Simmons v. Comm'r

T.C. Memo. 2009-283

UNITED STATES TAX COURT

DAVID L. SIMMONS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9527-07. Filed December 9, 2009.

David L. Simmons, pro se.

Joel D. McMahan, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WELLS, Judge: Respondent determined the following

deficiencies in petitioner’s Federal income taxes and additions

to tax for the following taxable years:
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Additions to Tax Under I.R.C.
Year Deficiency Sec. 6651(a)(2) Sec. 6651(f) Sec. 6654

1996 $76,222 $19,056 $55,261 $4,057
1997 100,079 25,020 72,558 5,355
1998 20,255 5,064 14,685 927
1999 79,131 19,783 57,370 3,830
2000 33,420 8,355 24,230 1,786

We must decide the following issues: (1) Whether petitioner’s

gross income must be increased by $200,680, $258,135, $61,527,

$207,697, and $95,513 for taxable years 1996, 1997, 1998, 1999,

and 2000, respectively; (2) whether petitioner’s gross income

must be increased by interest and dividend income of $86, $50,

$187, and $119 for taxable years 1996, 1997, 1998, and 1999,

respectively; (3) whether petitioner is liable for the fraudulent

failure to file additions to tax pursuant to section 6651(f)1 for

taxable years 1996 through 2000, or in the alternative, whether

petitioner is liable for failure to file additions to tax

pursuant to section 6651(a)(1) for taxable years 1996 through

2000; (4) whether petitioner is liable for the failure to pay

additions to tax pursuant to section 6651(a)(2) for taxable years

1996 through 2000; (5) whether petitioner is liable for the

failure to pay estimated tax additions to tax pursuant to section

6654 for taxable years 1996 through 2000.

1
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, as amended, for the
years in issue. Amounts are rounded to the nearest dollar.
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FINDINGS OF FACT

None of the facts have been stipulated, because petitioner

refused to agree to any stipulations. Petitioner resided in

Florida at the time the petition was filed.

Petitioner lived in Florida from 1996 until 1999.

Petitioner moved to Tennessee in the fall of 1999 and lived there

until the summer of 2005 when he moved back to Florida.

Petitioner is a licensed financial adviser who sells life

insurance, health insurance, annuities, and other personal lines

of insurance, including property and casualty, homeowners, and

automobile insurance. Petitioner’s licenses include certified

asset protection consultant, certified estate adviser, life

insurance agent, mortgage broker, Series 6, Series 63, and Series

26. To obtain Series 6 and Series 63 licenses, petitioner was

required to study the income tax consequences of individual

investment activities, including the taxation of mutual funds,

variable annuity products, variable life insurance products,

retirement plans, and deferred compensation plans.

Beginning with his 1991 taxable year petitioner stopped

filing Forms 1040, U.S. Individual Income Tax Return.

Petitioner failed to file Federal income tax returns for his

taxable years 1996 through 2000.

During the early 1990s, petitioner became involved with

Joseph Sweet and David Swanson in the sale and promotion of
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unincorporated business trust organizations (UBTOs). Petitioner

continued to sell UBTOs after Joseph Sweet and David Swanson had

been enjoined from promoting UBTOs. United States v. Swanson,

No. 8:04-cv-00339-EAK-TGW (M.D. Fla. Nov. 15, 2006) (final

judgment and permanent injunction); United States v. Sweet, 89

AFTR 2d 2002-2189 (M.D. Fla. 2002). Petitioner used UBTOs to

hide his own income after his client, Edward Tonitis, was found

liable for fraudulent failure to file additions to tax because of

his use of UBTOs. Tonitis v. Commissioner, T.C. Memo. 2004-60.

Petitioner did not maintain a personal bank account but

would deposit his personal income into a bank account opened in

the name of one of the UBTOs, asserting that the use of a UBTO

was a way to shelter earnings from income taxation. The UBTOs

that petitioner used never filed tax returns.

