
colorable merit. See Crain v. Commissioner, 737 F.2d 1417, 1417
5
Petitioner claims he has basis in his stock of the company
sufficient to offset capital gains distributions he received from
the company.
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(5th Cir. 1984). Accordingly, we hold that petitioner is liable
for the amounts of the deficiencies in his income tax set forth
in the notices of deficiency for the 1999 through 2002 taxable
years.
We address next whether petitioner is liable for the fraud
penalty pursuant to section 6651(f). In deciding whether a
failure to file is fraudulent under section 6651(f), we consider
the same elements that are considered in imposing the addition to
tax for fraud under former section 6653(b) and present section
6663. Clayton v. Commissioner, 102 T.C. 632, 653 (1994). Fraud
is defined as an intentional wrongdoing designed to evade tax
believed to be owing. Powell v. Granquist, 252 F.2d 56 (9th Cir.
1958); Miller v. Commissioner, 94 T.C. 316, 332 (1990). The
Commissioner bears the burden of demonstrating fraud by clear and
convincing evidence. Sec. 7454(a); Rule 142(b). The existence
of fraud is a question of fact to be resolved upon consideration
of the entire record. Korecky v. Commissioner, 781 F.2d 1566,
1568 (11th Cir. 1986), affg. per curiam T.C. Memo. 1985-63;
Estate of Pittard v. Commissioner, 69 T.C. 391 (1977). To carry
the burden of proof on the issue of fraud, the Commissioner must
show, for each year in issue, that (1) an underpayment of tax
exists and (2) some portion of the underpayment is due to fraud.
Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989).
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With respect to the first prong of the test, the
Commissioner need not prove the precise amount of the
underpayment resulting from fraud, but only that some part of the
underpayment of tax for each year in issue is attributable to
fraud. Lee v. United States, 466 F.2d 11, 16-17 (5th Cir. 1972);
Plunkett v. Commissioner, 465 F.2d 299, 303 (7th Cir. 1972),
affg. T.C. Memo. 1970-274. The Commissioner may not, however,
simply rely upon the taxpayer’s failure to show error in the
determinations of the deficiencies. DiLeo v. Commissioner, 96
T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Petzoldt
v. Commissioner, supra at 700.
The Commissioner must show that the taxpayer intended to
evade taxes known or believed to be owing by conduct intended to
conceal, mislead, or otherwise prevent the collection of taxes.
Korecky v. Commissioner, supra at 1568; Rowlee v. Commissioner,
80 T.C. 1111, 1123 (1983). Fraud is not to be imputed or
presumed, but rather must be established by some independent
evidence of fraudulent intent. Beaver v. Commissioner, 55 T.C.
85, 92 (1970); Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).
However, fraud need not be established by direct evidence, which
is rarely available, but may be proved by surveying the
taxpayer’s entire course of conduct and drawing reasonable
inferences therefrom. Spies v. United States, 317 U.S. 492, 499
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(1943); Korecky v. Commissioner, supra at 1568; Rowlee v.
Commissioner, supra at 1123. Although fraud may not be found
under "circumstances which at the most create only suspicion",
Petzoldt v. Commissioner, supra at 700, the intent to defraud may
be inferred from any conduct the likely effect of which would be
to conceal, mislead, or otherwise prevent the collection of taxes
believed to be owing, Spies v. United States, supra at 499.
Courts have relied on a number of indicia or badges of fraud
in deciding whether to sustain the Commissioner’s determinations
with respect to the additions to tax for fraud. Although no
single factor may be necessarily sufficient to establish fraud,
the existence of several indicia may be persuasive circumstantial
evidence of fraud. Solomon v. Commissioner, 732 F.2d 1459, 1461
(6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603; Beaver v.
Commissioner, supra at 93.
Circumstantial evidence that may give rise to a finding of
fraudulent intent includes: Understatement of income; inadequate
records; failure to file tax returns; concealment of assets;
failure to cooperate with tax authorities; filing false Forms W-
4; failure to make estimated tax payments; and engaging in
illegal activity. Bradford v. Commissioner, 796 F.2d 303, 307
(9th Cir. 1986), affg. T.C. Memo. 1984-601. The "badges of
fraud" are nonexclusive. Miller v. Commissioner, supra at 334.
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The taxpayer's background and the context of the events in
question may be considered as circumstantial evidence of fraud.
Spies v. United States, supra at 497; Plunkett v. Commissioner,
supra at 303.
The instant case involves numerous badges of fraud.
