                               T.C. Memo. 2014-256



                         UNITED STATES TAX COURT



                  HAMLET C. BENNETT, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 15929-10.                      Filed December 22, 2014.



      Hamlet C. Bennett, pro se.

      Nhi T. Luu and Kimberly T. Packer, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      COHEN, Judge: In two notices, respondent determined deficiencies and

additions to tax as follows:
                                         -2-

[*2]                                        Additions to tax/penalties
       Year          Deficiency            Sec. 6651(f)1       Sec. 6651(a)(2)

       1995           $128,770             $93,358.25           $32,192.50

       1996            125,550              91,023.75             31,387.50

       1997            148,087             107,363.08             37,021.75

       1998            223,584             162,098.40             55,896.00

       1999            177,637             128,786.83             44,409.25

       2000            337,105             244,401.13             84,276.25

       2001            280,939             203,680.78             70,234.75

       2002            368,152             266,910.20             92,038.00

       2003            284,406             206,194.35             71,101.50

       1
       The amount set forth above for the penalty under section 6651(f) for each
taxable year is at the maximum rate of 75% of the amount required to be shown as
tax on the return. These amounts will be reduced to 72.5% if the Court sustains
the additions to tax under section 6651(a)(2).

       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.

       Petitioner’s unreported income was determined using bank deposits plus

some specific income items from payments diverted to or for the benefit of

petitioner. The Internal Revenue Service (IRS) prepared substitutes for returns
                                          -3-

[*3] under section 6020(b), but petitioner failed to pay the amounts shown on

those returns. In the answer respondent alleged increased amounts to reflect that

petitioner’s status during 1995 through 2001 was married filing separately, rather

than single as used in the statutory notice. Before trial, respondent reviewed

additional bank records, reduced gross receipts for 1996 through 1998, and

allowed business expense deductions for 1995 through 1998 that had not been

allowed in the notices of deficiency. (Deductions had been allowed in the

statutory notice for the later years.) The issue for decision is whether petitioner’s

failure to file tax returns for the years in issue was fraudulent.

                                 FINDINGS OF FACT

      Some of the facts have been deemed stipulated pursuant to Rule 91(f). The

stipulated facts are incorporated in our findings by this reference. Petitioner

alleged a residence in Louisiana at the time he filed his petition.

      Petitioner was born in Los Angeles, California. He attended the Art Center

School, studied architecture, and graduated with a bachelor of arts degree in

January 1960. In 1965 he moved to Hawaii. He obtained jobs doing architectural

illustrations of housing tracts that were being developed. Petitioner has been a

licensed architect since 1985.
                                        -4-

[*4] Petitioner married Beverly Bennett in 1970. They were married until her

death in September 2001. From 1971 through 2008, petitioner resided in a house

constructed on seven acres of land in Holualoa, Hawaii, that Beverly Bennett had

obtained during a divorce from her prior husband.

      Petitioner designed office buildings and other commercial structures, but

most of his works were luxury residences designed for clients, including

celebrities. He entered into contracts to design houses and, in exchange for his

services, received gross receipts during each of the years in issue.

      From 1960 through 1993, petitioner filed income tax returns reporting his

earnings as an architect. Petitioner and Beverly Bennett (Bennetts) filed joint

returns from 1970 through 1993. On the jointly filed returns for 1992 and 1993,

the Bennetts owed approximately $90,000, which they did not pay in full. A

return was prepared for 1994 but apparently was not filed. No returns were filed

for the years in issue in this case.

      In the mid-1990s, the Bennetts attended a seminar presented by Royal

LaMarr Hardy, who was a carpet cleaner when petitioner first met him. Hardy

presented various means of avoiding tax liabilities, and the Bennetts decided to try

them. After a proceeding was filed to enforce a summons for petitioner’s business

records, on December 9, 1996, the Bennetts filed a petition in bankruptcy. The
                                        -5-

[*5] bankruptcy petition was filed the day that petitioner was supposed to appear

in a summons enforcement case. However, the Bennetts abandoned the

bankruptcy strategy by failing to file required documents when they realized that

bankruptcy would have adverse consequences to them.

