T.C. Memo. 2016-67
UNITED STATES TAX COURT
MARK ANDRES GREEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4715-12. Filed April 14, 2016.
Mark Andres Green, pro se.
Dessa J. Baker-Inman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: In two notices of deficiency dated November 18, 2011,
respondent determined Federal income tax deficiencies, additions to tax, and a
civil fraud penalty, as follows:
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[*2] Civil fraud
Additions to tax penalty
Sec. Sec. Sec. sec.
Year Deficiency 6651(a)(2)1 6651(f) 6654(a) 6663
2001 $43,790 $10,947.50 $31,747.75 $985.63 ---
2002 4,039 --- --- --- $3,029.25
2003 12,149 1,619.75 4,697.27 150.93 ---
2004 3,342 621.00 1,800.90 --- ---
1
The amounts of any additions to tax under sec. 6651(a)(2) will be
determined pursuant to sec. 6651(a)(2), (b), and (c).
After concessions,1 the issues for decision are whether: (1) petitioner failed
to report income for 2001, 2003, and 2004; (2) petitioner is entitled to a deduction
under sections 861 and 13412 for 2002; (3) petitioner is liable for additions to tax
under section 6651(f) for fraudulent failure to file for 2001, 2003, and 2004; (4)
petitioner is liable for a civil fraud penalty under section 6663 for 2002; (5)
petitioner is liable for additions to tax under section 6651(a)(2) for failure to pay
for 2001, 2003, and 2004; (6) petitioner is liable for an addition to tax under
section 6654 for failure to make estimated tax payments for 2001; (7) if petitioner
1
Respondent conceded that petitioner is not liable for an addition to tax
under sec. 6654 for 2003.
2
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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[*3] is not liable under section 6651(f), he is liable for additions to tax under
section 6651(a)(1) for 2001, 2003, and 2004; and (8) if petitioner is not liable
under section 6663, he is liable for an accuracy-related penalty under section
6662(a) for 2002.
FINDINGS OF FACT
Some of the facts were deemed stipulated under Rule 91(f) and are so
found. The stipulated facts and the exhibits attached thereto are incorporated
herein by this reference. Petitioner resided in Oklahoma at the time his petition
was timely filed.
During the years at issue petitioner was married, had three children, and was
employed as a construction manager for Petroleum Marketers Equipment
Company of Tulsa, Inc. (PMEC).
I. 2001 Tax Year
At the end of 2001 PMEC issued to petitioner a Form W-2, Wage and Tax
Statement (2001 Form W-2). The 2001 Form W-2 reported wages of $152,496.72
and withholding of $4,984.80 for Social Security tax, $2,363.39 for Medicare tax,
and zero for Federal income tax. Also in 2001 petitioner received $207.59 of
nonemployee compensation for services he provided to another entity, which the
entity reported on a Form 1099-MISC, Miscellaneous Income.
-4-
[*4] Petitioner did not file a 2001 Form 1040, U.S. Individual Income Tax
Return, by its due date or extension date in 2002. In January 2003 petitioner
submitted a Form 1040X, Amended U.S. Individual Income Tax Return, for 2001
(first 2001 Form 1040X). Petitioner reported adjusted gross income (AGI) of
$152,705 but did not specify the source of his income (e.g., whether it was income
from wages, interest, dividends, etc.). He claimed itemized deductions of
$163,054 and exemptions of $5,300, to total zero taxable income. Petitioner also
reported income tax withholding of $4,985 and claimed a refund of $4,985, an
amount equal to the Social Security tax PMEC had previously withheld, but did
not specify the source from which tax was withheld.
Petitioner submitted with his first 2001 Form 1040X a Schedule A, Itemized
Deductions, and Schedule C, Profit or Loss From Business. On line 27 of
Schedule A, Other Miscellaneous Deductions, petitioner claimed a $152,705
deduction for what he called a “claim of Right founded on USC 26, 1341--
compensation for personal labor.” The “claim of right” deduction of $152,705
was equal to the amount of AGI petitioner reported on his first 2001 Form 1040X.
On Schedule C petitioner reported gross income of $515 and an offsetting “claim
of right” deduction of $515. Petitioner also submitted with his first 2001 Form
1040X an affidavit, which, in part, stated:
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[*5] 5) Affiants affirm that the $152,705.00 deduction claimed on line 27
of the attached U.S. Individual Income Tax Return Form 1040
Schedule A Itemized Deduction [sic] is a claim of right adjustment
founded on USC Title 26, § 1341.
6) Affiants make “the claim of right” is as [sic] follows: a) The
Affiants are claiming a natural right; b) the natural right is a right to
make a living; c) The amount being claimed is a compensation for
personal labor that was received as repayment of a debt that was
owed to Affiants; d) The debt owed was for personal labor furnished
by Affiants; 3) [sic] No profit was made.
7) The law for this claim is founded in 26 CFR 1.861-8(a)(5)(i) and
USC Title 26 § 1341 * * *
In September 2005 petitioner submitted a second Form 1040X for 2001
(second 2001 Form 1040X). Petitioner reported zero AGI. In the “Explanation of
Changes to Income, Deductions, and Credits” section of the second 2001 Form
1040X, petitioner stated: “1099 + W-2 Payer made an error concluding I was an
IRC 3401(c) employee and earned 3401(a) wages.” Petitioner submitted with his
second 2001 Form 1040X a self-prepared Form 4852, Substitute for Form W-2,
Wage and Tax Statement, or Form 1099-R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,
(2001 Form 4852), reporting zero wages. The 2001 Form 4852 required petitioner
to explain his efforts to obtain a corrected Form W-2; petitioner stated:
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[*6] “Requested, but the company refuses to issue forms correctly listing payments
a[s] wages as defined in 3401(a) and 3121(a)”.
In contrast to the amounts reported on his first 2001 Form 1040X, on his
second 2001 Form 1040X petitioner reported income tax withholding of
$7,348.29, resulting in a second refund claim increased to $7,348.29, an amount
reflecting the Social Security tax and Medicare tax PMEC had previously
withheld.
Respondent determined that neither the first 2001 Form 1040X nor the
second 2001 Form 1040X was a valid return and did not process either return.
II. 2002 Tax Year
In 2002 petitioner submitted to PMEC a Form W-4, Employee’s
Withholding Allowance Certificate, claiming that he was exempt from tax. At the
end of 2002 PMEC issued to petitioner a Form W-2 (2002 Form W-2). The 2002
Form W-2 reported wages of $44,760.62 and withholding of $3,039.01 for Social
Security tax, $710.60 for Medicare tax, and no withholding for Federal income
tax.
Petitioner timely submitted a Form 1040 for 2002. Petitioner reported
income from wages of $44,761 and AGI of $44,761 and claimed itemized
deductions of $51,587 and exemptions of $6,000, to total zero taxable income.
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[*7] Petitioner also reported income tax withholding of $3,750, resulting in a
refund claim of $3,750, an amount equal to the Social Security tax and Medicare
tax PMEC had previously withheld. Again, petitioner claimed a deduction for
what he called a “claim of right” on Schedule A in an amount equal to his Form
W-2 wages. Attached to petitioner’s 2002 return was an affidavit that was
identical to the affidavit attached to the first 2001 Form 1040X except for the
amount of deduction claimed, which for 2002 was $44,761. See supra p. 5.
In September 2005 petitioner submitted a Form 1040X for 2002. Petitioner
reported AGI of zero, itemized deductions or standard deduction of $7,800,
exemptions of $6,000, and negative taxable income of $11,852. Petitioner
reported income tax withholding of $3,750, resulting in a refund claim of $3,750.
As with his second 2001 Form 1040X, in the “Explanation of Changes to Income,
Deductions, and Credits” section, petitioner wrote: “W-2 Payer made an error
concluding I was an IRC 3401(c) employee and earned 3401(a) wages.”
Petitioner submitted with his 2002 Form 1040X a self-prepared Form 4852
(2002 Form 4852) reporting zero wages. The 2002 Form 4852 required petitioner
to explain his efforts to obtain a corrected Form W-2; petitioner again wrote:
“Requested, but the company refuses to issue forms correctly listing payments a[s]
wages as defined in 3401(a) and 3121(a)”.
