                        T.C. Memo. 2010-237



                      UNITED STATES TAX COURT



                 DONALD W. ERNLE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20450-09.               Filed October 26, 2010.



     Donald W. Ernle, pro se.

     Derek Kaczmarek, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     JACOBS, Judge:   Respondent determined a deficiency of $4,124

in petitioner’s Federal income tax for 2007.    At trial respondent

(1) filed a motion to conform pleadings to the evidence, which

the Court granted, (2) filed an amended answer alleging fraud or

in the alternative negligence, and (3) orally moved for the
                               - 2 -

imposition of a penalty against petitioner pursuant to section

6673, which the Court took under advisement.

     The issues for decision are (1) whether petitioner received

unreported income totaling $35,792; (2) whether petitioner is

liable for the fraud penalty pursuant to section 6663 with

respect to the underpayment of tax or alternatively the accuracy-

related penalty pursuant to section 6662; and (3) whether a

penalty under section 6673 should be imposed against petitioner.

     All section references are to the Internal Revenue Code

(Code) in effect for 2007, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

                         FINDINGS OF FACT

     At the time he filed his petition, petitioner resided in

Arizona.

     On his timely filed 2007 Form 1040, U.S. Individual Income

Tax Return, petitioner reported total income of $661.    Petitioner

claimed a standard deduction of $5,350 and a personal exemption

of $3,400.   Petitioner reported $3,049 of Federal income tax

withholding; and because the Form 1040 showed zero taxable

income, petitioner claimed a $3,049 refund.

     Petitioner’s 2007 Form 1040 was manifestly false.   In

actuality, petitioner received $2,730 in nonemployee compensation
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from CAVU, Inc.,1 $12,019 in taxable retirement income from the

Defense Finance and Accounting Service (an agency of the

Department of Defense), $20,183 in taxable retirement income from

American Century Services, L.L.C., and $860 in wages from Aziza

Dujmic-Palm View Assisted Living.   These income items were

reported to respondent by the respective payors.

     Instead of attaching copies of the documents he received

from the third-party payors, petitioner attached to his Form 1040

the following documents that were created and signed by him:    (1)

A “corrected” Form 1099-MISC, Miscellaneous Income, purporting to

be from CAVU, Inc., reporting no nonemployee compensation; (2) a

“corrected” Form 1099-R, Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,

etc., purporting to be from the Defense Finance and Accounting

Service reporting no gross distribution and no taxable amount but

reporting $1,032 in Federal income tax withheld; (3) a series of

“corrected” Forms 1099-R purporting to be from American Century

Services TEFRA Agent collectively reporting no gross

distributions and no taxable amount but reporting $3,048.76 in

Federal income tax withheld; and (4) a Form 4852, Substitute for

Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions

From Pensions, Annuities, Retirement or Profit-Sharing Plans,


     1
      This nonemployee compensation is subject to self-
employment tax.
                                 - 4 -

IRAs, Insurance Contracts, etc., indicating that petitioner

received no income from Aziza Dujmic-Palm View Assisted Living.2

     Respondent examined petitioner’s 2007 Form 1040 as an

underreporting of income case.    On March 30, 2009, respondent

sent petitioner a CP2000 notice stating that the amount of income

petitioner reported on his 2007 Form 1040 did not match the

amount of income paid to petitioner as reported on documents

received from third-party payors.    The notice requested that

petitioner explain the reason therefor by April 29, 2009.

Petitioner failed to do so.

     On June 8, 2009, petitioner filed a Form 1040X, Amended U.S.

Individual Income Tax Return, for tax year 2007 in which he

overreported both his gross income and his Federal income tax

withholding.   Attached to the Form 1040X were several documents

purporting to corroborate this overreporting:    (1) A Form 1099-

OID, Original Issue Discount, purporting to be from Countrywide

Home Loans, Inc., showing original issue discount of $72,000 and

Federal income tax withheld of $71,900; (2) a Form 1099-OID

purporting to be from Bank of the West showing original issue

discount of $60,604.84 and Federal income tax withheld of

$60,504.84; and (3) a Form 1099-A, Acquisition or Abandonment of


     2
      We note that the “corrected” Forms 1099-R collectively
report that $4,080.76 ($1,032 plus $3,048.76) was withheld from
petitioner. The record does not reveal why petitioner claimed a
lesser amount, $3,049, as a refund.
                                - 5 -

Secured Property, purporting to document a loan of property from

petitioner to Bank of the West showing a balance of principal

outstanding of $60,604.84 and the fair market value of property

to be $60,504.84.

