                       T.C. Memo. 2006-157



                     UNITED STATES TAX COURT



            JOHN M. AND THELMA SMOLL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14204-05, 14205-05.   Filed July 31, 2006.



     John M. and Thelma Smoll, pro sese.1

     A. Gary Begun and Elizabeth Procter, for respondent.




     1
        David B. Carter, Jr. petitioned the Court on behalf of
petitioners but was permitted to withdraw on June 19, 2006, prior
to trial.
                                  -2-

                           MEMORANDUM OPINION2


       LARO, Judge:   These cases were consolidated for purposes of

trial, briefing, and opinion.     In a notice of deficiency dated

April 28, 2005, respondent determined the following deficiencies

and additions to tax with respect to John M. Smoll’s

(petitioner’s) 1999, 2002, and 2003 Federal income taxes:

                                         Additions to Tax
Year               Tax           Sec. 6651(f)        Sec. 6654
1999             $30,620           $22,966            $1,482
2002             118,533            88,900             3,961
2003              85,312            63,984             2,233

       In a second notice of deficiency dated April 28, 2005,

respondent determined the following deficiencies, additions to

tax, and penalties with respect to petitioners’ 2000 and 2001

Federal income taxes:

                            Addition to Tax           Penalty
Year             Tax        Sec. 6651(a)(1)          Sec. 6663
2000           $21,930          $5,482                $16,447
2001            24,890           6,222                 18,667

       Respondent filed a motion to dismiss this case for lack of

prosecution, and we are left to decide the propriety of




       2
        We found the facts of this case from matter that was
deemed stipulated under Rule 91(f) and from testimony that was
elicited at trial. For convenience, we have incorporated our
findings of fact with our opinion. Section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Dollar amounts are rounded. When their petitions were filed,
petitioners resided in Sturgis, Michigan.
                                  -3-

respondent’s determinations of the additions to tax and

penalties.3   We sustain those determinations in full.

I.   Background

      Petitioners were previously before the Court for taxable

years 1997 and 1998 in the cases of God’s Helping Hands Living

Estate Plan Trust, John M. & Thelma Smoll, Trustees v.

Commissioner, docket No. 8468-01, and John M. & Thelma Smoll,

Trustees v. Commissioner, docket No. 8489-01.     Those cases were

resolved with a Closing Agreement on Final Determination Covering

Specific Matters (closing agreement).    That litigation involved a

dispute between the parties as to whether God’s Helping Hands

Living Estate Plan Trust should be recognized for Federal income

tax purposes.     God’s Helping Hands Living Estate Plan Trust had

been established by petitioners and purported to operate a

farming business, holding title to the Smoll family residence,

vehicles, and other personal assets, along with deducting the

personal living expenses of the taxpayers.    The closing agreement

provided the following:

           NOW IT IS HEREBY DETERMINED AND AGREED FOR FEDERAL
      INCOME TAX PURPOSES THAT:

      1.   The God’s Helping Hands Living Estate Plan shall
      be disregarded for federal income tax purposes;
      2.   The taxpayers agree that there was no substantial
      change in the manner in which they transacted their

      3
       At trial, the Court informed the parties that it would
grant respondent’s motion with respect to the deficiencies in
Federal income tax.
                                 -4-

     business and personal matters before and after the
     formation of the trust.
     3.   The taxpayers agree that the trusts are alter egos
     of themselves and that all assets held in the name of
     the trust are the assets of the taxpayers.
     4.   The taxpayers agree that all income, expenses,
     deductions and credits, as allowed under the
     Internal Revenue Code, will be reported on the
     individual returns of the taxpayers for taxable years
     1997 and 1998 and for all subsequent years. [Emphasis
     added.]
     5.   The taxpayers will be liable for any additional
     taxes, civil penalties, and interests on those
     individual returns, which may arise because of the non-
     recognition of the trust arrangement.

     Despite entering into the agreement, petitioners continued

to use the trust in 2000 and 2001 and failed to report the

income, expenses, deductions, and credits on their individual

returns for those years, which returns they filed after the time

permitted by law.   Petitioner did not file a Federal income tax

return for 1999, 2002, and 2003.    Petitioners underpaid their

income tax for 2000 and 2001.    Petitioner underpaid his income

tax for 1999, 2002, and 2003.

     Petitioners were uncooperative during the audit process, and

respondent had to engage in summons enforcement.    On April 27,

2006, the Court, pursuant to Rule 91(f), granted respondent’s

motion to show cause why proposed facts should not be accepted as

established and made that order absolute after petitioners failed

to file a response as ordered.
                                  -5-

II.   Discussion

      1.    Additions to Tax Under Section 6651(a)(1)

      Section 6651(a)(1) imposes an addition to tax for failure to

file a return when due “unless it is shown that such failure is

due to reasonable cause and not due to willful neglect”.       The

addition equals 5 percent for each month that the return is late,

not to exceed 25 percent in total.       The Commissioner has the

burden of production with respect to the liability of an

individual for an addition to tax under section 6651(a)(1).          Sec.

7491(c).     The burden of showing reasonable cause under section

6651(a) remains on the taxpayer.        Higbee v. Commissioner, 116

T.C. 438, 446-448 (2001).     “Reasonable cause” requires

petitioners to demonstrate that they exercised ordinary business

care and prudence and nevertheless were unable to file their 2000

and 2001 Federal income tax returns by the due date.        United

States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c),

Proced. & Admin. Regs.     Willful neglect is defined as a

“conscious, intentional failure or reckless indifference.”