-8-
[*8] Petitioner’s timely filed 2002 Form 1040 was accepted as a valid return and
processed. Respondent determined that petitioner’s 2002 Form 1040X was not a
valid return and did not process it.
III. 2003 Tax Year
At the end of 2003 PMEC issued to petitioner a Form W-2 (2003 Form
W-2). The 2003 Form W-2 reported wages of $68,444.95 and withholding of
$4,672.55 for Social Security tax, $1,092.92 for Medicare tax, and $5,670.66 for
Federal income tax. Also at the end of 2003 PMEC issued to petitioner a Form
1099-MISC reporting $304.
Petitioner did not file a Form 1040 for 2003 by its due date or extension
date in 2004. In September 2005 petitioner submitted a Form 1040 for 2003.
Petitioner drew a line through all of the income items and did not report any
income or AGI. Petitioner reported income tax withholding of $11,436.13 and
claimed a refund of $11,436.13, an amount equal to the Federal income tax, Social
Security tax, and Medicare tax PMEC had previously withheld.
Petitioner submitted with his 2003 Form 1040 a self-prepared Form 4852
(2003 Form 4852) reporting zero wages. The 2003 Form 4852 required petitioner
to explain his efforts to obtain a corrected Form W-2; once again, petitioner wrote:
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[*9] “Requested, but the company refuses to issue forms correctly listing payments
a[s] wages as defined in 3401(a) and 3121(a)”.
Respondent determined that petitioner’s 2003 Form 1040 was not a valid
return and did not process it.
IV. 2004 Tax Year
At the end of 2004 PMEC issued to petitioner a Form W-2 (2004 Form
W-2). The 2004 Form W-2 reported wages of $28,251.58 and withholding of
$1,994.66 for Social Security tax, $466.49 for Medicare tax, and $858.64 for
Federal income tax. Also at the end of 2004 PMEC issued to petitioner a Form
1099-MISC reporting $2,320.73.
Petitioner submitted a Form 1040 for 2004 on September 6, 2005.
Petitioner again drew a line through all of the income items and did not report any
income or AGI. Petitioner reported income tax withholding of $3,319.79 and
claimed a refund of $3,319.79, an amount equal to the Federal income tax, Social
Security tax, and Medicare tax PMEC had previously withheld.
Petitioner submitted with his 2004 tax return a self-prepared Form 4852
(2004 Form 4852) reporting zero wages. The 2004 Form 4852 required petitioner
to explain his efforts to obtain a corrected Form W-2; as with every other Form
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[*10] 4852, petitioner wrote: “Requested, but the company refuses to issue forms
correctly listing payments a[s] wages as defined in 3401(a) and 3121(a)”.
Respondent determined that petitioner’s 2004 Form 1040 was not a valid
income tax return and did not process it.
V. Revenue Agent Examination
Revenue Agent Jeffers (RA Jeffers) was assigned to examine petitioner’s
tax returns for 2001-2004. RA Jeffers credibly testified that petitioner was
uncooperative and that he continuously asserted frivolous arguments throughout
the examination process. Petitioner failed to appear for three different scheduled
appointments with RA Jeffers. In a letter dated May 3, 2003, petitioner submitted
to the Internal Revenue Service (IRS) the same affidavit that was attached to his
2002 Form 1040 in which he asserted a “claim of right” deduction. In another
letter petitioner submitted to RA Jeffers dated October 13, 2004, petitioner stated
that he and his wife were “private citizens and non-taxpayers, as legally defined.”
RA Jeffers issued to petitioner publications addressing topics such as why citizens
of the United States must pay taxes and the truth about frivolous tax arguments.
After failing to receive documentation from petitioner, RA Jeffers issued
summonses to PMEC, and to Bank of America for petitioner’s bank records.
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[*11] Petitioner responded by writing a letter dated January 28, 2005, to Bank of
America urging it not to comply with the summons.
VI. Petitioner’s Bank Records
Petitioner endorsed checks and deposited moneys received from PMEC and
various other sources into several different bank accounts at Local Oklahoma
Bank.3 One such account was petitioner’s personal checking account that he held
jointly with his wife (personal account), while another was held in the names of
petitioner’s wife and daughter.
A. Petitioner’s Personal Account4
Petitioner deposited most of the paychecks he received from PMEC into his
personal account. Several times each month in 2002 and 2003, petitioner or his
wife wrote checks from petitioner’s personal account made payable to Braechele
Resources, Inc. (Braechele), for approximately $450-$500 per check.
3
The Local Oklahoma Bank lists itself as the “International Bank of
Commerce” on its bank records. The Court will refer to the bank as “Local
Oklahoma Bank”.
4
Respondent introduced into evidence the bank records for petitioner’s
personal account for 2001, 2002, and 2003; the 2004 bank records were not
introduced into evidence.
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[*12] B. Wife and Daughter’s Account5
On occasion, petitioner would deposit checks made out to him into the
account held in the names of his wife and daughter. As with petitioner’s personal
account, in 2002 and 2003 the account held in the names of petitioner’s wife and
daughter made regular payments to Braechele. Also in 2002 and 2003 Braechele
issued checks made payable to petitioner’s daughter that were deposited into the
account held in the names of petitioner’s wife and daughter.
VII. Petitioner’s Concealed Bank Records
In addition to depositing moneys into his personal account and the account
held in the names of his wife and daughter, petitioner also deposited moneys
received from various sources into another Local Oklahoma Bank account held in
the name of Theocentric Foundation (Theocentric account) and a Bank of America
account held in the name of Braechele (Braechele account). Although the
Braechele and Theocentric accounts were in the names of business entities,
petitioner used the funds deposited into these accounts to pay the personal living
expenses of himself and his family. Petitioner has identified these accounts, but
5
Respondent introduced into evidence the bank records for the account held
in the names of petitioner’s wife and daughter for 2001, 2002, and 2003; the 2004
bank records were not introduced into evidence.
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[*13] he has failed to explain any business purpose for either the Theocentric
account or the Braechele account.
A. Theocentric Account6
Petitioner opened the Theocentric account with Local Oklahoma Bank in
October 2002. On Local Oklahoma Bank’s “Business Application / Signature
Card” petitioner indicated that Theocentric Foundation (Theocentric) was a
“corporation sole”,7 but he did not provide a taxpayer identification number or any
other identifying information other than Theocentric’s name and address.
Petitioner designated himself as “overseer” of Theocentric. As overseer, petitioner
had full control over the corporation sole, including signature authority. In 2002
and 2003 petitioner occasionally caused Theocentric to write checks made payable
6
Respondent introduced into evidence the bank records for the Theocentric
account for 2002 and 2003; the 2004 bank records were not introduced into
evidence.
7
Historically, a “corporation sole” is a succession of persons holding an
ecclesiastical or monarchial office. See Gardner v. Commissioner, 145 T.C. __, __
(slip op. at 7) (Aug. 26, 2015) (citing Black’s Law Dictionary 342 (7th ed. 1999),
and Bryan A. Garner, A Dictionary of Modern Legal Usage 225 (2d ed. 1995)).
Corporations sole are authorized under the laws of some States to enable religious
leaders to hold property and conduct business for the benefit of the religious
entity, as opposed to the benefit of the officeholder himself. See id. (citing Rev.
Rul. 2004-41, 2004-1 C.B. 845). The record does not reflect whether petitioner
actually took the steps necessary to organize Theocentric as a corporation sole
under the laws of any State.
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[*14] to Braechele and consistently used funds deposited into the Theocentric
account to pay his personal living expenses, including his credit card and cell
phone bills. Petitioner has failed to explain any business purpose for the
Theocentric account.
B. Braechele Account8
Braechele was incorporated in the State of Nevada on April 16, 2001. On
its Form SS-4, Application for Employer Identification Number, William Reed
was listed as the principal officer of Braechele. In its articles of incorporation,
Braechele stated that its first board of directors would consist of one member, Mr.
