                           T.C. Memo. 2011-10



                      UNITED STATES TAX COURT



                  RICHARD H. FRANKE, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17085-08.                Filed January 11, 2011.



     David S. Greenberg, for petitioner.

     Kim-Khanh Thi Nguyen and Blake Ferguson, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies,

penalties, and an addition to tax as follows:

                                   Penalty       Addition to Tax
     Year     Deficiency          Sec. 6663      Sec. 6651(a)(1)

    2003       $17,530             $13,147            ---
    2004        25,306              18,979            ---
    2005        19,355              14,516          $4,838
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As an alternative to the section 6663 penalty, in the notice,

respondent determined an accuracy-related penalty under section

6662.   After concessions by petitioner, the sole issue for

decision is whether he is liable for the penalties for fraud

under section 6663.    All section references are to the Internal

Revenue Code, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in California at the time he filed his

petition.   Petitioner became a tax return preparer in about 1993

and continued to prepare tax returns until 2009.

     During the years in issue, petitioner was an enrolled agent;

i.e., a person authorized to practice before the Internal Revenue

Service (IRS).    During 2004 and 2005, he was president of the

Inland Empire Chapter of the California Society of Enrolled

Agents.

     Petitioner received, but did not report, gross income of

$58,578, $79,912, and $65,886 during 2003, 2004, and 2005,

respectively.    He received the income through a partnership he

had formed under the name of Life Structuring Network.    Life

Structuring Network provided services including tax preparation,

bookkeeping, notary, insurance, and sales of nutritional
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supplements.    The other partner in the partnership was RichFran

House, an alleged “corporation sole”.    A corporation sole, under

State law, allows a religious leader to hold property and conduct

business on behalf of a religious entity.

     The Life Structuring Network partnership agreement allocated

100 percent of the profits to RichFran House and 100 percent of

the losses to petitioner.    The agreement provided:

     Skills Contributed

     Each partner named below shall participate by working
     in the manner described:

     Richard Franke will make available his skills in tax
     preparation and representation as an enrolled agent and
     in financial planning as an insurance agent.

     Richfran House will make available the various skills
     of its members and the resources of its library.

The partnership’s only source of income was services performed by

petitioner.    Life Structuring Network did not keep records

showing income and expenses of the business activities and did

not file Federal partnership returns for the years in issue.

     RichFran House was one of three entities petitioner formed

after purchasing a corporation sole package from the Freedom and

Privacy Committee for $2,295.    The other entities were National

Church and National Ministries to Families.    During IRS

examinations of certain of petitioner’s tax return preparation

clients, petitioner provided lists of alleged payments to

RichFran House, National Church, and National Ministries to
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Families in support of his clients’ claimed charitable

contribution deductions.   The charitable contribution deductions

were disallowed, and the IRS imposed tax return preparer

penalties on petitioner and commenced an examination of

petitioner’s tax liability.

     On or about April 14, 2004, petitioner filed a Form 1040,

U.S. Individual Income Tax Return, for 2003.    On that return he

reported total income of $456 and no tax due.   He did not report

any income from Life Structuring Network.   On May 20, 2004,

petitioner signed a Uniform Residential Loan Application, by

which he applied for a $220,000 mortgage.   On that application,

he represented that his employer was Life Structuring Network and

that his base monthly income was $5,400.

     On March 29, 2004, the IRS issued News Release IR-2004-42

warning taxpayers of a “‘Corporation Sole’ Tax Scam”.    On October

18, 2004, the U.S. District Court for the Central District of

California preliminarily enjoined sale of the corporation sole

program through the Freedom and Privacy Committee (FPC), finding

that the program was an abusive tax shelter.    See United States

v. Saladino, 95 AFTR 2d 2005-1236, at 2005-1237, 2007-1 USTC par.

50,289 at 87,658 (C.D. Cal. 2005), affd. 175 Fed. Appx. 812 (9th

Cir. 2006).   A permanent injunction was entered January 20, 2005.

