                         T.C. Memo. 1999-100



                       UNITED STATES TAX COURT



                 DAVID M. LEGGETT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17637-97.               Filed March 30, 1999.



     David M. Leggett, pro se.

     Michael A. Pesavento, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following de-

ficiencies in, and additions to, petitioner's Federal income tax

(tax):
                                    - 2 -

                                            Additions to Tax
                                              Sec.      Sec.
          Year         Deficiency           6651(f)     6654

          1992          $17,383         $8,312         $408
          1993           20,790         15,593          809
          1994           25,676         19,257        1,199
          1995           20,070         20,302        1,468

     The issues remaining for decision are:

     (1) Should respondent's determination that petitioner's

filing status is married, filing separately be sustained?      We

hold that it should.

     (2) Is petitioner liable for the addition to tax under

section 6651(f)1 for fraudulent failure to file a return for each

of the years at issue?    We hold that he is.

                           FINDINGS OF FACT

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

     Petitioner's mailing address was in Florida at the time the

petition was filed.

     During the years at issue, petitioner, who dealt primarily

in cash, worked as an employee of Biddle Painting and Drywall,

Inc. (Biddle).   On or about June 30, 1993, petitioner submitted

to Biddle a false Form W-8 (Certificate of Foreign Status) in

which he claimed not to be a U.S. citizen and to be exempt from

backup withholding rules.    As an employee, Biddle paid petitioner

compensation for his services during 1992, 1993, 1994, and 1995

     1
        All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                                - 3 -

in the amounts of $52,456, $60,970, $74,925, and $79,360, re-

spectively.

     On January 24, 1995, petitioner and Biddle executed what

purported to be a contract which was entitled "CONTRACT BETWEEN

TRADESMAN/LABORER/CRAFTSMAN AND PROPERTY OWNER".    That document

stated in pertinent part:

     In the absence of "real" money (commodity money), the
     TRADESMAN [petitioner] offers to trade his property at
     the rate of _________ Federal Reserve Notes (FRN's) for
     each hour of labor expended on behalf of the PROPERTY
     OWNER [Biddle]. The TRADESMAN does not receive the
     FRN's as equal trade value for his property, but for
     the potential opportunity to trade said FRN's for
     something of actual value. However, the PROPERTY OWNER
     is immediately, upon receipt of the FRN's by the
     TRADESMAN, relieved of any further obligations to the
     TRADESMAN for the labor for which said FRN's were
     given.

                *    *      *   *       *   *   *

     TRADESMAN is specifically NOT the employee of the
     PROPERTY OWNER, nor is he an "independent contractor".

     During 1992 and 1993, petitioner received taxable interest

income from Great Western Bank in the amounts of $149 and $88,

respectively.   During 1992, he also received self-employment

income from NTS Sabal Golf Villas in the amount of $181.

     Biddle and the other payors of income to petitioner during

the years at issue reported the payment of such income to the

Internal Revenue Service (Service).

     Petitioner made estimated tax payments for 1992 in the

amounts of $1,800, $2,000, and $2,500 on April 20, 1992, June 20,

1992, and September 23, 1992, respectively.     Petitioner made no
                                - 4 -

estimated tax payments for 1993, 1994, and 1995.       No amounts were

withheld by Biddle for any of the years at issue from the com-

pensation that Biddle paid petitioner during those years.

     Petitioner and his wife, Donna Leggett (Ms. Leggett), filed

joint Federal income tax returns, Forms 1040 (returns), for 1988,

1989, 1990, and 1991, in which they reported the following

adjusted gross income and tax liability:

        Year    Adjusted Gross Income       Tax Liability

        1988          $38,495                 $4,144
        1989           37,280                  3,551
        1990           33,685                  2,816
        1991           31,970                  2,651

     On March 4, 1994, petitioner submitted to the Service Forms

1040NR, U.S. Nonresident Alien Income Tax Return (Forms 1040NR),

for the years 1984 through 1992.   Handwritten at the top of those

forms were the words "AMENDED RETURN".      Most of the lines in

those forms were stricken out and other lines in those forms

contained the notation "N/A".   The word "(DEFERRED)" appeared on

the line showing "Amount * * * REFUNDED TO YOU".

