T.C. Memo. 2015-10
UNITED STATES TAX COURT
JOSEPH R. BANISTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 30500-12. Filed January 12, 2015.
Joseph R. Banister, pro se.
Mark H. Howard and Skyler K. Bradbury, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies and additions to tax
or penalties as follows:
-2-
[*2] Additions to tax/penalties
Sec. Sec. Sec.
Year Deficiency 6651(a)(2) 6651(f) 6654
2003 $48,362 $12,090.50 $35,062.45 $1,247.81
2004 60,685 15,171.25 43,996.63 1,739.07
2005 43,214 10,803.50 31,330.15 1,733.35
2006 27,525 6,881.25 19,955.63 1,302.61
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 issue for decision is whether petitioner’s failure to
file returns for each year was fraudulent.
FINDINGS OF FACT
Some of the facts have been deemed stipulated under Rule 91(f). Petitioner
resided in Nevada at the time he filed the petition.
Petitioner’s Background
Petitioner graduated from San Jose State University in 1986 with a
bachelor’s degree in accounting. Early in his career, petitioner worked in various
positions in accounting, including three years at the firm KPMG, formerly KPMG
Peat Marwick. He was licensed as a certified public accountant by California on
February 1, 1991.
-3-
[*3] Petitioner was employed by the Internal Revenue Service (IRS) as a special
agent in the Criminal Investigation Division from 1993 to February 1999. In 1999
he authored a book entitled “Investigating the Federal Income Tax: A Preliminary
Report”. In the book petitioner presented a variety of arguments that he and other
citizens were not obligated to pay Federal income tax for reasons including that
such payment was voluntary, that the Sixteenth Amendment was not legally
ratified, and that Government financing operations are unconstitutional. Petitioner
began providing tax consultation services, speaking at conventions throughout the
country, operating Web sites, and selling books, CDs, and DVDs setting forth his
views on income tax and the Internal Revenue Code.
On March 19, 2003, the Director of the Office of Professional
Responsibility (OPR) of the U.S. Department of the Treasury filed a complaint
initiating proceedings to bar petitioner from practicing before the Internal Revenue
Service for disreputable conduct in violation of Circular 230, specifically 31
C.F.R. secs. 10.22(b) and (c), 10.34, and 10.51(d) and (j) (2003).
During the course of the proceedings commenced by the OPR, petitioner
admitted that he had advised taxpayers that they were not liable for income taxes
for reasons including that the Sixteenth Amendment was not legally ratified and
-4-
[*4] that section 861 and related regulations defined “source of income” in a way
to exclude domestic income of U.S. taxpayers.
In an amended complaint filed October 21, 2003, the OPR asserted
petitioner’s failure to file Federal income tax returns for 1999, 2000, 2001, and
2002 as additional grounds for disbarment or suspension. The OPR then moved
for summary judgment, which was granted by an administrative law judge on
November 24, 2003. The order granting the motion for summary judgment refuted
petitioner’s section 861 and Sixteenth Amendment arguments as among those that
“courts have considered long ago and rejected as frivolous” and found that
petitioner (respondent in that proceeding) could not assert those arguments in
good faith.
Petitioner was disbarred from practice before the IRS by a decision issued
December 24, 2003. In that decision the administrative law judge concluded that
petitioner’s advice to taxpayers, as alleged in the complaint, constituted
disreputable conduct. In a subsequent administrative appeal within the IRS Office
of Chief Counsel, that decision was affirmed June 25, 2004, by a Decision on
Appeal that reviewed numerous authorities showing that petitioner had advised
taxpayers to rely on frivolous positions. The findings of the administrative law
judge on the amended complaint were vacated because the record did not establish
-5-
[*5] that petitioner had the level of gross income giving rise to the return-filing
requirement. The order disbarring petitioner was affirmed, however, because the
allegations concerning his advice to clients were sufficient to establish
disreputable conduct.
Petitioner filed a complaint in the U.S. District Court for the Northern
District of California under the Administrative Procedure Act seeking review of
his disbarment from practice before the IRS. Banister v. U.S. Dep’t of the
Treasury, No. 5:10cv02764 (N.D. Cal. filed June 24, 2010). His claims were
rejected on March 10, 2011, by the District Court and on November 23, 2012, by
the Court of Appeals for the Ninth Circuit. Banister v. U.S. Dep’t of the Treasury,
499 Fed. Appx. 668 (9th Cir. 2012). The Court of Appeals described his section
861 argument as “universally dismissed by our court system.” Id. at 670. The
Court of Appeals rejected petitioner’s arguments that his “good faith belief” in his
positions was a defense to disbarment by the OPR and that the administrative
proceedings violated his due process rights.