Reed. On another document submitted to Bank of America, Mr. Reed was listed
as Braechele’s president, secretary, treasurer, and director. On Bank of America’s
“Signatory Notarization Form” Mr. Reed was listed as the person with signature
authority over the Braechele account. On its Form SS-4, however, Braechele
listed its business address as the same address petitioner had consistently listed on
his IRS filings, and the account statements for the Braechele account were mailed
to petitioner’s address.
8
Respondent introduced into evidence the bank records for the Braechele
account for 2001, 2002, 2003, and 2004.
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[*15] Petitioner routinely deposited personal checks he received from various
sources into the Braechele account. In addition, as discussed supra, Braechele
received and deposited checks from petitioner’s personal account, the account held
in the names of petitioner’s wife and daughter, and the Theocentric account.
During all of the years at issue, petitioner used the Braechele account to pay for
the personal living expenses and other personal expenses of himself and his
family. Importantly, all checks issued out of the Braechele account were in the
name of Braechele and were pre-signed by Mr. Reed. Petitioner admitted during
trial that the Braechele account, although in the name of Braechele, was really his
personal account.
In summary, much of petitioner’s income was concealed in the Braechele
and Theocentric accounts. Petitioner sometimes deposited moneys directly into
the corporate accounts, but most of the time he deposited moneys he received into
his personal account, or, alternatively, into an account held in the names of his
wife and daughter. Regular payments were then made to Braechele from
petitioner’s personal account and the account held in the names of petitioner’s
wife and daughter. From the Theocentric and Braechele accounts, petitioner
would then issue checks in the names of the corporations to pay the personal
expenses of himself and his family. Most expenses were paid out of the Braechele
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[*16] account, likely because Mr. Reed sent blank, pre-signed checks to petitioner,
who then had unfettered discretion to use checks that were in a corporation’s name
and were not signed by petitioner himself to pay personal expenses.
In fact, in 2012 Mr. Reed pleaded guilty to 1 count of conspiracy to defraud
the United States, 31 counts of aggravated identity theft, and 1 count of evasion of
payment of tax. As part of the plea memorandum submitted to the U.S. District
Court for the District of Nevada, Mr. Reed admitted that he helped form and was a
member of the first board of directors of Asset Protection Group, Inc. (APG). In
the plea memorandum Mr. Reed also admitted to the following:
APG’s “asset protection” services allowed clients to place funds in
bank accounts that could never be traced back to the clients
themselves. APG effectuated this process by creating and using
Nevada corporations which employed APG as resident agent and
nominee officer, via REED. The vast majority of the Nevada
corporations listed REED as the nominee officer. The majority of
bank accounts established by APG for these newly formed Nevada
corporations were opened at Nevada First Bank, which was purchased
by Bank of Nevada in 2006. Because REED was the sole officer and
director of the Nevada corporations created by APG, REED was
usually the sole signor on the Bank of Nevada nominee bank
accounts. To allow APG clients to access funds deposited in the
nominee accounts, REED would either issue checks on the nominee
bank accounts at the direction of the APG clients, or he would send
blank, pre-signed, checks to the customers to use at their discretion.
The APG clients had complete control of the Nevada corporations
and the nominee bank accounts associated with the corporations.
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[*17] VIII. Petitioner’s Concealed Real Estate Properties and the Green Family
Trust
Petitioner owned several properties, including one on Beech Street, another
on 111th Street, and one on Aspen Street, all in Broken Arrow, Oklahoma (Beech
Property, 111th Street Property, and Aspen Property, respectively). According to
a uniform residential loan application signed by petitioner on April 20, 2004, the
Beech Property, 111th Street Property, and Aspen Property had market values of
$165,000, $140,000, and $85,000, respectively. Dating back to 1996 each of these
properties appeared to have been transferred several times between petitioner and
several entities for little or no consideration via quitclaim deed or general warranty
deed. Petitioner has failed to explain any business purpose for the multiple
transfers.
A. Beech Property
On April 25, 1996, petitioner purported to transfer the Beech Property to an
entity called Beach Properties for consideration of $21.9 On August 7, 2001,
Beach Properties purported to transfer the Beech Property to Braechele for
9
The Court is aware of the different spellings--Beech and Beach--that are
used for the Beech Property, which is on Beech Street, and the entity Beach
Properties. There is no evidence in the record as to whether “Beach Properties” is
a real business entity.
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[*18] consideration of $121. On March 18, 2004, Braechele purported to transfer
the Beech Property back to petitioner for consideration of $25; petitioner’s wife
signed the quitclaim deed as Braechele’s vice president. On March 30, 2004,
Beach Properties purported to transfer the Beech Property back to petitioner for
consideration of $10; petitioner signed the quitclaim deed as Beach Properties’
authorized agent. Also on March 30, 2004, Braechele again purported to transfer
the Beech Property back to petitioner for consideration of $10, but this time
petitioner signed the quitclaim deed as Braechele’s vice president. Petitioner then
purported to transfer the Beech Property to D. Scott Heineman and Kurt F.
Johnson, trustees of the Green Family Trust, on June 10, 2004. None of the
transfers were reflected on the respective tax returns for the years at issue.
B. 111th Street Property
On January 16, 1998, petitioner signed a quitclaim deed purporting to
transfer the 111th Street Property to an entity called Future Resources for
consideration of $21. Future Resources then purported to transfer the 111th Street
Property to Braechele by quitclaim deed for consideration of $121 on August 7,
2001. On March 18, 2004, Braechele purported to transfer the 111th Street
property back to petitioner for consideration of $25; petitioner’s wife signed the
quitclaim deed as Braechele’s vice president. On April 20, 2004, Braechele again
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[*19] purported to transfer the 111th Street Property to petitioner for consideration
of $10, only this time petitioner signed the quitclaim deed as Braechele’s vice
president. Again, none of the transfers were reflected on the respective tax returns
for the years at issue.
C. Aspen Property
On September 16, 2003, an entity called SEJA-4, L.C., purported to transfer
the Aspen Property to petitioner by general warranty deed for consideration of
$10. Petitioner then purported to transfer the Aspen Property to Theocentric for
consideration of $25 on March 12, 2004. On June 10, 2004, petitioner and his
wife again purported to transfer the Aspen Property by quitclaim deed, but this
time to Mr. Heineman and Mr. Johnson, trustees of the Green Family Trust. On
August 16, 2004, Theocentric purported to transfer the Aspen Property to the
Green Family Trust for consideration of $10; petitioner signed the quitclaim deed
as Theocentric’s overseer. None of the transfers were reported on the respective
tax returns for the years at issue.
D. Green Family Trust
Petitioner and his wife purported to establish the “Green Family Trust”,
naming Mr. Heineman and Mr. Johnson as trustees.
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[*20] In 2004 and 2005 Mr. Heineman and Mr. Johnson ran a mortgage
elimination scheme through an entity called the “Dorean Group”. In 2005 Mr.
Heineman and Mr. Johnson were indicted on charges of conspiracy to commit
mail fraud and over 30 counts of mail fraud for their participation in the mortgage
elimination scheme; both were ultimately found guilty and sentenced to over 20
years in a Federal penitentiary. Respondent introduced into evidence the
indictment against Mr. Johnson and Mr. Heineman that was filed in the U.S.
District Court for the Northern District of California. The relevant paragraphs in
the indictment state:
10. As part of the Dorean Group’s debt elimination program,
Heineman, Johnson, and the Dorean Group established trusts
(“Trusts”). The trustees of the Trusts were Heineman and Johnson,
and the beneficiaries were the Dorean Group’s client. In furtherance
of the program, Heineman, Johnson, and the Dorean Group caused
Dorean Group clients to record quitclaim deeds with the recorder’s
office, clerk of the court’s office, and register of deeds’ office in the
jurisdiction in which the Dorean Group’s clients’ properties were
located, whereby clients purportedly transferred their respective
interests in mortgaged properties to the corresponding Trusts.