Petitioner is an intelligent and well-educated businessman, who
prior to 1999 complied with applicable tax laws. Petitioner
failed to file tax returns or make tax payments in taxable years
1999 through 2002. Petitioner attempted to conceal assets and
income in a sham trust. Petitioner failed to cooperate with
reasonable requests for documents. We conclude that the record
shows by clear and convincing evidence that petitioner
understated his income and that there are sufficient badges of
fraud to show that petitioner fraudulently intended to understate
his income. We therefore hold that petitioner is liable for the
fraud penalty pursuant to section 6651(f) for taxable years 1999,
2000, and 2001.
Pursuant to section 7491(c), respondent bears the burden of
production with respect to the additions to tax under sections
6651(a)(1), 6651(a)(2), and 6654. Consequently, respondent must
produce sufficient evidence to demonstrate that the addition to
tax is appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446
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(2001). Once respondent meets his burden of production,
petitioner must produce sufficient evidence to persuade the Court
that respondent’s determination is incorrect. Id. at 447.
Section 6651(a)(1) imposes an addition to tax for failure to
file an income tax return. A taxpayer may be relieved of the
addition, however, if he can demonstrate that the “failure is due
to reasonable cause and not due to willful neglect”. Id.
Willful neglect means conscious intentional failure or reckless
indifference. United States v. Boyle, 469 U.S. 241, 245 (1985).
Proced. & Admin. Reg. section 301.6651-1(c)(1) states that if a
taxpayer exercises ordinary business care and prudence and is
nevertheless unable to file on time, then the delay is due to
reasonable cause.
Respondent has carried his burden of production, showing
that petitioner failed to file a return for taxable year 2002.
Petitioner has failed to demonstrate reasonable cause for his
failure to file a return and failure to pay the tax due, citing
only frivolous, protester arguments. See Yoder v. Commissioner,
T.C. Memo. 1990-116 (holding misguided interpretations of the
Constitution are not reasonable cause). The addition to tax
under section 6651(a)(1) for taxable year 2002 is accordingly
sustained.
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Section 6651(a)(2) provides for an addition to tax in
instances where there is a failure to pay the amount of tax shown
on a return, and it applies only when an amount of tax is shown
on a return. Cabirac v. Commissioner, 120 T.C. 163, 170 (2003).
Petitioner did not file a return or pay taxes for any of the
years 1999 through 2002, and respondent prepared substitute
returns pursuant to section 6020(b). Under section 6651(g)(2), a
return prepared by the Secretary under section 6020(b) is treated
as the return filed by the taxpayer for purposes of determining
an addition to tax under section 6651(a)(2). Cabirac v.
Commissioner, supra at 170. We hold that petitioner is liable
for the additions to tax under section 6651(a)(2) for taxable
years 1999 through 2002.
Section 6654(a) imposes an addition to tax for failure to
pay estimated income tax. Section 6654 applies where prepayments
of tax, either through withholdings or by making estimated
quarterly payments, do not equal the percentage of total
liability required under the statute,6 unless one of the several
exceptions under section 6654(e) applies. Niedringhaus
6
Sec. 6654(d) requires quarterly installment payments of 25
percent of the required annual payment. Sec. 6654(d)(1)(A). The
required annual payment is the lesser of 90 percent of the tax
due for the year in issue or 100 percent of the tax shown on the
return in the preceding year. Sec. 6654(d)(1)(B).
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v. Commissioner, 99 T.C. 202, 222 (1992). Petitioner reported a
tax liability in 1998 of $9,258 and owed tax in each of years in
issue, yet failed to make any estimated payments. We therefore
hold that petitioner is liable for the addition to tax under
section 6654 for taxable years 1999 through 2002.
Section 6673(a)(1) provides that this Court may require the
taxpayer to pay a penalty not in excess of $25,000 whenever it
appears to this Court: (a) The proceedings were instituted or
maintained by the taxpayer primarily for delay; (b) the
taxpayer’s position is frivolous or groundless; or (c) the
taxpayer unreasonably failed to pursue available administrative
remedies. Respondent has moved that the Court impose a penalty
in the instant case. The record indicates that petitioner was
warned that this Court could impose a penalty if he persisted in
raising frivolous tax protester arguments. Despite being warned,
petitioner raised frivolous arguments throughout the Appeals
process, in his petition to this Court, and in his briefs.
Accordingly, we shall impose a $10,000 penalty on petitioner
pursuant to section 6673.
To reflect the foregoing,
An appropriate order and
decision will be entered.