Petitioner’s certified public accountant’s license was revoked by the
California Board of Accountancy in 2007 because of the conduct that led to his
disbarment from practice before the IRS. Petitioner filed unsuccessful challenges
-6-
[*6] to that decision with the California Court of Appeals, the California Supreme
Court, and the U.S. Supreme Court.
Petitioner’s Income and Respondent’s Determination
During 2003, 2004, 2005, and 2006, petitioner earned income from his tax
consultation services, speeches, book sales, and other business activities
promulgating his views of the Federal income tax system. In 2006 he received
$71,497 in nonemployee compensation. He deposited his income into six bank
accounts over which he maintained control. He earned interest income on some of
them. Deposits into those accounts totaled $280,270.01, $522,418.98,
$247,666.61, and $118,608.72 for 2003, 2004, 2005, and 2006, respectively.
Petitioner did not file Federal income tax returns or pay taxes for any of those
years.
The IRS commenced an audit for petitioner’s 2003 through 2006 tax years.
Petitioner failed to submit for examination complete and adequate books and
accounts for the years under audit. He resisted IRS efforts to obtain bank records
through the use of summonses. The IRS ultimately prepared substitutes for returns
under section 6020(b), determining petitioner’s correct adjusted gross income for
each year by the bank deposits analysis method. The IRS determined that taxable
deposits into the six bank accounts were $143,607.46, $177,402.24, $130,502.24,
-7-
[*7] and $87,389.49 for 2003, 2004, 2005, and 2006, respectively. Those amounts
were used in the statutory notice sent to petitioner.
OPINION
Petitioner’s tax year 2002 was the subject of an earlier case in this Court
that was decided in Banister v. Commissioner, T.C. Memo. 2008-201, aff’d, 418
Fed. Appx. 637 (9th Cir. 2011). In that case and during the course of
administrative proceedings brought by the OPR and the California Board of
Accountancy, petitioner never contended that he had filed returns or denied that he
received income. He has proceeded on the basis of frivolous arguments about
validity and applicability of the Federal income tax and procedural arguments
patently intended to prolong litigation. The stipulation in this case also reflects
collateral litigation involving petitioner’s erroneous tax advice to others, but that
litigation is not material to our conclusions here.
During the course of this case, petitioner did not deny receipt of the income
determined in the statutory notice and did not identify deductions that had not
been allowed. His arguments, his motions, his attempts to conduct discovery, and
his cross-examination of respondent’s witnesses at trial have been directed to his
claim that the statutory notice was invalid because it was not signed by an
authorized person and that, as a result, this Court lacks jurisdiction over his case.
-8-
[*8] In his pretrial memorandum he also asserted that his U.S. income was not
subject to tax and that he had no obligation to file tax returns, repeating or
restating the arguments that had led to his disqualification to practice before the
IRS and his loss of his certified public accountant’s license. Petitioner refused to
testify at trial, citing his Fifth Amendment privilege against self-incrimination.
Instead he submitted a “motion for offer of proof” that, to the extent intelligible at
all, repeated and elaborated on his argument that his U.S. income was not subject
to income tax.
Shortly before trial respondent filed a motion for leave to file out of time a
motion for partial summary judgment on the validity of the statutory notice, but
the motion was denied because it was too close to the trial date. See Rule 121(a).
In the order denying leave, the Court noted that the motion was meritorious though
untimely and that petitioner’s arguments were frivolous and might result in a
penalty under section 6673. At the conclusion of trial, respondent moved for a
penalty under that section.
Courts have held consistently, in various contexts, that (1) a signature is not
required on a notice of deficiency and that (2) provisions of the Internal Revenue
Manual do not give rights to a taxpayer or affect the validity of a notice or this
Court’s jurisdiction. See, e.g., Selgas v. Commissioner, 475 F.3d 697, 699-700
-9-
[*9] (5th Cir. 2007); Tavano v. Commissioner, 986 F.2d 1389, 1390 (11th Cir.
1993), aff’g T.C. Memo. 1991-237; Urban v. Commissioner, 964 F.2d 888, 889
(9th Cir. 1992), aff’g T.C. Memo. 1991-220; Ball v. Commissioner, T.C. Memo.
2006-141, slip op. at 7. Arguments concerning delegation of authority have been
rejected and characterized as frivolous. See, e.g., Winslow v. Commissioner, 139
T.C. 270, 274, 276 (2012); Ball v. Commissioner, slip op. at 9 n.4.
Petitioner has a history of pursuing frivolous arguments and rejecting the
conclusions of every agency or court that has considered them. His argument that
domestic income is not subject to Federal income tax has been restated by him in
various filings, but the same conclusion has been rejected as frivolous in his
administrative proceedings and in the Court of Appeals’ opinion sustaining his
disbarment by the OPR. No further discussion of petitioner’s stale theories is
warranted. See Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).