11. Heineman, Johnson, and the Dorean Group then caused to
be sent by Mail Delivery a “self-executing presentment packet”
(hereinafter, “Presentment Packet”) consisting of various documents
to the lenders of the Dorean Group’s clients’ loans. In the
Presentment Packet, Heineman, Johnson, and the Dorean Group
claimed to be authorized to act on behalf of the borrower and
demanded the lender to prove the validity of its loan to the borrower
within 10 days * * *. Wording in the Presentment Packet further
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[*21] alleged that if the lender failed to prove the validity of the loan,
the Dorean Group would deem this to be the lender’s “tacit asset” and
“default,” and would act as the lender’s agent and attorney-in-fact to
“correct title” on the property secured by the lender’s loan.
12. After a Presentment Packet was sent by Mail Delivery to
the lender of a Dorean Group client’s loan, and at least 10 days had
elapsed, Heineman, Johnson, and the Dorean Group caused a * * *
“Specific Power of Attorney” * * * to be sent, typically by Mail
Delivery, to the recorder’s office, clerk of the court’s office, and
register of deeds’ office in the jurisdiction in which each client’s
property was located to be recorded on the client’s property title. In
this recordation, on which Heineman’s signature typically appeared,
Heineman, and if he was not able, Johnson, was purportedly acting as
agent and attorney-in-fact on behalf of the lender.
13. Acting allegedly on behalf of the lender as its agent and/or
attorney-in-fact, Heineman, Johnson, and the Dorean Group caused a
* * * “Discharge of Mortgage” * * * to be sent, typically by Mail
Delivery, to the recorder’s office, clerk of the court’s office, and
register of deeds’ office in the jurisdiction in which the Dorean Group
client’s property was located to be recorded as part of that property’s
title. In this recordation * * * it was falsely claimed that the loan
secured by the property had been fully paid, when such loan had not
been fully repaid. This recordation caused the Dorean Group client’s
property title to falsely appear free and clear of any encumbrances,
when the lender’s secured loan had not been fully paid.
14. With title appearing free and clear of any encumbrances,
Heineman, Johnson, and the Dorean Group caused at least five of its
clients to successfully obtain a refinance loan from a separate lender.
When a refinance loan was obtained, the Dorean Group * * * received
50% of the refinance loan’s proceeds, the Dorean Group client
retained approximately 25-40% of the proceeds * * *
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[*22] Respondent introduced the following documents into evidence to
demonstrate that petitioner participated in this mortgage elimination scheme: on a
uniform residential loan application signed April 20, 2004, petitioner stated that
the Aspen Property was subject to a mortgage of $63,000; petitioner caused to be
recorded with the recorder’s office a quitclaim deed signed on June 10, 2004,
whereby petitioner and his wife purported to transfer the Aspen Property to Mr.
Heineman and Mr. Johnson in their capacity as trustees of the Green Family Trust;
Mr. Heineman then signed and sent to the recorder’s office a discharge of
mortgage which claimed that the mortgage on the Aspen Property was fully paid
and requested the register of deeds to discharge the mortgage; and attached to the
discharge of mortgage was a specific power of attorney through which Mr.
Heineman purported to be the attorney-in-fact of Countrywide Home Loans.
In March 2015 the U.S. District Court for the Northern District of
Oklahoma determined that petitioner had attempted to participate in the mortgage
elimination scheme by creating the Green Family Trust and naming Mr. Heineman
and Mr. Johnson as purported trustees. See United States v. Green, No. 12-CV-
441-JED-FHM, 2015 WL 1482508 (N.D. Okla. Mar. 31, 2015), aff’d sub nom.
United States v. Wells Fargo Home Mortg., __ F. App’x __, 2015 WL 7567269
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[*23] (10th Cir. Nov. 25, 2015).10 The District Court ordered that all transfers of
the Beech Property, 111th Street Property, and Aspen Property made to the Green
Family Trust were null, void, and without effect. Id., 2015 WL 7567269, at *4. In
addition, the District Court ordered that all instruments filed by the Greens, Mr.
Heineman, or Mr. Johnson in an attempt to extinguish or diminish the lien rights
of the mortgagee banks, including any specific power of attorney and discharge of
mortgage, were null, void, and without effect. Id.
IX. Substitutes for Returns
Respondent prepared substitutes for returns under section 6020(b) for
petitioner’s tax years 2001, 2003, and 2004 stating that petitioner had unreported
wage or salary income of $152,496, $68,444, and $28,251 and unreported
business income of $207, $304, and $2,320 for 2001, 2003, and 2004,
respectively. In addition, the substitute for return for petitioner’s 2004 tax year
stated that petitioner was subject to self-employment tax of $328. These
substitutes for returns consisted of Forms 4549, Income Tax Examination
Changes, Forms 886-A, Explanation of Items, and Forms 13496, IRC Section
10
The Court takes judicial notice of the U.S. District Court for the Northern
District of Oklahoma’s decision and the U.S. Court of Appeals for the Tenth
Circuit’s affirmation.
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[*24] 6020(b) Certification, which were signed by an authorized IRS official or
employee.
OPINION
I. Unreported Income
A. Burden of Proof
Generally, the Commissioner’s determinations set forth in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of showing the
determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). When a case involves unreported income, the U.S. Court of Appeals for
the Tenth Circuit, to which this case would be appealable absent a stipulation to
the contrary, has held that the Commissioner’s determination of unreported
income is entitled to a presumption of correctness once some substantive evidence
is introduced demonstrating that the taxpayer received unreported income. United
States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991). Once the
Commissioner introduces some substantive evidence linking the taxpayer to the
income, the presumption of correctness applies and the burden shifts to the
taxpayer to produce substantial evidence overcoming it. Id.
Respondent introduced into evidence Forms W-2 and Forms 1099-MISC for
2001, 2003, and 2004. The record establishes and petitioner admitted at trial that
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[*25] he received payments as reported for 2001, 2003, and 2004. The Court
concludes that respondent has laid the requisite minimal evidentiary foundation
for the contested unreported income and that respondent’s determinations are
entitled to the presumption of correctness.
Section 7491(a) shifts the burden of proof to the Commissioner if the
taxpayer produces credible evidence on any factual issues and satisfies the
requirements of section 7491(a)(2). Petitioner did not argue for the applicability
of section 7491(a) and has not shown that he meets the requirements to shift the
burden; therefore, the burden of proof remains his.
B. Gross Income
The notice of deficiency for 2001, 2003, and 2004 was based on substitutes
for returns prepared by respondent under section 6020(b). On the basis of the
Forms W-2 and Forms 1099-MISC, substitutes for returns were prepared in which
respondent determined that petitioner had unreported wage or salary income of
$152,496, $68,444, and $28,251 and unreported business income of $207, $304,
and $2,320 for 2001, 2003, and 2004, respectively.
Section 61(a)(1) and (2) defines gross income as “all income from whatever
source derived”, including compensation for services and gross income derived
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[*26] from business. Wages and salaries are compensation for services that are
includible in gross income. See sec. 1.61-2(a), Income Tax Regs.
Petitioner admitted at trial to receiving compensation for services as
reported on Forms W-2 and Forms 1099-MISC for 2001, 2003, and 2004. That
compensation falls within the definition of gross income under section 61(a).
Petitioner has made many unfounded arguments--including an assertion that
wages are not income--which lead him to his conclusion that he is not liable for
Federal income tax, all of which, this Court and the U.S. Court of Appeals for the
Tenth Circuit have consistently held, lack even colorable merit and are frivolous.