     Petitioner created the documents in an obvious attempt to

mislead the Internal Revenue Service (IRS) into believing he was

entitled to a $90,190 tax refund.    The IRS did not accept the

Form 1040X as valid.    Instead, respondent sent petitioner a

notice of deficiency on June 22, 2009.

     Petitioner timely petitioned this Court, and a trial was

held on April 20, 2010.    Petitioner refused to cooperate in the

required pretrial stipulation process.    See Rule 91.

     At trial petitioner filed frivolous motions and raised

frivolous objections.    Petitioner refused to testify, call

witnesses, or proffer any meaningful or credible evidence.

     As noted supra p. 1, at the conclusion of the trial

respondent filed a motion to conform pleadings to the evidence in

order to raise the affirmative issues of a section 6663(a) fraud

penalty or, in the alternative, a section 6662(a) accuracy-

related penalty.    The penalty amount respondent asserts is based

on the understatement reflected in petitioner’s 2007 Form 1040

and not on petitioner’s inflated claim to withholding tax credits

as reported on his 2007 Form 1040X.
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                                OPINION

      The Commissioner’s determinations in his notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving, by a preponderance of the evidence, that these

determinations are incorrect.    Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933).      Petitioner does not assert

that the burden of proof shifts to respondent pursuant to section

7491(a); but even if he did, we need not and do not decide the

issue because we resolve the case on the preponderance of the

evidence and not on an allocation of the burden of proof,

rendering the issue of burden moot.       See Knudsen v. Commissioner,

131 T.C. 185, 186-189 (2008).

I.   Unreported Income

      Section 61(a) generally includes in gross income “all income

from whatever source derived” unless excluded by a specific

provision of the Code.   This section is construed broadly to

encompass any accession to a taxpayer’s wealth.       Commissioner v.

Schleier, 515 U.S. 323, 327-328 (1995); Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 429-430 (1955); MacGregor v.

Commissioner, T.C. Memo. 2010-187.       Payments for services and

retirement payments are specifically included in the definition

of gross income.   Sec. 61(a)(1), (11).

      In the absence of adequate records, the Commissioner may

reconstruct income using any method that is reasonable in the
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light of all the surrounding facts and circumstances.     Catalano

v. Commissioner, 81 T.C. 8, 13 (1983), affd. without published

opinion sub nom. Knoll v. Commissioner, 735 F.2d 1370 (9th Cir.

1984).   We have held that the Commissioner may rely upon third-

party statements, including Forms 1099.   See Spurlock v.

Commissioner, T.C. Memo. 2003-124.

      The uncontested evidence demonstrates that petitioner

received wages from Aziza Dujmic-Palm View Assisted Living,

nonemployee income from CAVU, Inc., and retirement income (i.e.,

pension income) from the Defense Finance and Accounting Service

and American Century Services, L.L.C., in the amounts respondent

determined.   These payments constitute income and generally are

taxable as such.   See Wheeler v. Commissioner, 127 T.C. 200, 205

n.11 (2006), affd. 521 F.3d 1289 (10th Cir. 2008) (retirement

income); Rowlee v. Commissioner, 80 T.C. 1111, 1119-1122 (1983)

(wages); Brunsman v. Commissioner, T.C. Memo. 2003-291

(nonemployee compensation); sec. 1.61-11(a), Income Tax Regs.

(retirement income).   Petitioner presented no evidence

demonstrating that any of these amounts were nontaxable.      We

therefore sustain respondent’s determination that petitioner

received $35,792 in unreported income for 2007.