Petitioner repeatedly denied to the Internal Revenue Service

(IRS) that he was liable for any tax for the years in issue. In

correspondence he sent to the IRS petitioner offered a variety of

frivolous tax-protester type arguments claiming that he was not

liable for Federal income tax, that he did not have the

obligation to file a tax return, and that he was not a citizen of

Florida even while he lived in that State.

Petitioner also engaged in other methods to conceal his

income and avoid contact with the IRS. On IRS forms petitioner

used a fraudulent Social Security number, driver’s license
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number, and tax identification number. Petitioner used a general

delivery address and mail drop boxes to conceal his residential

location from the IRS. In an effort to hide assets, petitioner

transferred funds between his domestic UBTO accounts and an

offshore bank account in the Principality of Andorra.

Petitioner gave sales presentations on UBTOs to potential

clients of his insurance business and to other individuals,

urging them to form UBTOs. Petitioner instructed each such

individual to notify employers not to issue the individual a Form

W-2, Wage and Tax Statement, or pay the individual in the

individual’s name but rather to pay the individual in the name of

the UBTO, in order to escape taxation. Petitioner was

reprimanded by the State Bar of Florida during 1998 for the

unlicensed practice of law in connection with the sale of UBTOs.

Petitioner failed to maintain or to submit to the IRS for

examination books and records of his business dealings for each

of the years in issue. When the IRS requested that information,

petitioner responded that he was not under any obligation to

maintain records or to provide them to the IRS.

To reconstruct petitioner’s income for the years in issue,

the IRS subpoenaed petitioner’s bank records. Using the

subpoenaed information, the IRS prepared summaries of

petitioner’s bank accounts and used the information to prepare

section 6020(b) substitute returns for petitioner’s taxable years
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1996 through 2000. Petitioner deposited to his bank accounts

$200,680 during 1996, $258,135 during 1997, $61,527 during 1998,

$207,697 during 1999, and $95,513 during 2000. Petitioner earned

interest and dividend income of $86 for 1996, $50 for 1997, $187

for 1998 and $119 for 1999.

Throughout the instant proceedings, petitioner made

frivolous arguments such as “citizens working in the private

sector do not owe income tax”, “IRS employees lack the authority

to issue a notice of deficiency”, and “the United States

Constitution was erroneously amended to allow for an income tax.”

OPINION

Generally, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer has the burden of proving

it incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). The Court of Appeals for the Eleventh Circuit, to which

an appeal in this case would lie, requires the Commissioner to

introduce some minimal evidence linking the taxpayer to the

alleged income-producing activity before the presumption

attaches. Blohm v. Commissioner, 994 F.2d 1542, 1549 (11th Cir.

1993), affg. T.C. Memo. 1991-636.

We conclude that respondent has sufficiently linked

petitioner to an income-producing activity. Petitioner testified

that, during the years in issue, he sold insurance products to

clients. Additionally, one of petitioner’s clients testified
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that petitioner sold her a UBTO and advised her to use the UBTO

to avoid paying income tax on her personal income. Furthermore,

respondent’s revenue agent testified that she reconstructed

petitioner’s income using petitioner’s bank records.2 Therefore,

petitioner has the burden of proving that respondent’s deficiency

determination was incorrect.3 Blohm v. Commissioner, supra.

Petitioner has failed to provide credible evidence that

respondent’s deficiency determinations are incorrect. Petitioner

has presented only frivolous arguments. We conclude that the

UBTOs were sham trusts designed to obfuscate petitioner’s

obligation to pay taxes and to frustrate the collection of his

tax liabilities by the IRS. Petitioner’s contentions are tax-

protester arguments that are without merit and so trivial that

they do not warrant discussion. See Crain v. Commissioner, 737

F.2d 1417, 1417 (5th Cir. 1984) (“We perceive no need to refute

these arguments with somber reasoning and copious citation of

precedent; to do so might suggest that these arguments have some

colorable merit.”). Accordingly, we hold that petitioner has not

met his burden of proof with respect to respondent’s deficiency

2
Petitioner also admitted to earning income for the years in
issue in his written responses to respondent’s requests for
admission.
3
Petitioner does not contend that sec. 7491(a) should apply
to shift the burden of proof to respondent, nor did he establish
that it should apply to the instant case.
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determinations. Consequently, we sustain respondent’s deficiency

determinations for the taxable years in issue.