United States v. Saladino, 95 AFTR 2d 2005-1230 (C.D. Cal. 2005).

The findings of the court included the following:
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Saladino markets the FPC “corporation sole” arrangement
as a means to evade the reporting and payment of
federal income taxes, as well as a means to conceal
assets and thereby evade estate and inheritance taxes
and IRS collection efforts. Saladino markets the
corporation sole package for $2,295. After receiving a
customer’s application and payment, Saladino instructs
participants how to form a corporation sole, including
how to conceal assets and taxable income by
transferring assets and income to their corporations
sole.

     * * * Saladino falsely or fraudulently advises
participants that they can treat their corporations
sole as a “church” with no tax return filing
requirement, and yet can control and use the assets and
income of the corporation sole for their own personal
benefit. FPC promotional material states that “this
product will position you to have full-time ministry
which is tax free.” Saladino advises participants that
corporations sole that are used for the participants’
personal benefit are tax exempt, do not need to file
tax returns of any kind, and do not need to keep
records. Saladino also falsely states that a
corporation sole’s church status cannot be challenged
by the Government.

     * * * Saladino further falsely states that
participants can make donations to their corporations
sole and then deduct the donations on the participants’
federal income tax returns (in the event returns are
filed), even though the entities are owned and
controlled by the participants.

     * * * Saladino falsely or fraudulently advises
that a participant who becomes the “minister” or
“overseer” of the corporation sole and takes a vow of
poverty, can assign his income to the corporation sole
and thereby transform taxable individual income into
nontaxable income of the corporation sole. According
to Saladino, “Once you declare your pauper status, your
income is tax-free to you and your assets cannot be
encumbered with a property tax.”

         *     *     *     *     *     *     *
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          * * * Saladino falsely or fraudulently touts
     participating in the corporation sole program as a
     mechanism that enables participants to drop out of the
     federal tax system entirely. The effect of Saladino’s
     scheme is that the participant lives in the same
     residence and operates the same business activity as he
     did prior to joining the program. All living expenses
     of the participant and his family are paid from
     compensation earned from the business activity, just as
     before the creation of the corporation sole. The
     participant receives the full benefit of, and has full
     control over, all corporation sole funds. The only
     substantive change in the participants’ regular
     business and lifestyle activities is the alleged
     benefit of no taxation.

Id. at 2005-1231 to 2005-1232.

     On April 15, 2005, petitioner filed a Form 1040 for 2004.

He did not report his income from Life Structuring Network on the

2004 return and reported no tax due.      In June or July 2006, an

IRS examiner gave petitioner copies of the injunctions against

the FPC’s corporation sole program.      On October 14, 2006,

petitioner filed a Form 1040 for 2005.      He did not report his

income from Life Structuring Network and reported no taxable

income and no tax due.   In February or March 2007, petitioner

admitted to an IRS auditor that he realized that some of the

items in his corporation sole package were not correct.

Thereafter petitioner filed Forms 1040 for 2006 and 2007 on which

he continued to invoke the corporation sole program as an excuse

for failing to report his taxable income.

     During the audit of petitioner’s tax returns, the examiner

requested petitioner’s bank records.      Because petitioner did not
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provide the records, the examiner obtained the records through

use of a summons and prepared a bank deposits and cash

expenditures analysis for the years in issue.    The bank records

revealed petitioner’s receipt of substantial income from

petitioner’s tax preparation services and related businesses and

payment of petitioner’s personal living expenses out of accounts

in the names of petitioner’s corporations.    Examination of the

corporation sole bank accounts disclosed no expenditures for

religious purposes.    Petitioner did not provide records

substantiating business expenses that he claimed.    Substitutes

for returns for 2003, 2004, and 2005 were prepared by the IRS

determining the partnership income of Life Structuring Network.