See Lonsdale v. United States, 919 F.2d 1440, 1448 (10th Cir. 1990) (the
following arguments, among others, made by the taxpayers were “completely
lacking in legal merit and patently frivolous”: (1) wages are not income, (2) no
statutory authority exists for imposing an income tax on individuals, and (3) the
Commissioner has no power or authority to administer the Internal Revenue laws);
Aldrich v. Commissioner, T.C. Memo. 2013-201, at * 9 (taxpayer’s argument that
the “lack of underlying Code of Federal Regulations to support the statutes”
nullified the statutes was frivolous); Garber v. Commissioner, T.C. Memo. 2012-
47, 2012 WL 570728, at * 2 (taxpayer’s claims that the Commissioner was unable
to provide him with any section of the Code that would make the taxpayer liable
- 27 -
[*27] for Federal income tax and that he was not a withholding agent were
frivolous and devoid of any basis in law), aff’d, 500 F. App’x 540 (7th Cir. 2013);
Lindberg v. Commissioner, T.C. Memo. 2010-67 (taxpayer’s argument that her
wages were not taxable because the third-party information returns did not
correctly apply the definition of wages in section 3121(a) lacked even
considerable merit and was frivolous); Carskadon v. Commissioner, T.C. Memo.
2003-237, 2003 WL 21904166, at * 3 (taxpayers’ argument that wages were not
income was frivolous where the arguments were tax defier rhetoric “based on mere
semantics” and unsupported by the law); Corcoran v. Commissioner, T.C. Memo.
2002-18, 2002 WL 71029, at * 2 (taxpayer’s argument that he had no gross
income pursuant to section 861 from sources within the United States and without
the United States was completely lacking in merit), aff’d, 54 F. App’x 254 (9th
Cir. 2002). The Court perceives no need to address petitioner’s arguments further;
to do so might suggest that these arguments have some colorable merit. See Crain
v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984); Wnuck v. Commissioner,
136 T.C. 498, 513 (2011). Accordingly, respondent’s determinations with respect
to petitioner’s unreported income for 2001, 2003, and 2004 are sustained, and
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[*28] respondent’s determination that petitioner is liable for self-employment tax
for 2004 is sustained.11
II. 2002 Deduction Based on Sections 861 and 1341
Deductions and credits are a matter of legislative grace, and the taxpayer
bears the burden of proving entitlement to any deduction or credit claimed on a
return. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial
Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). As with the unreported income
issue, see supra p. 25, petitioner did not argue for the applicability of section
7491(a) and has not shown that he meets the requirements to shift the burden;
therefore, the burden of proof remains his.
Respondent processed petitioner’s 2002 income tax return but disallowed
what petitioner had termed a “claim of right” deduction on his Schedule A of
$44,761. Petitioner’s claimed deduction was equal to the wages he received from
PMEC in 2002. In the affidavit attached to his 2002 Form 1040, petitioner stated
that the deduction was based on section 1341 and section 1.861-8(a)(5)(i), Income
Tax Regs., for “compensation for personal labor that was received as repayment of
11
On the basis of petitioner’s business income of $2,320 in 2004, respondent
determined that petitioner is liable for self-employment tax of $328 for 2004,
taking into account the deduction allowed by sec. 164. See sec. 1401. Petitioner
did not challenge this determination in his petition.
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[*29] a debt”. As discussed supra, petitioner’s argument is the type of frivolous
argument that this Court and the U.S. Court of Appeals for the Tenth Circuit have
consistently rejected. See e.g., Lonsdale, 919 F.2d at 1448; Carskadon v.
Commissioner, 2003 WL 21904166, at *3; Corcoran v. Commissioner, 2002 WL
71029, at * 2. Accordingly, respondent’s disallowance of petitioner’s 2002
Schedule A deduction based on sections 861 and 1341 is sustained.
III. Section 6651(f) Addition to Tax
Respondent determined petitioner was liable for the section 6651(f)
fraudulent failure to file addition to tax for 2001, 2003, and 2004.
Section 6651(a)(1) imposes an addition to tax for failure to timely file a
Federal income tax return. Section 6651(f) provides that the subsection (a)(1)
addition to tax shall be increased from 5% to 15% of the tax required to be shown
on the return for each month or fraction thereof for which there is a failure to file a
return, up to 75% in the aggregate, where such failure to timely file is fraudulent.
In ascertaining whether a taxpayer’s failure to timely file was fraudulent under
section 6651(f), the Court considers whether the taxpayer (1) failed to timely file a
return for the taxable year where there was a tax liability required to be shown on
a return (2) because of fraudulent intent. See sec. 6651(a), (b)(1), (f); Clayton v.
Commissioner, 102 T.C. 632, 653 (1994); Porter v. Commissioner, T.C. Memo.
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[*30] 2015-122, at *44. Respondent has the burden of proving these elements by
clear and convincing evidence for each year for which fraud is alleged. Sec.
7454(a); Rule 142(b); see Zell v. Commissioner, 763 F.2d 1139, 1142 (10th Cir.
1985), aff’g T.C. Memo. 1984-152; Clayton v. Commissioner, 102 T.C. at 646;
Porter v. Commissioner, at *44; Taylor v. Commissioner, T.C. Memo. 1995-269,
1995 WL 363202, at *5, aff’d without published opinion, 108 F.3d 1388, 1997
WL 139744 (10th Cir. 1997).
A. Whether Petitioner Filed Valid Returns
Because section 6651(f) increases the addition to tax imposed by subsection
(a)(1), respondent first must prove that petitioner failed to timely file a required
Federal tax return. See sec. 6651(a)(1). Respondent introduced Forms W-2
showing that petitioner earned enough income to require him to make a return for
each of the years at issue. See secs. 6011(a), 6012(a)(1)(A). Although petitioner
submitted documents purporting to be returns for 2001, 2003, and 2004,
respondent determined that those returns were invalid.
The Code does not define what constitutes a valid return. See Appleton v.
Commissioner, 140 T.C. 273, 284 (2013). On the basis of the Supreme Court’s
opinions in Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934), and
Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453 (1930), this Court
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[*31] has established a four-part test to determine whether a document submitted
by a taxpayer is a valid return. In order to qualify as a return, the document must
meet the following requirements: (1) the document must contain sufficient data to
calculate tax liability; (2) the document must purport to be a return; (3) there must
be an honest and reasonable attempt to satisfy the requirements of the tax law; and
(4) the taxpayer must execute the return under penalties of perjury. Beard v.
Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986); see
Estate of Sanders v. Commissioner, 144 T.C. 63, 78 (2015); Appleton v.
Commissioner, 140 T.C. at 284-285. This Court and the U.S. Court of Appeals for
the Tenth Circuit have consistently held that a Form 1040 with zeros on every
income line is devoid of financial data and is therefore not a valid return. See,
e.g., United States v. Melot, 562 F. App’x 646, 651 (10th Cir. 2014); United States
v. Rickman, 638 F.2d 182, 184 (10th Cir. 1980) (holding that a document that
does not provide information from which a tax can be computed is not a return);
Cabirac v. Commissioner, 120 T.C. 163, 169 (2003). Petitioner’s second 2001
Form 1040X and Forms 1040 for 2003 and 2004 reported zeros on every income
line. Accordingly, petitioner’s second 2001 Form 1040X and Forms 1040 for
2003 and 2004 were not valid tax returns.
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[*32] Petitioner did not file a Form 1040 for 2001; instead, petitioner filed two
Forms 1040X. Although the first 2001 Form 1040X reported AGI of $152,705,
the return lacked information sufficient to apprise respondent of petitioner’s
Federal tax liability and misrepresented Social Security tax withheld as Federal
income tax withheld. Even if the first 2001 Form 1040X had not misrepresented
petitioner’s Federal income tax withholding, the return lacked information
sufficient to apprise respondent of petitioner’s Federal tax liability because it does
not contain any information as to the source of income from which tax was
purportedly withheld. See United States v. Rickman, 638 F.2d at 184 (where the
taxpayer reported zero income, requested a refund of tax withheld, but did not
make disclosures from which a tax might be determined, the Court held that the
return did not contain information from which a tax could be computed and was
not an honest and reasonable attempt to satisfy the requirements of the tax law);
Oman v. Commissioner, T.C. Memo. 2010-276, 2010 WL 5209360, at *10
(applying the Beard test, the Court determined that a taxpayer’s Form 1040 did not
contain sufficient data to calculate tax liability where the return showed $6,055 tax
withheld but did not contain any information as to income from which such tax
was purportedly withheld). Because petitioner’s first 2001 Form 1040X did not
- 33 -
[*33] contain sufficient data to calculate the tax liability, it was not a valid tax
return. See Rickman, 638 F.2d at 184; Beard v. Commissioner, 82 T.C. at 777.