     Around January 1994, respondent assessed frivolous return

penalties (civil penalties) against petitioner and Ms. Leggett

for filing frivolous Forms 1040NR.      Thereafter, but prior to May

24, 1994, respondent commenced collection efforts against pe-

titioner and Ms. Leggett for those penalties.     In response to

those collection efforts, petitioner wrote a letter to the
                              - 5 -

Service's District Director in Jacksonville, Florida.   That

letter stated in pertinent part:

     It has come to my attention that your thugs/agents
     locally have been making their rounds to local Natural
     Free Citizens to extort money from them, and to steal
     their property. The returns that you refer to in your
     4/18/94 data have been Lawfully revoked as of 4/20/93
     (Lawful Affidavit) and corrected Lawfully. My 4/29/94
     NOTICE OF OBJECTION, NOTICE TO ABATE (enclosed) still
     stands. Any action on or against my property will be
     deemed as Fraud and WILLFUL TRESPASS.

     By letter dated December 22, 1995, respondent disallowed the

so-called "deferred" refunds that petitioner claimed in the Forms

1040NR for all taxes previously paid for 1984 through 1992.

     Petitioner did not file returns for the years at issue.   On

August 30, 1995, a revenue agent of the Service (revenue agent)

sent a letter (August 30, 1995 letter) to petitioner and Ms.

Leggett, which stated in pertinent part:

     The Internal Revenue Service does not have a record of
     you [sic] having filed your Federal Income Tax Returns
     for the years shown above [1992, 1993, and 1994].[2] In
     order to resolve this matter as expeditiously as pos-
     sible, and make the matter as simple as possible, it is
     very important that you contact this office within 10
     days from the date of this letter. Please call us at
     the telephone number shown above.

     At the time you telephone, you will be informed by an
     Internal Revenue Agent of the Examination Division what
     procedures you will need to follow to file your de-
     linquent returns. You may wish to commence gathering
     documentation to support the items of income and ex-
     pense listed on delinquent return. * * *



     2
        At the time the revenue agent sent the Aug. 30, 1995
letter, petitioner's return for 1995 was not yet due.
                               - 6 -

     Should you fail to telephone us within the 10 day
     period, you will leave us no choice but to proceed with
     other actions to bring you into compliance with the tax
     laws. This may include preparation of a report based
     upon information currently in our possession, and
     assessing any taxes, interest, and penalties for the
     year involved.

     If you have previously filed returns for the years
     shown above, or have returns completed that can be
     processed as delinquent returns, please inform us at
     the time you telephone. You will be asked to provide
     copies of the returns previously filed, or the del-
     inquent returns prepared and not filed. [Fn. added.]

     Shortly after the August 30, 1995 letter was sent to pe-

titioner, petitioner telephoned the revenue agent to request a

meeting which he would be allowed to record by taping it with his

tape recorder.   In September 1995, the revenue agent and another

revenue agent of the Service met (September 1995 meeting) with

petitioner, his father William Leggett, and another individual

named Toby Brown.   Petitioner brought some papers with him to the

September 1995 meeting, and he started to read frivolous ar-

guments from those papers about his being a nonresident alien.

He also questioned the authority of the Service over him.     The

revenue agents attempted to ask petitioner several questions at

the September 1995 meeting in order to ascertain his income and

similar information that they needed to determine his tax lia-

bility for the years for which he did not file returns.   However,

petitioner refused to answer those questions.   Instead, he

continued to read from the papers that he had brought with him.