We next turn to whether petitioner is liable for fraud

additions to tax pursuant to sections 6651(f) for the years in

issue.4 Section 6651(f) provides for an addition to tax of 15

percent of the amount of tax required to be shown for each month

the return is late up to 75 percent in the aggregate if the

failure to file is due to fraud. In ascertaining whether

petitioner’s failure to file was fraudulent pursuant to section

6651(f), the Court considers the same elements that are

considered in imposing the fraud penalty under section 6663 and

the additions to tax pursuant to former section 6653(b). Clayton

v. Commissioner, 102 T.C. 632, 653 (1994); Rossman v.

Commissioner, T.C. Memo. 2006-128.

The Commissioner has the burden of production with respect

to the additions to tax and the burden of proof with respect to

fraud. Secs. 7454(a), 7491(c). To carry the burden of proof on

the fraud penalties, the Commissioner must show by clear and

convincing evidence both (1) that the taxpayer underpaid his tax

for each taxable year in issue and (2) that at least some part of

the underpayment was due to fraud. DiLeo v. Commissioner, 96

4
Respondent argues, in the alternative, that petitioner is
liable for failure to file additions to tax pursuant to sec.
6651(a)(1). Because we find petitioner liable for the fraud
additions to tax, we decline to address that issue.
 - 9 -

T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Hebrank

v. Commissioner, 81 T.C. 640, 642 (1983).

The Commissioner need not prove the precise amount of the

underpayment resulting from fraud, but only that there is some

underpayment and that some part of it 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. To carry that burden, the

Commissioner may not rely on the taxpayer’s failure to meet his

burden of proving error in the Commissioner’s determination as to

the deficiencies. DiLeo v. Commissioner, supra at 873;

Habersham-Bey v. Commissioner, 78 T.C. 304, 312 (1982); Otsuki v.

Commissioner, 53 T.C. 96, 106 (1969).

Respondent has established clearly and convincingly that

petitioner failed to report certain receipts that were includable

in his gross income for the years in issue. As stated above,

petitioner admitted to earning income during the years in issue.

See supra note 2. Accordingly, we conclude that the record

contains clear and convincing evidence of petitioner’s

underpayment of tax during each of the years in issue.

As to fraudulent intent, “Fraud is established by proving

that a taxpayer intended to evade tax believed to be owing by

conduct intended to conceal, mislead, or otherwise prevent the

collection of such tax.” Clayton v. Commissioner, supra at 647.
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The existence of fraud is a question of fact that is resolved by

examining the entire record. Niedringhaus v. Commissioner, 99

T.C. 202, 210 (1992). Fraud is not imputed or presumed but must

be established by some independent evidence of fraudulent intent.

Id. Fraudulent intent may be established by circumstantial

evidence and reasonable inferences drawn from the record.

Clayton v. Commissioner, supra at 647. Circumstantial evidence

that indicates fraud, also known as “badges of fraud”, includes,

but is not limited to: (1) Understatement of income, (2)

inadequate records, (3) failure to file tax returns, (4)

implausible or inconsistent explanations of behavior, (5)

concealing assets, (6) failure to cooperate with tax authorities,

(7) filing false forms, (8) failure to make estimated tax

payments, (9) dealing in cash, (10) engaging in illegal activity,

and (11) attempting to conceal illegal activity. Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601.

Many of the foregoing badges of fraud are present in the

instant case: Petitioner failed to file returns for taxable

years 1991 through 2000; petitioner failed to cooperate with

respondent’s requests for books and records and acted to conceal

assets through mail drop boxes, foreign bank accounts, the use of

UBTOs, and the use of a false Social Security number; and

petitioner participated in a UBTO tax evasion scheme that he
 - 11 -

promoted to others even after learning that other promoters had

been enjoined from similar promotions. Additionally, in

connection with his promotion of UBTOs, petitioner gave advice

and filed tax forms in an attempt to conceal his income and that

of his clients. Petitioner’s continued involvement in sham

trusts is evidence of his fraudulent intent. See Rossman v.

