                          T.C. Memo. 2001-211



                       UNITED STATES TAX COURT



                  GABRIEL LOPEZ, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 174-00.                 Filed August 9, 2001.


     J. Richard Johnston, for petitioner.

     H. Clifton Bonney, Jr. and Paul R. Zamolo, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined the following

additions to and penalties on petitioner’s Federal income taxes:
                                         - 2 -
                                 Additions to Tax                     Penalty
                      Sec.     Sec.     Sec.        Sec.
            Sec.      6653     6653     6653        6653      Sec.      Sec.
Year        6651     (b)(1)   (b)(2) (b)(1)(A)    (b)(1)(B)   6654      6663
                                1
1983           $0    $3,702               $0         $0       $423        $0
                                1
1984            0     3,785                0          0        349         0
                                1
1985       (1,263)    3,445                0          0        263         0
                                                       1
1986       (1,313)        0     0      4,225                   250         0
                                                       1
1987         (987)        0     0      2,962                   214         0
1988         (970)    2,911     0          0           0       251         0
1989       (1,874)        0     0          0           0       509     5,621
1990       (1,844)        0     0          0           0       485     5,533
1991         (311)        0     0          0           0        34     5,267
       1
           50 percent of the interest payable with respect to the portion
           of the underpayment due to fraud.

All section references are to the Internal Revenue Code for the

years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

       The sole issue for decision is whether petitioner is liable

for the additions to tax and penalties for fraud.1

                                    FINDINGS OF FACT

       Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.               At the time he filed the

petition, petitioner resided in San Leandro, California.

       In 1962, petitioner graduated from high school.               From August

1962 to August 1966, petitioner served in the U.S. Air Force.

During his service, he worked as an electrician.                 During this

time, petitioner enrolled in college correspondence courses.


       1
        Petitioner’s only argument against the sec. 6654
additions to tax is that they are barred by the statute of
limitations because he is not liable for the additions to tax and
penalties for fraud.
                                - 3 -

     On December 1, 1966, petitioner accepted employment as a

civilian employee with the Department of the Navy (the Navy) in

Oakland, California.   From December 1966 until sometime in 1997,

petitioner worked for the Navy as an electrician.

     Petitioner filed individual Federal income tax returns for

1962 through 1982.   Petitioner prepared many of these returns

himself.

     For 1983 through 1991, petitioner was not entitled to be

exempt from withholding.    Sometime during 1982, petitioner

purchased, reviewed, and studied a book entitled “How Anyone Can

Stop Paying Income Taxes” by Irwin Schiff (Mr. Schiff’s book).

After reading Mr. Schiff’s book, petitioner, on November 23,

1982, filed a false Form W-4, Employee’s Withholding Allowance

Certificate, with the Navy claiming to be exempt from Federal

income tax withholding.    On January 7, 1983, petitioner again

filed a false Form W-4 claiming to be exempt from Federal income

tax withholding.   Prior to filing the false Forms W-4, petitioner

was aware that Mr. Schiff had been convicted for failing to file

tax returns.

     During the years in issue, the Navy had a policy of rolling

over Forms W-4 until employees filed a replacement form.

Petitioner was aware of this policy, and during the years in

issue he allowed the false January 1983 Form W-4 to remain on

file with his employer.    As a result of the false January 1983
                                - 4 -

Form W-4, the Navy did not withhold any Federal income taxes from

petitioner’s wages for 1983 through 1990.

     During the years in issue, petitioner received the following

amounts of wages in connection with his employment with the Navy:

$35,700, $31,995, $33,322, $33,169, $34,623, $34,596, $40,307,

$40,158, and $39,402 for 1983, 1984, 1985, 1986, 1987, 1988,

1989, 1990, and 1991, respectively.      Petitioner also received

Forms W-2, Wage and Tax Statement, for 1983 through 1991.        For

1983 through 1991, petitioner was required to file individual

Federal income tax returns.    He failed to timely file these

returns.

     During 1991, the Internal Revenue Service (IRS) assigned

members of its Compliance Action Response Team (CART) to review

records at the Navy and to work on tax compliance issues related

to civilian employees of the Navy.      Revenue Agent Georgene

Bonovich, a member of CART, interviewed petitioner because he

claimed on his Form W-4 to be exempt from Federal income tax

withholding.    After Revenue Agent Bonovich asked petitioner why

he had not filed tax returns for tax years following 1982,

petitioner explained that he understood that tax returns could be

used against him in a judicial proceeding, that IRS publications

stated that he did not have to file tax returns, and that he did

not have a tax liability until he received a bill from the

Government.    Revenue Agent Bonovich asked to see any items
                               - 5 -

petitioner had that supported his position; however, petitioner

refused to submit anything except another Form W-4 claiming

exempt status.