Respondent has clearly and convincingly proven that petitioner had an
obligation to file timely income tax returns showing tax liabilities for 2001, 2003,
and 2004, and failed to do so.12
B. Whether Petitioner’s Failure to File Was Fraudulent
In determining whether a taxpayer had the requisite fraudulent intent for
imposition of the section 6651(f) addition to tax, the Court considers the same
elements that it considers in imposing the fraud penalty under section 6663 and
former section 6653(b)(1). Clayton v. Commissioner, 102 T.C. at 653. 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
tax. Zell v. Commissioner, 763 F.2d at 1142-1143; Clayton v. Commissioner, 102
T.C. at 647. The existence of fraudulent intent is determined by looking at the
entire record and the taxpayer’s conduct. See DiLeo v. Commissioner, 96 T.C.
12
Because sec. 6651(f) is keyed to subsec. (a)(1), a taxpayer cannot be liable
for a subsec. (f) addition to tax if the failure to file is due to reasonable cause and
not willful neglect. See sec. 6651(a)(1); Mohamed v. Commissioner, T.C. Memo.
2013-255, at *22-*23. Petitioner bears the burden of proof with regard to the
“reasonable cause” exception of sec. 6651(a)(1), see Higbee v. Commissioner, 116
T.C. 438, 447 (2001), and he did not meet this burden.
- 34 -
[*34] 858, 874 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992); Taylor v. Commissioner,
1995 WL 363202, at * 5. Fraud is never presumed and must be proven by
independent evidence. Zell v. Commissioner, 763 F.2d at 1143; Beaver v.
Commissioner, 55 T.C. 85, 92 (1970); Taylor v. Commissioner, 1995 WL 363202,
at *5. Fraud need not be established by direct evidence, which is rarely available,
but may be proved by circumstantial evidence and reasonable inferences drawn
from the facts. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992); Taylor v.
Commissioner, 1995 WL 363202, at *5.
In determining whether there was fraudulent intent, the Court will look at a
nonexclusive list of factors, or “badges of fraud.” See Bradford v. Commissioner,
796 F.2d 303, 307 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Niedringhaus v.
Commissioner, 99 T.C. at 211; Recklitis v. Commissioner, 91 T.C. 874, 910
(1998); Taylor v. Commissioner, 1995 WL 363202, at *5. These factors include:
(1) failing to file income tax returns; (2) filing false documents, including false
income tax returns; (3) understating income; (4) concealing income or assets; (5)
engaging in illegal activity; (6) failing to cooperate with tax authorities; and (7)
asserting frivolous arguments and objections to the tax laws. Bradford v.
Commissioner, 796 F.2d at 307; Niedringhaus v. Commissioner, 99 T.C. at 211;
Taylor v. Commissioner, 1995 WL 363202, at *5. While no single factor is
- 35 -
[*35] determinative for establishing fraud, the existence of several “badges of
fraud” may constitute compelling circumstantial evidence of fraud. Bradford v.
Commissioner, 796 F.2d at 307-308; Niedringhaus v. Commissioner, 99 T.C. at
211; Taylor v. Commissioner, 1995 WL 363202, at *5. The U.S. Court of Appeals
for the Tenth Circuit has held that willful refusal to file or the filing of protest
returns is not by itself enough to justify fraud penalties; rather, when a taxpayer
fails to file a return, he is not liable for fraud penalties unless he commits some
affirmative act of concealment or misrepresentation. Zell v. Commissioner, 763
F.2d at 1146.
Petitioner’s behavior exhibits many of the badges listed above.
(1) Failing To File Income Tax Returns
While the mere failure to file a return, standing alone, is not sufficient to
support a finding of fraud, see id., an extended pattern of failing to file returns is a
badge of fraud and may be persuasive circumstantial evidence of the intent to
evade tax. See Bradford v. Commissioner, 796 F.2d at 308; Petzholdt v.
Commissioner, 92 T.C. 661, 701 (1989). Petitioner failed to file valid Federal
- 36 -
[*36] income tax returns for 2001, 2003, and 2004, as discussed supra. This factor
weighs against petitioner for 2001, 2003, and 2004.
(2) Filing False Documents
Filing false documents with the IRS constitutes an “affirmative act” of
misrepresentation sufficient to justify the fraud penalty. Zell v. Commissioner,
763 F.2d at 1146. Petitioner filed false documents with the IRS for 2001, 2003,
and 2004. For each year, petitioner submitted an invalid Form 1040 or Form
1040X and submitted false Forms 4852 reporting zero wages after unsuccessfully
attempting to persuade PMEC to submit false Forms W-2. Not only did petitioner
attempt to evade income tax by filing false returns, but each year he attempted to
have Social Security and Medicare tax erroneously refunded to him by reporting
those amounts as income tax withholding. This factor weighs against petitioner
for 2001, 2003, and 2004.
(3) Understating Income
A pattern of substantially underreporting income for several years is strong
evidence of fraud, particularly if the understatements are not due to innocent
mistake or are not otherwise satisfactorily explained. See Holland v. United
States, 348 U.S. 121, 137-139 (1954); Spies v. United States, 317 U.S. 492, 499
(1943); Marcus v. Commissioner, 70 T.C. 562, 577 (1978), aff’d without
- 37 -
[*37] published opinion, 621 F.2d 439 (5th Cir. 1980); Taylor v. Commissioner,
1995 WL 363202, at *6. Petitioner admitted that he received all amounts that
were reported on his Forms W-2 and Forms 1099-MISC, yet he either reported
zero income or attempted to “zero out” his income by claiming deductions in
amounts equal to his income under the frivolous “claim of right”. This factor
weighs against petitioner for 2001, 2003, and 2004.
(4) Concealing Income and Assets
An intent to evade tax may be inferred from “concealment of assets or
covering up sources of income.” Spies, 317 U.S. at 499. Concealing assets
coupled with a failure to file tax returns is a strong indication of fraud. Freidus v.
Commissioner, T.C. Memo. 1999-195, 1999 WL 391919, at *10. A taxpayer’s use
of nominee corporations is evidence of asset concealment. See Bennett v.
Commissioner, T.C. Memo. 2014-256, at *12 (finding a taxpayer liable for the
section 6651(f) addition to tax where he adopted various means of concealing
income by diverting income to nominees); Lain v. Commissioner, T.C. Memo.
2012-99, 2012 WL 1129851, at *5 (“Placing title to assets in the name of a
nominee evidences a taxpayer’s fraudulent intent.”); DeVries v. Commissioner,
T.C. Memo. 2011-185, 2011 WL 3418248, at *7 (finding that placing title to
assets in the name of nominees evidences that the taxpayer’s failure to file tax
- 38 -
[*38] returns was done with fraudulent intent for the taxpayer to be subject to the
section 6651(f) addition to tax); Freidus v. Commissioner, 1999 WL 391919, at *
11 (finding that the taxpayer used corporate accounts as mere repositories for
proceeds derived from the taxpayer’s income-producing activities); Jones v.
Commissioner, T.C. Memo. 1994-230, (finding that a taxpayer’s use of alter ego
corporations to conduct personal as well as business transactions was evidence of
asset concealment), aff’d without published opinion, 68 F.3d 460 (4th Cir. 1995).
A nominee is an entity or individual who holds bare legal title to assets owned by
another entity or individual. See Oxford Capital Corp v. United States, 211 F.3d
280, 284 (5th Cir. 2000); DeVries v. Commissioner, 2011 WL 3418248, at *7.
Perhaps most damning to petitioner, respondent introduced clear and
convincing evidence that petitioner went to great lengths to affirmatively act to
conceal income and assets. Petitioner used at least two corporate nominee bank
accounts--the Braechele and Theocentric accounts--to conceal personal income.