Commissioner, supra. Accordingly, we hold that petitioner

fraudulently underpaid his Federal income taxes for the years in

issue and is therefore liable for the additions to tax pursuant

to section 6651(f) determined by respondent.

We next turn to the issue of whether petitioner is liable

for the failure to pay additions to tax pursuant to section

6651(a)(2). Section 6651(a)(2) provides for an addition to tax

for failure to pay the amount shown as tax on a return on or

before the payment due date. The addition to tax is 0.5 percent

per month with an additional 0.5 percent per month for each month

the failure continues up to 25 percent. Id. In instances where

the taxpayer fails to file a return, the return prepared by the

Commissioner pursuant to section 6020(b) shall be treated as the

return filed by the taxpayer for the purpose of calculating the

addition to tax pursuant to section 6651(a)(2). Sec. 6651(g)(2).

For a return to constitute a section 6020(b) return, it must be

subscribed, it must contain sufficient information from which to

compute the taxpayer’s tax liability, and the return form and any
 - 12 -

attachments must purport to be a return. Spurlock v.

Commissioner, T.C. Memo. 2003-124. Respondent bears the burden

of production under section 7491(c), and petitioner bears the

burden of proof. See Higbee v. Commissioner, 116 T.C. 438, 446

(2001).

The record contains a substitute return for each of the

years in issue. The substitute returns are subscribed and

include a section 6020(b) certification, Form 4549, Income Tax

Examination Changes, and Form 886-A, Explanation of Items. Those

forms are sufficient to compute petitioner’s tax liabilities for

the years in issue, and respondent has certified that they will

be treated as returns. Because petitioner has not paid the

amounts shown, we uphold respondent’s determination of the

failure to pay additions to tax against petitioner pursuant to

section 6651(a)(2) for the years in issue.

We next turn to the issue of whether petitioner is liable

for the failure to pay estimated tax additions to tax pursuant to

section 6654(a). Taxpayers are liable for an addition to tax for

failure to pay estimated taxes where prepayments of tax, either

through withholding or by making estimated quarterly payments

during the year, do not equal the lesser of 90 percent of the tax

for the current taxable year or 100 percent of the tax shown for

the previous taxable year, if a return was filed for the previous

year. Sec. 6654. An exception applies if the tax due for the
 - 13 -

year in issue is less than $1,000, the individual had no tax

liability for the preceding year, or a waiver applies. Sec.

6654(e). Respondent bears the burden of production to show that

the taxpayer had an estimated tax payment obligation, which

includes whether a return was filed for the preceding year. See

sec. 7491(c); Wheeler v. Commissioner, 127 T.C. 200, 211-212

(2006), affd. 521 F.3d 1289 (10th Cir. 2008). Petitioner bears

the burden of proof. See Higbee v. Commissioner, supra at 446.

The record shows that petitioner failed to file returns for

his taxable years 1995 through 1999, and he was therefore

required to make estimated tax payments equal to 90 percent of

his tax for each of the years in issue. Petitioner made no

estimated tax payments and has failed to show that any exception

applies. Accordingly, we uphold respondent’s determination of

the failure to pay estimated tax additions to tax against

petitioner for the years in issue.

As noted above, petitioner maintained frivolous arguments

throughout the instant proceedings. Pursuant to section

6673(a)(1), the Court is authorized to impose a penalty not in

excess of $25,000 when it appears to the Court that, inter alia,

proceedings have been instituted or maintained by the taxpayer

primarily for delay or that the position of the taxpayer in such

proceedings is frivolous or groundless. We take this opportunity

to warn petitioner that, should he institute or maintain any
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further frivolous or groundless positions in proceedings before

this Court, we may impose a penalty upon him pursuant to section

6673.

The Court has considered all other arguments made by the

parties and, to the extent we have not addressed them herein, we

consider them moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

for respondent.