We must decide, however, whether petitioner’s failure to file returns for
2003 through 2006 was accompanied by an intent sufficient to sustain the section
6651(f) penalty. Section 6651(f) provides a penalty of 75% of the amount
required to be shown as tax on unfiled returns if the failure to file the returns is
fraudulent. In applying section 6651(f) to determine whether petitioner’s failure
to file tax returns was fraudulent, we consider the same elements considered in
- 10 -
[*10] cases involving former section 6653(b) and present section 6663. See
Clayton v. Commissioner, 102 T.C. 632, 653 (1994); Niedringhaus v.
Commissioner, 99 T.C. 202, 211-213 (1992). The civil fraud penalty is a sanction
provided primarily as a safeguard for the protection of the revenue and to
reimburse the Government for the heavy expense of investigation and the loss
resulting from the taxpayer’s fraud. Helvering v. Mitchell, 303 U.S. 391, 401
(1938). Respondent has the burden of proving fraud by clear and convincing
evidence. See sec. 7454(a); Rule 142(b).
Bank deposits are prima facie evidence of income. See Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C.
651, 656-657 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977). Proof of gross receipts in
the amounts shown by the bank deposits analysis in this case is sufficient to satisfy
respondent’s burden of showing that petitioner had an obligation to file returns.
See secs. 1, 6011, 6012.
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
- 11 -
[*11] maintain adequate records, failure to cooperate with taxing authorities in
determining the taxpayer’s correct liability, and implausible or inconsistent
explanations of behavior. See, e.g., Bradford v. Commissioner, 796 F.2d 303,
307-308 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Powell v. Granquist, 252
F.2d 56, 60 (9th Cir. 1958); Grosshandler v. Commissioner, 75 T.C. 1, 19-20
(1980); Gajewski v. Commissioner, 67 T.C. 181, 199-200 (1976), aff’d without
published opinion, 578 F.2d 1383 (8th Cir. 1978). Petitioner’s education and
experience are further evidence that he acted with fraudulent intent. See Scallen v.
Commissioner, 877 F.2d 1364, 1370-1371 (8th Cir. 1989), aff’g T.C. Memo.
1987-412; Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), aff’g
T.C. Memo. 1982-603; Wright v. Commissioner; T.C. Memo. 2000-336, slip op.
at 14.
The additions to tax for fraud have frequently been imposed on taxpayers
like petitioner “who were knowledgeable about their taxpaying responsibilities
* * * [and] consciously decided to unilaterally opt out of our system of taxation.”
Miller v. Commissioner, 94 T.C. 316, 335 (1990); see Niedringhaus v.
Commissioner, 99 T.C. at 212, 217-219; Chase v. Commissioner, T.C. Memo.
2004-142; Tonitis v. Commissioner, T.C. Memo. 2004-60; Madge v.
Commissioner, T.C. Memo. 2000-370, aff’d, 23 Fed. Appx. 604 (8th Cir. 2001);
- 12 -
[*12] Greenwood v. Commissioner, T.C. Memo. 1990-362. Because petitioner
refused to testify, he has shown no plausible nonfraudulent explanation for his
behavior. His arguments about the validity of the statutory notice are directed at
events occurring long after the years in issue and do not reflect the relevant state
of mind at the times his returns were due. By the time that the return for each year
in issue was due, petitioner was clearly on notice that his positions regarding
taxable income and duty to file returns were frivolous. His persistence in
discredited arguments in the face of unanimous rulings by the courts negates good
faith. Thus he has offered no defense to the inference of fraudulent intent to be
drawn from the circumstantial evidence and objective facts found. Respondent’s
burden of proof has been satisfied.
Petitioner was warned of the possibility of a penalty under section 6673 if
he persisted in his frivolous contentions. He has presented neither evidence nor
arguments showing a reasonable dispute as to the income, tax, penalties, or
additions to tax determined in the statutory notice. Under these circumstances,
section 6673(a)(1) provides for a penalty not in excess of $25,000 when
proceedings have been instituted or maintained by the taxpayer primarily for delay
or where the taxpayer’s position is frivolous or groundless. Petitioner has been
undeterred despite loss of his privilege to practice before the IRS, loss of his
- 13 -
[*13] license as a certified public accountant, and other losses in litigation.
Adding a penalty to his substantial tax debt may not dissuade him. However,
serious sanctions also serve to warn other taxpayers, particularly those that he
purports to counsel, to avoid pursuing similar tactics. See Coleman v.
Commissioner, 791 F.2d 68, 71-72 (7th Cir. 1986); Takaba v. Commissioner, 119
T.C. 285, 295 (2002). An award of $25,000 to the United States will be included
in the decision to be entered here.
An order granting respondent’s oral motion for a penalty under section 6673
will be issued, and
Decision will be entered
for respondent.