      Petitioner established Architects Group Trust (AGT) in 1996, Architects

Management, LLC (AML) in 2001, and Divine Wellness Spiritual Order (DWSO)

in 2003. Attorney Paul Sulla assisted petitioner in establishing the entities.

Petitioner directed that payments be made to these entities for his services,

including:

                Amount                  Entity                Year

                $96,000                 AGT                   1999

                 84,000                 AGT                   2000

                240,000                 AML                   2001

                300,000                 AML                   2002

      Petitioner maintained control over bank accounts and brokerage accounts

into which he deposited gross receipts from his architectural services. Some of the

accounts were in the names of the entities he established. Deposits to those

accounts exceeded $300,000 in 1995, 1996, and 1997; $500,000 in 1998 and

1999; and $1 million in 2000, 2001, 2002, and 2003. Neither petitioner nor the
                                         -6-

[*6] entities he established filed tax returns reporting petitioner’s income for his

architectural services.

      At times petitioner instructed his clients to purchase assets for him, his

family, or his associates in lieu of paying him directly for his services. For

example, during 2000, he agreed to perform architectural services for a car dealer.

In payment for the services, the dealer purchased two automobiles worth a total of

$100,000 for women friends of petitioner. At other times, petitioner directed that

payments for his services be made to a draftsman or others performing services for

petitioner.

      Petitioner established nominee entities and adopted other devices in order to

conceal income he received for his architectural services during the years in issue.

He did so even though his tax adviser and tax return preparer, a certified public

accountant, tried to dissuade him. When foreclosure proceedings were

commenced regarding the mortgage on petitioner’s residence, he provided funds

to a nominee to repurchase the residence in order to conceal his continuing

beneficial ownership.

      Petitioner was contacted in 1999 by agents conducting a criminal

investigation of Hardy. He initially provided oral statements to the agents but

refused to sign and tore up the affidavit prepared consistent with those statements.
                                         -7-

[*7] Petitioner adopted a series of frivolous arguments and pursued them even

after he was indicted and convicted and spent years in prison, as described below.

The frivolous theories pursued by him from time to time included: filing tax

returns was “voluntary”; he was not a “person” required to file returns; section 911

and regulations concerning withholding of income tax exclude domestic income of

U.S. citizens; the IRS did not follow proper procedures; and actions were not

properly delegated to IRS employees.

      On February 9, 2006, petitioner was indicted on various Federal counts

including income tax evasion in violation of section 7201 for 1999 through 2003.

He was found guilty by a jury, and judgment was entered by the District Court for

the District of Hawaii on August 18, 2008. Petitioner was sentenced to 78 months

in prison. In June 2009, his conviction was affirmed by the Court of Appeals for

the Ninth Circuit, which concluded, among other things, that the evidence during

the criminal trial was sufficient as to willfulness. Petitioner served over five years

of his sentence and was released in November 2013.

                                      OPINION

      Petitioner contends that compensation for architectural services he

performed in Hawaii is not subject to income tax and that therefore he was not

required to file returns for the years in issue. Before trial, respondent filed a
                                          -8-

[*8] motion for partial summary judgment that petitioner was collaterally estopped

to deny fraudulent intent for 1999 through 2003 inclusive, years for which

petitioner had been convicted of tax evasion under section 7201. That motion was

granted. In the order granting summary judgment, the Court stated that the

amounts of the deficiencies and penalties for 1999 through 2003 would be

determined on the evidence at trial, as would petitioner’s liabilities, if any, for the

other years in issue. The Court also warned petitioner that his position was

frivolous and that continuation of groundless and frivolous positions might subject

him to a penalty not to exceed $25,000 under section 6673.

       Petitioner persisted in his position at trial that his earnings for architectural

services rendered in Hawaii are not taxable because he is a U.S. citizen and has no

foreign earned income taxable under section 911 and related regulations. His

argument is based on inapplicable statutes and circular reasoning. He denies that

“worldwide income” includes domestic income, substituting his own reading of

statutory and regulatory materials for those of every court that has spoken on the

subject in innumerable cases decided over decades. He takes items out of context,

treats “includes” as a term of limitation, and contends that references to certain

categories within a statute or regulation exclude all others. He has not presented

any reason to reject respondent’s recalculated deficiencies and additions to tax or
                                         -9-

[*9] penalties. He has refused to produce evidence of nontaxable bank deposits or

deductible expenses.