II.   Section 6663(a) Fraud Penalty

      Section 6663(a) provides for a 75-percent penalty for any

portion of an underpayment attributable to fraud.   Fraud is
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defined as an intentional wrongdoing designed to evade tax

believed to be owing.    Petzoldt v. Commissioner, 92 T.C. 661, 698

(1989).    Fraudulent intent is defined as “‘actual, intentional

wrongdoing, and the intent required is the specific purpose to

evade a tax believed to be owing.’”      Estate of Temple v.

Commissioner, 67 T.C. 143, 159 (1976) (quoting Mitchell v.

Commissioner, 118 F.2d 308, 310 (5th Cir. 1941), revg. 40 B.T.A.

424 (1939)).    If any portion of the underpayment is attributable

to fraud, the entire underpayment is 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).

     The Commissioner has the burden of proving by clear and

convincing evidence that (1) an underpayment exists the year in

issue, and (2) that some portion of the underpayment is due to

fraud.    See sec. 7454(a); Rule 142(b).   Fraud is never imputed or

presumed but must be established by independent evidence that

establishes fraudulent intent.     Petzoldt v. Commissioner, supra

at 699.    Fraud need not be established by direct evidence, which

is rarely available, but may be proved by surveying the

taxpayer’s entire course of conduct and drawing reasonable

inferences therefrom.    Kosinski v. Commissioner, 541 F.3d 671,

679 (6th Cir. 2008), affg. T.C. Memo. 2007-173; see Spies v.

United States, 317 U.S. 492, 499 (1943).     Several “badges of
                                 - 9 -

fraud” have been developed from which fraudulent intent may be

inferred:   (1) Understatement of income; (2) failure to cooperate

with tax authorities; (3) filing false documents; (4) intent to

mislead which may be inferred from a pattern of conduct; and (5)

maintaining inadequate records.     Bradford v. Commissioner, 796

F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Camien

v. Commissioner, 420 F.2d 283, 287 (8th Cir. 1970), affg. T.C.

Memo. 1968-12.

     Respondent has established that petitioner (1) grossly

understated his income; (2) failed to cooperate with respondent’s

agents during the examination of his 2007 Form 1040; (3) filed a

false 2007 Form 1040 to which were attached phony documents

(i.e., the “corrected” Forms 1099-R, 1099-MISC, and the Form

4852); and (4) filed a false 2007 Form 1040X together with false

documents (i.e., the phony Forms 1099-OID and Form 1099-A).

Petitioner engaged in a pattern of conduct by which he attempted

to defraud the Federal Government.

     Respondent has met the standard of showing by clear and

convincing evidence that petitioner intentionally filed a

fraudulent Form 1040 for 2007.    Petitioner presented no evidence

or arguments to show that any part of the underpayment is not due

to fraud.   Accordingly, we hold that petitioner is liable for the

section 6663(a) fraud penalty on the underpayment of tax reported

on his Form 1040.   Because of our holding, we need not
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address respondent’s alternative position that petitioner is

liable for the section 6662 accuracy-related penalty.

III.    Section 6673(a) Penalty

       Section 6673(a)(1) provides for a penalty not in excess of

$25,000 whenever it appears that the taxpayer has instituted

proceedings before this Court primarily for delay, the taxpayer’s

position is frivolous or groundless, or the taxpayer unreasonably

failed to pursue available administrative remedies.      A taxpayer’s

position is frivolous if it is “contrary to established law and

unsupported by a reasoned, colorable argument for change in the

law.”    Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986).

       Petitioner’s case is frivolous.     Petitioner failed to abide

by the Court’s Rules (i.e., Rule 91) to stipulate all relevant

matters not privileged.    He refused to stipulate even his own

2007 Form 1040 and the notice of deficiency.      At trial petitioner

made frivolous objections.    Petitioner filed frivolous motions.

Petitioner refused to testify and failed to provide any colorable

argument in defense of his position.

       Petitioner through his chicanery has wasted the Court’s

limited resources.    We therefore require petitioner to pay a

penalty pursuant to section 6673(a)(1) of $4,000.

       To reflect the foregoing,


                                             Decision will be entered

                                       for respondent.