United States v. Boyle, supra at 245.

      Petitioners stipulated they did not file tax returns for

2000 and 2001 within the time required by law.       Respondent has

thus satisfied his burden of production with regard to the

section 6651(a)(1) addition to tax.       See Higbee v. Commissioner,

supra.     Petitioners have neither offered an explanation for their
                                  -6-

failure to file nor produced evidence to establish any reasonable

cause for their failure to file the returns.      We sustain

respondent’s determination of the addition to tax under section

6651(a)(1).

     2.   Additions to Tax Under Section 6654

     Respondent determined that petitioner underpaid his

estimated income tax and is liable for an addition to tax under

section 6654 for 1999, 2002, and 2003.      Where payments of tax,

either through withholding or by making estimated tax payments,

do not equal the percentage of the total liability required under

the statute, imposition of an addition to tax under section 6654

is automatic, absent a showing that the taxpayer has met one of

the exceptions contained therein.       See Recklitis v. Commissioner,

91 T.C. 874, 913 (1988).   Because petitioner has not shown that

any of the exceptions apply, we sustain respondent’s

determination on this issue.

     3. Additions to Tax and Penalty Under Sections 6651(f) and
     6663

     Section 6651(f) imposes an addition to tax of up to 75

percent of the amount required to be shown on the tax return when

the failure to file a Federal income tax return is due to fraud.

Section 6663 imposes a 75-percent penalty on the portion of any

underpayment due to fraud.     Because these sections are construed

similarly as to a determination of a fraudulent intent, we

consolidate our discussion of respondent’s fraud determinations.
                                -7-

See Clayton v. Commissioner, 102 T.C. 632, 653 (1994); see also

Temple v. Commissioner, T.C. Memo. 2000-337, affd. 62 Fed. Appx.

605 (6th Cir. 2003).

     To establish fraud, the Commissioner must show by clear and

convincing evidence that there is an underpayment and that a

portion of the underpayment is attributable to fraud.     See sec.

7454(a); Rule 142(b); Hagaman v. Commissioner, 958 F.2d 684, 696

(6th Cir. 1992), affg. and remanding T.C. Memo. 1990-655;

Petzoldt v. Commissioner, 92 T.C. 661, 669 (1989).   If the

Commissioner establishes that any portion of an underpayment is

attributable to fraud, the entire underpayment shall be treated

as attributable to fraud, except to the extent the taxpayer

establishes otherwise.   See sec. 6663(b); Hagaman v.

Commissioner, supra at 696; Marretta v. Commissioner, T.C. Memo.

2004-128, affd. 168 Fed. Appx. 528 (3d Cir. 2006).

     The existence of fraud is a question of fact established by

consideration of the entire record.   Petzoldt v. Commissioner,

supra at 699.   Fraud is established through proof “that the

taxpayer intended to evade tax believed to be owing by conduct

intended to conceal, mislead, or otherwise prevent the collection

of such tax.”   Recklitis v. Commissioner, supra at 909; see also

Hagaman v. Commissioner, supra at 696.   Because direct proof of

fraud is seldom available, fraud may be proved by circumstantial

evidence and reasonable inferences from the facts.      United States
                                    -8-

v. Walton, 909 F.2d 915 (6th Cir. 1990); Petzoldt v.

Commissioner, supra at 699.       Courts have recognized numerous

indicia of fraud, including (1) a pattern of underreporting

income, (2) the maintenance of inadequate records, (3) the giving

of implausible or inconsistent explanations of behavior, and (4)

the establishment of a pattern of inaction and delay during

pretrial and trial proceedings.       Spies v. United States, 317 U.S.

492, 499 (1943); Conti v. Commissioner, 39 F.3d 658, 663 (6th

Cir. 1994), affg. and remanding on other grounds T.C. Memo. 1992-

616.       Although no single factor is necessarily sufficient to

establish fraud, the existence of several indicia constitutes

persuasive circumstantial evidence of fraud.       Petzoldt v.

Commissioner, supra at 700.

       At trial and by facts deemed stipulated, respondent

established by clear and convincing evidence that petitioners

understated their 2000 and 2001 Federal income tax with the

intent to commit fraud and that petitioner failed to file his

1999, 2002, and 2003 returns with the same intent.4      See secs.

6651(f), 6663(a); Petzoldt v. Commissioner, supra at 699.

Petitioners have a pattern of failing to file tax returns and

understating their income when they do file income tax returns.

Petitioners also failed to maintain adequate records or cooperate


       4
        We also note that the record establishes clearly and
convincingly that petitioner had an underpayment for 1999, 2002,
and 2003.
                                 -9-

with respondent, and they consistently provided respondent’s

representatives with implausible or inconsistent explanations for

their behavior.   See Bradford v. Commissioner, 796 F.2d 303, 307

(9th Cir. 1986) (stating that the failure to report income,

maintain adequate records, and cooperate with the Commissioner

are “badges of fraud” from which fraudulent intent may be

inferred), affg. T.C. Memo. 1984-601.    Petitioners conducted

transactions in cash during the years at issue and failed to

substantiate the sources of their cash; their failure to classify

their cash transactions and expenses in a manner consistent with

applicable law for the taxable years at issue was fraudulent with

the intent to evade tax.    Accordingly, petitioner is liable for

the 6651(f) addition to tax, and petitioners are both liable for

the section 6663 penalty.

     To reflect the foregoing,


                                 An order of dismissal and decisions

                            will be entered for respondent.