Respondent introduced clear and convincing evidence in the form of bank
records showing that much of petitioner’s income flowed into and then out of the
Braechele and Theocentric accounts. The Braechele and Theocentric accounts,
however, were nothing more than corporate nominees; all income and expenses
flowing therefrom were chargeable to petitioner. Petitioner would either deposit
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[*39] personal income directly into one of the corporate nominee accounts or
deposit income into his personal account or an account held in the names of his
wife and daughter and then make a separate payment from his personal account or
his wife and daughter’s account to one of the corporate nominee accounts.
Perhaps most alarming and the strongest evidence of petitioner’s intent to conceal
income and assets is the fact that petitioner received and had unfettered discretion
to use blank checks in the name of Braechele that were pre-signed by Mr. Reed.
Petitioner used those checks to pay the personal expenses of himself and his
family. In other words, petitioner deliberately funneled his income into Braechele
with the expectation that it would come out of the funnel without being able to be
traced back to him. The Braechele account as structured and operated by
petitioner is the scheme devised by Mr. Reed; the same scheme that lead Mr. Reed
to plead guilty to conspiracy to defraud the United States, aggravated identity
theft, and evasion of payment of tax. Petitioner has not attempted to argue that a
legitimate business purpose exists for either the Braechele or Theocentric
accounts; to the contrary, petitioner openly admitted at trial that the Braechele
account was his personal account. On the basis of the evidence presented to the
Court, respondent has convincingly established that petitioner created at least the
Braechele and Theocentric accounts for the purpose of concealing his personal
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[*40] income under the guise of corporate nominees Braechele (and Mr. Reed) and
Theocentric in 2001, 2003, and 2004.13 This factor weighs against petitioner for
2001, 2003, and 2004.
In addition to concealing income in corporate nominee bank accounts,
petitioner used corporate nominees to conceal assets. The Court has previously
held that placing title to assets in the name of nominees evidences fraudulent
intent for a taxpayer to be subject to the section 6651(f) addition to tax. See
DeVries v. Commissioner, 2011 WL 3418248, at *7; Leggett v. Commissioner,
T.C. Memo. 1999-100, aff’d without published opinion, 221 F.3d 1357 (11th Cir.
2000). Petitioner purported to transfer the Beech Property, 111th Street Property,
and Aspen Property between himself and several nominee corporations in attempt
to conceal the properties. These properties, valued at $165,000, $140,000, and
$85,000, respectively, were purportedly transferred several times for consideration
not exceeding $121 on any transfer. Often times petitioner or his wife signed on
13
Even though respondent did not introduce into evidence the 2004 bank
records for petitioner’s personal account, the account held in the names of
petitioner’s wife and daughter, and the Theocentric account, the 2004 bank records
for the Braechele account, along with petitioner’s admissions during trial,
establish that petitioner continued to pay personal expenses out of the Braechele
account during 2004. Accordingly, respondent convincingly established that the
Braechele account continued to be nothing more than a nominee bank account
during 2004.
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[*41] behalf the various entities, indicating that petitioner still controlled the use
and disposition of the properties. Petitioner has not presented any evidence or
advanced any argument to rebut respondent’s assertion that petitioner used Beach
Properties, Braechele, Future Resources, Theocentric, and the Green Family Trust
as nominees to conceal his personal assets. This factor weighs against petitioner.
(5) Engaging in Illegal Activity
Engaging in an illegal activity is a badge of fraud. See Niedringhaus v.
Commissioner, 99 T.C. at 211. In 2004 petitioner participated in an illegal
mortgage elimination scheme by creating the Green Family Trust and then
transferring the Aspen Property to the Green Family Trust. After the transfer the
“trustees”, purporting to be the attorney-in-fact for the lender, then caused a
“Specific Power of Attorney” and “Discharge of Mortgage” to be delivered to the
recorders office and requested a discharge of mortgage on the Aspen Property.
This scheme, as structured and operated by petitioner, is the same scheme for
which Mr. Heineman and Mr. Johnson, the “trustees” of the Green Family Trust,
were convicted for fraud. This factor weighs against petitioner for 2004.
(6) Failing To Cooperate With Tax Authorities
Failure to cooperate with revenue agents during an audit is a badge of fraud.
See Zell v. Commissioner, 763 F.2d at 1146; Grosshandler v. Commissioner, 75
- 42 -
[*42] T.C. 1, 19-20 (1980); Taylor v. Commissioner, 1997 WL 139744, at *4.
The Court has previously held that attempting to circumvent the Commissioner’s
efforts to obtain records when he has issued a summons evinces a fraudulent
intent. See Porter v. Commissioner, at *58-*59. Petitioner failed to appear at
three scheduled appointments and attempted to impede RA Jeffers’ examination,
first by refusing to submit documents that she requested, then by asserting
frivolous legal arguments, and finally by urging Bank of America to refuse to
comply with her summons of the Braechele account records. This factor weighs
against petitioner.
(7) Asserting Frivolous Arguments
Frivolous, irrelevant, and meritless arguments, coupled with affirmative acts
designed to evade Federal income tax, support a finding of fraud. See Kotmair v.
Commissioner, 86 T.C. 1253, 1259-1261 (1986); Porter v. Commissioner, at *58.
Not only did petitioner assert frivolous arguments to RA Jeffers, but, as discussed
supra, petitioner has consistently maintained those arguments to the Court in this
case and has previously raised frivolous arguments in other cases before the Court.
See, e.g., Green v. Commissioner, 608 F. App’x 671 (10th Cir. 2015). The Court
has previously warned petitioner that if he continued to assert frivolous arguments,
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[*43] the Court would impose the section 6673 penalty. See id. This factor
weighs against petitioner.
E. Conclusion
Taking the entire record into account, the Court concludes that petitioner’s
failure to file timely tax returns for 2001, 2003, and 2004 was fraudulent.
Although petitioner submitted Forms 1040 or 1040X for 2001, 2003, and 2004,
none of those documents were valid returns. Petitioner’s failure to file a valid
return for each year was deliberate and intended to conceal the fact that he had
income subject to tax. Respondent has proven fraudulent intent by showing that
petitioner committed affirmative acts of concealment or misrepresentation with
respect to each year. See Zell v. Commissioner, 763 F.2d at 1146. Petitioner is
therefore liable for the addition to tax under section 6651(f) for 2001, 2003, and
2004. Since petitioner is liable under section 6651(f), there is no need to discuss
respondent’s alternative position that petitioner is liable under subsection (a)(1).
IV. Section 6663 Civil Fraud Penalty
Respondent determined that petitioner is liable for the section 6663 civil
fraud penalty for 2002.
Section 6663(a) imposes a penalty equal to 75% of a taxpayer’s
underpayment of Federal income tax that is due to fraud. An “underpayment” for
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[*44] purposes of the section 6663 civil fraud penalty is, in general, the excess of
the amount of tax due over the amount of tax shown on the return. Sec. 6664(a);
see Mohamed v. Commissioner, T.C. Memo. 2013-255, at *19. If any portion of
the underpayment is attributable to fraud, the entire underpayment will be treated
as attributable to fraud unless the taxpayer establishes by a preponderance of the
evidence that part of the underpayment is not due to fraud. Sec. 6663(b). In other
words, the section 6663 fraud penalty consists of two elements: (1) the existence
of an underpayment, and (2) fraudulent intent with respect to some portion of the
underpayment. DiLeo v. Commissioner, 96 T.C. at 873. To establish fraud, the
Commissioner must prove both elements with clear and convincing evidence. Sec.
7454; Rule 142(b); DiLeo v. Commissioner, 96 T.C. at 873; Taylor v.
Commissioner, 1995 WL 363202, at *5.
As discussed supra, petitioner was not entitled to a deduction for what he
termed a “claim of right” for 2002; thus an underpayment existed. Respondent
clearly and convincingly established the first element of the section 6663 civil
fraud penalty.