In the notice of deficiency that partnership income was allocated

to petitioner.

                               OPINION

     Petitioner testified that he became an ordained minister in

1962.   He asserted vaguely phrased objectives of the three

entities that he formed using the corporation sole package

provided by the FPC.    However, he presented no reliable evidence

of any religious or charitable activities conducted during the

years in issue.   During those years, his only apparent activities

were secular profit-making businesses, the income from which was

used for his personal living expenses.
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     The addition to tax in cases of fraud is a civil 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).    To sustain the

75-percent addition to tax provided by section 6663, the

Commissioner has the burden of proving, by clear and convincing

evidence, an underpayment of tax and that the underpayment was

due to fraud.   Sec. 7454(a); Rule 142(b).   This burden is met if

it is shown that the taxpayer intended to evade taxes known to be

owing by conduct intended to conceal, mislead, or otherwise

prevent the collection of such taxes.   Stoltzfus v. United

States, 398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner,

394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81.

     Petitioner has stipulated his receipt of gross income for

each year in the amounts set forth in our findings, and he has

conceded that he is not entitled to deduct expenses that he

claimed during the audit.   Because petitioner failed to present

any evidence of offsetting deductions, respondent’s burden of

proving an underpayment has been met.   See, e.g., Brooks v.

Commissioner, 82 T.C. 413, 432-433 (1984), affd. without

published opinion 772 F.2d 910 (9th Cir. 1985).    Respondent does
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not have the burden of disproving petitioner’s entitlement to

deductions, even in a criminal case where the Government bears a

heavier burden of proof.   See, e.g., Elwert v. United States, 231

F.2d 928, 933-936 (9th Cir. 1956).

     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).   In determining whether petitioner’s underpayment was due

to fraud, we apply long-recognized “badges of fraud”, discussed

in cases applying section 6663 or former section 6653(b)(1).      See

Niedringhaus v. Commissioner, 99 T.C. 202, 211-213 (1992).

Circumstantial evidence of fraud present here includes failure to

report substantial amounts of income from business activities,

failure to file partnership returns, failure to keep records, and

giving implausible explanations of behavior.    See Bradford v.

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

Memo. 1984-601; Powell v. Granquist, 252 F.2d 56, 60-61 (9th Cir.

1958); Grosshandler v. Commissioner, 75 T.C. 1, 20 (1980);

Gajewski v. Commissioner, 67 T.C. 181, 199-202 (1976), affd.

without published opinion 578 F.2d 1383 (8th Cir. 1978).

     Petitioner was a tax return preparer for many years and

represented that he researched the tax issues involved here.      His

business experience is a relevant consideration in determining

whether he had fraudulent intent.    See Solomon v. Commissioner,
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732 F.2d 1459, 1461-1462 (6th Cir. 1984), affg. T.C. Memo. 1982-

603; Beaver v. Commissioner, 55 T.C. 85, 93-94 (1970).    If he

researched the issue, he should have known of the limited use of

a corporation sole for the benefit of a legitimate religious

organization.   Neither reason nor authority permits use of a

corporation sole to avoid taxes on income from business

activities such as those engaged in by petitioner.

     Although petitioner admitted that during the audit he had

been shown the injunctions describing the abuses inherent in the

corporation sole package that he used, he continued with his

course of understating his tax liabilities on the individual tax

returns that he filed.    He testified at trial in September 2010

that he had never changed his view that his corporate entities

were “automatically exempt” and that they were separate from his

personal activities.   He never identified any activities,

however, beyond his personal businesses, which were conducted

through a partnership in which one of his allegedly religious

entities was a partner.   In view of all of the evidence, we do

not believe that petitioner’s alleged belief is held in good

faith.   Respondent has proven fraud by clear and convincing

evidence, and the additions to tax under section 6663 will be

sustained.
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To reflect petitioner’s concessions and the foregoing,


                                 Decision will be entered

                           for respondent.