      Petitioner’s interpretative arguments have been consistently rejected in

strong terms, even in judicial opinions sustaining criminal convictions. See, e.g.,

United States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987) (“utterly without

merit”); United States v. Latham, 754 F.2d 747, 750 (7th Cir. 1985) (“inane” and

“preposterous”); United States v. Rice, 659 F.2d 524, 528 (5th Cir. 1981)

(“frivolous non-sequitur”). In Takaba v. Commissioner, 119 T.C. 285, 292

(2002), the taxpayer and his counsel, Paul Sulla (the attorney who assisted

petitioner in establishing entities used to conceal income), were sanctioned under

section 6673(a)(1) and (2), respectively, for arguing, among other things, that a

U.S. citizen residing in Hawaii was not taxable on compensation earned in Hawaii.

No further discussion of petitioner’s stale theories is warranted. See Crain v.

Commissioner, 737 F.2d 1417 (5th Cir. 1984).

      Petitioner has conceded all of the facts necessary to sustain the revised

deficiencies, including the bank deposits and his marital status. The section

6651(a)(2) additions to tax are sustained upon the basis of petitioner’s failure to

pay the tax shown on the returns the IRS prepared under section 6020(b). See
                                         - 10 -

[*10] Cabirac v. Commissioner, 120 T.C. 163, 170 (2003); Tinnerman v.

Commissioner, T.C. Memo. 2006-250, slip op. at 16.

      We must decide, however, whether petitioner’s failure to file returns for

1995 through 1998, years for which collateral estoppel does not apply, 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. 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).

      In applying section 6651(f) to determine whether petitioner’s failure to file

tax returns was fraudulent, we consider the same elements considered in 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). 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
                                        - 11 -

[*11] 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 cooperate with taxing authorities in determining the taxpayer’s correct

liability, implausible or inconsistent explanations of behavior, and concealment of

assets. 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 admits that he received payments for architectural services

performed during each of the years in issue, and the specific items of diverted

income and the bank deposits have been deemed stipulated because he did not

deny them. 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 for each of the years in issue 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.
                                        - 12 -

[*12] We reject any inference that petitioner’s persistence in his frivolous theories

demonstrates sincerity or good faith or is otherwise a defense to the charge of

fraud. Petitioner filed tax returns for decades before 1995, stopping only after he

faced large tax liabilities for 1993 and 1994. He “discovered” his various

frivolous arguments in alleged reliance on a carpet cleaner turned tax adviser,

while disregarding the cautionary advice of his certified public accountant. He

adopted various means of concealing income by diverting income to nominees or

to entity accounts. He rejects the judgments of the courts, including a jury verdict,

a District Court judgment, and an appellate court opinion that he was criminally

responsible for his conduct. A person with his education and skills could be

expected to abandon unsuccessful arguments if acting in good faith. We conclude

that petitioner’s failure to file for each year in issue was due to fraud. See Miller

v. Commissioner, 94 T.C. 316, 332-336 (1990); 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);

Greenwood v. Commissioner, T.C. Memo. 1990-362.

      Petitioner was warned of the possibility of a penalty under section 6673 if

he persisted in his contention that he was not required to file returns and pay tax

on his income for architectural services performed in Hawaii. Under these
                                       - 13 -

[*13] 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 the taxpayer’s position is frivolous or groundless. It may

seem that an additional $25,000 on top of the amounts petitioner already owes will

not change his position. However, serious sanctions also serve to warn other

taxpayers to avoid pursuing similar tactics. See Coleman v. Commissioner, 791

F.2d 68, 71-72 (7th Cir. 1986); Takaba v. Commissioner, 119 T.C. at 295. An

award of $25,000 to the United States will be included in the decision to be

entered here.

      To reflect the change in petitioner’s filing status for 1995 through 2001 and

respondent’s revised bank deposits analysis,


                                                Decision will be entered

                                          under Rule 155.