As discussed supra, in determining whether a taxpayer had the requisite
fraudulent intent for imposition of the section 6651(f) addition to tax, the Court
considers the same elements that it considers in imposing the fraud penalty under
- 45 -
[*45] section 6663 and former section 6653(b)(1). Clayton v. Commissioner, 102
T.C. at 653. Respondent has introduced clear and convincing evidence that many
of the badges of fraud that were present in 2001, 2003, and 2004, discussed supra,
were present in 2002 with respect to at least some portion of the 2002
underpayment, thereby proving the second element of fraud. For example,
although petitioner filed a valid Form 1040 for 2002,14 he attempted to zero out his
income under the frivolous “claim of right”. As he had for 2001, 2003, and 2004,
petitioner filed a self-prepared Form 4852 for 2002 showing zero wages after
failing to convince PMEC to file a false Form W-2. Although he had not done so
for 2001, 2003, and 2004, petitioner submitted a false Form W-4 to his employer
for 2002 claiming to be exempt from tax. This Court and the U.S. Court of
Appeals for the Tenth Circuit have held that filing a false Form W-4 is an
affirmative act of misrepresentation and thus evidence of fraud. See Zell v.
Commissioner, 763 F.2d at 1146 (holding that where a taxpayer had not merely
failed to file a return but also filed false Forms W-4, thus committing an
“affirmative act” of misrepresentation, imposition of fraud penalty was justified);
14
In contrast to petitioner’s first Form 1040X for 2001, petitioner’s Form
1040 for 2002--which respondent accepted as a valid return--was submitted on the
proper form and specified the source--income from wages--of petitioner’s income
and withholding. Accordingly, the Form 1040 for 2002 contained sufficient data
to calculate tax liability.
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[*46] Nix v. Commissioner, T.C. Memo. 2012-304, at *11 (filing a false Form
W-4 is circumstantial evidence of fraud), aff’d, 553 F. App’x 960 (11th Cir. 2014);
Teeters v. Commissioner, T.C. Memo. 2010-244 (where the Commissioner has
shown substantial amounts of unreported income on which the withholding has
been reduced by submission of a false Form W-4, fraud has been established by
clear and convincing evidence). In addition, respondent introduced evidence in
the form of bank statements for 2002 to clearly establish that the Braechele and
Theocentric accounts were nothing more than corporate nominees through which
petitioner concealed his income. See supra pp. 36-39.
On the basis of the entire record, the Court concludes that petitioner is liable
for the civil fraud penalty under section 6663 for 2002. Since petitioner is liable
under section 6663, the Court will not discuss respondent’s alternative position
that petitioner is liable for an accuracy-related penalty under section 6662(a).
V. Section 6651(a)(2) Addition to Tax
Respondent determined that petitioner is liable for additions to tax under
section 6651(a)(2) for failure to timely pay his 2001, 2003, and 2004 tax
liabilities.
Section 6651(a)(2) provides for an addition to tax of 0.5% per month up to
25% for failure to pay the amounts shown on a return unless it is shown that the
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[*47] failure is due to reasonable cause and not due to willful neglect. Section
7491(c) provides that the Commissioner bears the burden of production in any
court proceeding with respect to the liability of any individual for any penalty,
addition to tax, or additional amount.
To satisfy his burden of production, respondent must produce sufficient
evidence that petitioner filed returns showing tax liabilities for the years at issue.
See Wheeler v. Commissioner, 127 T.C. 200, 210 (2006), aff’d, 521 F.3d 1289
(10th Cir. 2008). A return prepared by the Commissioner in accordance with
section 6020(b) is treated as the return filed by the taxpayer for the purpose of
determining the amount of the addition under section 6651(a)(2). Sec. 6651(g)(2);
Wheeler v. Commissioner, 127 T.C. at 208-209.
Respondent has the burden of proving that substitutes for returns satisfying
the requirements of section 6020(b) were submitted. See Cabirac v.
Commissioner, 120 T.C. at 170; Gleason v. Commissioner, T.C. Memo. 2011-154,
2011 WL 2600917, at *12; see also Wheeler v. Commissioner, 127 T.C. at 210.
To constitute a section 6020(b) substitute for return, “the return must be
subscribed, it must contain sufficient information from which to compute the
taxpayer’s tax liability, and the return form and any attachments must purport to be
a ‘return’”. Rader v. Commissioner, 143 T.C. 376, 382 (2014) (quoting Spurlock
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[*48] v. Commissioner, T.C. Memo. 2003-124, 2003 WL 1987156, at *10), aff’d,
616 F. App’x 391 (10th Cir. 2015). The Court has held that the requirements of
section 6020(b) have been met where the substitutes for returns consist of Forms
4549-A, Forms 886-A, and Forms 13496. See Rader v. Commissioner, 143 T.C.
at 382; Gleason v. Commissioner, 2011 WL 2600917, at *12.
Petitioner’s substitutes for returns included Forms 4549-A, Forms 886-A,
and Forms 13496.15 Further, the substitutes for returns purport to be “section
6020(b) returns”, contain the information necessary to calculate petitioner’s
liabilities, and are subscribed. Petitioner’s substitutes for returns constitute valid
section 6020(b) returns deemed to have been filed by petitioner for purposes of
section 6651(a)(2). Accordingly, respondent has satisfied his burden.
Once the Commissioner meets his burden, the burden of proof is with the
taxpayer to show that the additions to tax that the Commissioner determined in the
notice of deficiency should not be imposed. See Higbee v. Commissioner, 116
T.C. 438, 446-447 (2001). Petitioner’s burden requires that he prove that his
failure to timely pay his Federal income tax was due to reasonable cause and was
not due to willful neglect. See sec. 6651(a)(2).
15
The forms contain petitioner’s name and address. Petitioner’s taxpayer
identification number (e.g., Social Security number) has been redacted in
accordance with Rule 27(a).
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[*49] Petitioner did not pay any of his tax liabilities for 2001, 2003, and 2004.
Petitioner has failed to present any evidence that would establish that his failure to
pay was due to reasonable cause, and instead he has sought to rely on
unreasonable and unsupportable arguments. Accordingly, petitioner is liable for
the addition to tax under section 6651(a)(2) for 2001, 2003, and 2004.
VI. Section 6654 Addition to Tax
Respondent determined that petitioner is liable for an addition to tax under
section 6654(a) for failure to pay estimated income tax for 2001.
Section 6654(a), (b), and (c) imposes an addition to tax on an individual
taxpayer who underpays at least one of four required installments of estimated tax.
The addition to tax is calculated with reference to four installment payments each
equal to 25% of the required annual payment. Sec. 6654(c)(1), (d)(1)(A). The
“required annual payment” is the lesser of (1) 90% of the tax shown on the return
for the taxable year (or, if no return is filed, 90% of the tax for such year), or (2)
100% of the tax shown on the taxpayer’s return for the preceding taxable year.
Sec. 6654(d)(1)(B). Option (2) does not apply where a taxpayer has not filed a
return for the preceding taxable year. Id. cl. (ii).
The Commissioner has the burden of production with respect to the section
6654 addition to tax. Sec. 7491(c). To satisfy his burden of production under
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[*50] section 7491(c), the Commissioner must produce evidence establishing that
the taxpayer had a “required annual payment” as defined in section 6654(d)(1)(B).
Wheeler v. Commissioner, 127 T.C. at 211-212. This burden requires the
Commissioner to produce evidence that allows the Court to determine the amount
of the required annual payment. See sec. 6654(d)(1)(B)(i) and (ii); Wheeler v.
Commissioner, 127 T.C. at 212. To determine the amount of petitioner’s required
annual payment for 2001, the Court must know whether petitioner filed a return
for the preceding taxable year (2000) and, if so, the amount of “tax shown” on that
return. See sec. 6654(d)(1)(B)(ii). Thus, the Commissioner must introduce
evidence showing whether petitioner filed a return for 2000 and, if he did, the
amount of “tax shown” on that return. See id.
On the basis of the record, the Court concludes that respondent has not met
his burden of production. Therefore, petitioner is not liable for the section 6654(a)
addition to tax for 2001.
The Court has considered all of the arguments made by the parties and to
the extent they are not addressed herein, they are considered unnecessary, moot,
irrelevant, or without merit.
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[*51] To reflect the foregoing,
An appropriate decision
will be entered.