     Revenue Agent Bonovich informed petitioner that he was not

eligible to claim exempt status and suggested that he file tax

returns for the years he had not filed.     Subsequently, in

February of 1991, respondent issued a determination letter to the

Navy changing petitioner’s exempt status to one which subjected

him to withholding.   Consequently, in 1991, petitioner’s employer

withheld $5,778 from his wages.

     On November 18, 1991, Special Agents Brian Potter and

Deborah Van Patten interviewed petitioner regarding the years in

issue.   Petitioner stated that he had read the Internal Revenue

Code and researched whether he was required to file tax returns.

He said that he stopped filing tax returns because that was what

he wished to do.

     During this interview, petitioner argued that there is no

provision of the Internal Revenue Code that required him to file

a tax return and that filing a tax return would require him to

give up his constitutional rights.     Petitioner gave evasive

answers to questions about whether he filed, the amount of his

wages, how he filled out his Forms W-4, what his Social Security

number is, whether he had bank accounts, what the duties of his

job were, and the location of his job.     He also refused to answer
                                 - 6 -

whether he ever was married and what was the status of his

health.   Additionally, he claimed not to remember what high

school he attended and when he graduated.

     The special agents recommended that criminal proceedings be

instituted against petitioner.    In an information filed on

March 2, 1994, the United States charged petitioner with one

count of willfully failing to file an income tax return in

violation of section 7203 for 1990.      On June 23, 1994, petitioner

pleaded guilty to this charge.    As part of his plea, petitioner

admitted that he did not timely file income tax returns for 1983

through 1992.

     On September 24, 1993, petitioner filed Federal income tax

returns for 1983 through 1991.    Petitioner reported tax

liabilities as follows:   $7,403, $7,569, $6,890, $5,663, $3,949,

$3,881, $7,494, $7,377, $7,022 for 1983, 1984, 1985, 1986, 1987,

1988, 1989, 1990, and 1991, respectively.2     As of May 11, 1995,

petitioner paid these amounts and the interest associated with

these years.

                              OPINION

     The addition to tax and penalty in the case of fraud is a

civil sanction provided primarily as a safeguard for the


     2
        Petitioner was married from 1983 through 1988. His tax
liabilities were reduced by $400, $1,616, $1,837, and $381 for
1983, 1984, 1985, and 1986, respectively, for amounts withheld by
his wife’s employer.
                                 - 7 -

protection of the revenue and to reimburse the Government for the

heavy expense of investigation and the loss resulting from a

taxpayer's fraud.    See Helvering v. Mitchell, 303 U.S. 391, 401

(1938).   Fraud is intentional wrongdoing on the part of the

taxpayer with the specific purpose to evade a tax believed to be

owing.    See McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd.

519 F.2d 1121 (5th Cir. 1975).

     The Commissioner has the burden of proving fraud by clear

and convincing evidence.     See sec. 7454(a); Rule 142(b).   To

satisfy the burden of proof, the Commissioner must show:      (1) An

underpayment existed; and (2) the taxpayer intended to evade

taxes known to be owing by conduct intended to conceal, mislead,

or otherwise prevent the collection of taxes.     See Parks v.

Commissioner, 94 T.C. 654, 660-661 (1990).     The Commissioner must

meet this burden through affirmative evidence because fraud is

never imputed or presumed.    See Beaver v. Commissioner, 55 T.C.

85, 92 (1970).

A.   Underpayment of Tax

     Petitioner does not dispute that he underpaid his taxes for

1983 through 1991.   We are satisfied that the Commissioner has

established by clear and convincing evidence an underpayment of

tax by petitioner for each of the years in issue.

B.   Fraudulent Attempt

     The Commissioner must prove that a portion of the
                               - 8 -

underpayment for each taxable year in issue was due to fraud.

Profl. Servs. v. Commissioner, 79 T.C. 888, 930 (1982).     The

existence of fraud is a question of fact to be resolved from the

entire record.   Gajewski v. Commissioner, 67 T.C. 181, 199

(1976), affd. without published opinion 578 F.2d 1383 (8th Cir.

1978).   Because direct proof of a taxpayer's intent is rarely

available, fraud may be proven by circumstantial evidence, and

reasonable inferences may be drawn from the relevant facts.

Spies v. United States, 317 U.S. 492, 499 (1943); Stephenson v.

Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th

Cir. 1984).   Mere suspicion, however, does not prove fraud.

Cirillo v. Commissioner, 314 F.2d 478, 482 (3d Cir. 1963), affg.

in part and revg. in part T.C. Memo. 1961-192; Katz v.

Commissioner, 90 T.C. 1130, 1144 (1988); Shaw v. Commissioner, 27

T.C. 561, 569-570 (1956), affd. 252 F.2d 681 (6th Cir. 1958).

     Over the years, courts have developed a nonexclusive list of

factors that demonstrate fraudulent intent.   These badges of

fraud include:   (1) Understating income, (2) maintaining

inadequate records, (3) implausible or inconsistent explanations

of behavior, (4) concealment of income or assets, (5) failing to

cooperate with tax authorities, (6) engaging in illegal

activities, (7) an intent to mislead which may be inferred from a

pattern of conduct, (8) lack of credibility of the taxpayer's

testimony, (9) filing false documents, (10) failing to file tax
                               - 9 -

returns, and (11) dealing in cash.     Spies v. United States,

supra at 499; Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir.

1990); Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir.

1986), affg. T.C. Memo. 1984-601; Recklitis v. Commissioner, 91

T.C. 874, 910 (1988).   Although no single factor is necessarily

sufficient to establish fraud, the combination of a number of

factors constitutes persuasive evidence.     Solomon v.

Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per

curiam T.C. Memo. 1982-603.

     1.   Petitioner’s Sophistication and Experience

     Petitioner is an electrician with a high school education.

He also took some college correspondence courses.    On the basis

of these facts, we shall not hold petitioner to either a high or

low standard while evaluating his actions.

     2.   Consistent and Substantial Understatements of Income

     The mere failure to report income is not sufficient to

establish fraud.   Merritt v. Commissioner, 301 F.2d 484, 487 (5th

Cir. 1962), affg. T.C. Memo. 1959-172.    Consistent and

substantial understatements of income, however, may be strong

evidence of fraud when coupled with other circumstances.     Marcus

v. Commissioner, 70 T.C. 562, 577 (1978), affd. without published

opinion 621 F.2d 439 (5th Cir. 1980).    A pattern of consistent

underreporting of income, when accompanied by other circumstances

indicating an intent to conceal income, may justify the inference
                               - 10 -

of fraud.    Holland v. United States, 348 U.S. 121, 139 (1954).

Petitioner did not report any of his income for the years in

issue until September 24, 1993.      Thus, petitioner consistently

and substantially understated his income during the years in

issue by claiming exempt status.

     3.     Filing False Forms W-4

     Filing false Forms W-4 may be evidence of fraud and an

affirmative act of evasion.    United States v. Mal, 942 F.2d 682,

685 (9th Cir. 1991); Bradford v. Commissioner, supra at 308;

Recklitis v. Commissioner, supra at 910-911; Rowlee v.

Commissioner, 80 T.C. 1111, 1125 (1983); Stephenson v.

Commissioner, supra at 1007.    Petitioner filed false Forms W-4

with his employer.

     4.     Petitioner’s Failure To File

     Although failure to file tax returns, even over an extended

period, may not per se establish fraud, it may be persuasive

circumstantial evidence of fraud.      Marsellus v. Commissioner, 544

F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368;

Stafford v. Commissioner, T.C. Memo. 1997-50, affd. without

published opinion 146 F.3d 868 (5th Cir. 1998); Recklitis v.

Commissioner, supra at 910-911; Schiff v. Commissioner, T.C.

Memo. 1984-223, affd. 751 F.2d 116 (2d Cir. 1984).      The failure

to file returns is particularly persuasive evidence when the
                               - 11 -

taxpayer also filed false Forms W-4.3   Hebrank v. Commissioner,

81 T.C. 640, 642 (1983); Rowlee v. Commissioner, supra at 1123-

1125; Habersham-Bey v. Commissioner, 78 T.C. 304, 313 (1982); see

Schiff v. Commissioner, supra.

     Petitioner did not file tax returns for the years in issue

until September 24, 1993.    As noted supra, he also filed false

Forms W-4.    For approximately 20 years prior to the first year in

issue, petitioner filed tax returns.

     5.     Failure To Cooperate

     Failure to cooperate with taxing authorities is evidence of

fraud.    Bradford v. Commissioner, supra at 307.   Petitioner

refused to show Revenue Agent Bonovich the documents he relied

upon to support his position that he was not required to file.

At the meeting with the special agents, petitioner was

argumentative, evasive, forgetful, and generally uncooperative.

     6.     Cheek Defense

     Petitioner’s only argument against the imposition of the

addition to tax and penalty for fraud is a Cheek defense.        A good

faith misunderstanding of the Internal Revenue Code may be a

defense against additions to tax pursuant to section 6653(b) and

penalties for fraud pursuant to section 6663.   See Cheek v.

     3
        The failure to file tax returns combined with the use of
false Forms W-4 may be sufficient to establish criminal tax
evasion. United States v. Parkinson, 602 F. Supp. 121, 123 (N.D.
Ill. 1984), affd. without published opinion 774 F.2d 1168 (7th
Cir. 1985).
                              - 12 -

United States, 498 U.S. 192, 202 (1991); Niedringhaus v.

Commissioner, 99 T.C. 202, 217 (1992).     In applying Cheek, we

look to the theories underlying petitioner’s beliefs.      Pennybaker

v. Commissioner, T.C. Memo. 1994-303.

     Petitioner’s argument is that he relied on Mr. Schiff’s book

in filing the false Forms W-4 and not filing tax returns for the

years in issue.   Petitioner points to his testimony as evidence

of his beliefs.   His testimony was not credible.    We need not,

and do not, accept his self-serving testimony.      Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986).     At the time petitioner

“relied” on what he read in Mr. Schiff’s book, he knew that Mr.

Schiff had been convicted of failing to file tax returns.     The

propositions contained in Mr. Schiff’s book are the stale,

meritless, and patently frivolous arguments that have been

rejected by this Court scores of times and at least twice when

presented by Mr. Schiff himself.     Schiff v. Commissioner, T.C.

Memo. 1992-183; Schiff v. Commissioner, T.C. Memo. 1984-223,

affd. 751 F.2d 116 (2d Cir. 1984).     Petitioner’s history of

filing tax returns for 20 years prior to 1983 and his admissions

in his plea bargain are evidence of knowledge of his duty to file

Federal income tax returns and to pay taxes upon his wages.

     We dealt with this same argument, and similar facts, in Roth

v. Commissioner, T.C. Memo. 1992-563.     Phillip Roth also served

in the United States Air Force.    After leaving the Air Force, Mr.
                                - 13 -

Roth became a commercial airline pilot.       Mr. Roth and his wife

filed joint Federal income tax returns for 1965 through 1981.           In

1982, Mr. Roth purchased Mr. Schiff’s book.         At the time, Mr.

Roth knew that Mr. Schiff had been convicted of a tax crime.           In

1982, 1983, and 1985, Mr. Roth filed false Forms W-4 with his

employers wherein he claimed exempt status.         In 1983, Mrs. Roth

filed a false Form W-4 with her employer.          Mr. and Mrs. Roth did

not file tax returns for 1982 through 1985.         We placed no weight

on Mr. Roth’s claimed reliance on Mr. Schiff’s book, rejected Mr.

Roth’s Cheek defense, and sustained the additions to tax for

fraud against both Mr. and Mrs. Roth.        Id.

     In United States v. Burdett, 962 F.2d 228 (2d Cir. 1992),

affg. 768 F. Supp. 409 (E.D.N.Y. 1991), the U.S. Court of Appeals

also addressed a Cheek defense based upon reliance on Mr.

Schiff’s book.    In Burdett, the taxpayer was an electrician who

did not file Federal income tax returns or pay his taxes for the

years 1984 through 1987.     Id. at 229.     The taxpayer testified

that from 1984 through 1987 he earned wages of at least $38,000

per year.   Id.   Just like petitioner, the taxpayer testified that

he had read Mr. Schiff’s book and studied the Internal Revenue

Code, and based on this he was convinced that he did not have to

file tax returns.    Id.   The court held:

     Burdett’s claim of a good-faith belief in his exemption
     was so baseless as to be a mockery of the good-faith
     defense. Measured by any known legal criteria, there
     is no support in the law for his view; it has been
                              - 14 -

     rejected so often that no one who, like Burdett, claims
     to have researched the question could still sincerely
     believe that someone in Burdett’s circumstances was
     exempt from the tax laws.

Id. at 229-230.

C.   Conclusion

     After reviewing all of the facts and circumstances, we

conclude that petitioner’s Cheek defense is without merit and

that respondent has proven by clear and convincing evidence that

for each of the years in issue petitioner’s entire underpayment

was attributable to fraud.   Accordingly, we sustain the additions

to tax and penalties for fraud.

     To reflect the foregoing,

                                         Decision will be entered

                                    for respondent.