When the revenue agents realized that petitioner did not intend
                                - 7 -

to answer any of their questions, they informed him that the

meeting was concluded and asked him and the individuals who

accompanied him to leave.   After the September 1995 meeting,

petitioner sent a letter to the revenue agent's supervisor

complaining that he had been denied due process.   Petitioner did

not provide to the Service at the September 1995 meeting, or at

any other time, any documents or information from which his tax

liability could be determined for the years for which he did not

file returns.

     The Service's audit of petitioner continued from August 1995

through October 1996.    That audit took significantly longer than

that type of audit should have taken because petitioner refused

to cooperate with the revenue agent or any other representatives

of the Service.   As a result of petitioner's refusal to cooperate

with the Service, the Service had to conduct an extensive in-

vestigation in order to determine petitioner's income for each of

the years at issue and other information relevant to determining

his tax liability for each such year.

     On February 19, 1988, petitioner acquired his residence

located at 5136 Neponset Avenue, Orlando, Florida (Neponset

property) for $98,000.   In acquiring that property, petitioner

obtained on February 19, 1988, a mortgage loan from the Cal-

ifornia Federal Savings and Loan Association in the amount of

$78,400.   During 1992, petitioner paid principal and interest

totaling $24,983 on the mortgage loan on the Neponset property,
                                - 8 -

and that mortgage loan was completely paid off by December 22,

1992.

     During August 1995, petitioner obtained from World Savings

and Loan Association another mortgage loan on the Neponset

property in the amount of $65,000.      According to the application

for that mortgage loan, the purpose of the loan was to acquire

farmland in Tennessee.

     On or about August 14, 1995, after respondent had commenced

collection activity against petitioner and Ms. Leggett for the

civil penalties, petitioner purchased real property in Tennessee

(Tennessee property) for approximately $130,000.     Petitioner

titled that property in the name of Young Farm Trust, Frank

Starling Trustee.    The Tennessee property was not incumbered by

any mortgages.   On or about February 13, 1997, the Young Farm

Trust, Frank Starling Trustee, transferred the Tennessee property

back to petitioner and Ms. Leggett for no consideration.

     On March 20, 1996, after respondent had commenced collection

activity against petitioner and Ms. Leggett for the civil pen-

alties, petitioner and Ms. Leggett conveyed the Neponset property

to Michael T. Morgan for no consideration.     On June 5, 1996, a

notice of Federal tax lien was filed with the Clerk of the

Circuit Court for Orange County, Florida, for taxes owed by

Michael T. Morgan.   Shortly thereafter, on June 17, 1996, Michael

T. Morgan transferred the Neponset property back to petitioner

and Ms. Leggett for no consideration.
                                - 9 -

     In March 1996, petitioner and an unidentified individual

visited (March 1996 meeting) the office of a revenue officer of

the Service (revenue officer) who was responsible for conducting

investigations of delinquent returns and collecting unpaid taxes.

Petitioner asked the revenue officer for permission to tape the

March 1996 meeting, but the revenue officer declined because the

revenue officer did not have equipment readily available with

which he also could have taped that meeting.   However, the

revenue officer informed petitioner that if petitioner were to

give him 10 days' written notice, he could arrange another

meeting that could be taped.   Petitioner informed the revenue

officer at the March 1996 meeting that there were certain civil

penalties that he wanted to have abated by the Service that arose

from his having submitted Forms 1040NR.   The revenue officer

asked petitioner at the March 1996 meeting if he was a U.S.

citizen or a nonresident alien.   Petitioner responded that he was

both.    The revenue officer told petitioner that he had to be one

or the other, but that he could not be both.

     The revenue officer also advised petitioner at the March

1996 meeting that the Service's records indicated that he had not

filed returns for 1992, 1993, and 1994 and that the Service had

records from payors of income to petitioner, which indicated that

petitioner had substantial income for those years.3   Petitioner

     3
         As of the time of the March 1996 meeting, petitioner's
                                                    (continued...)
                               - 10 -

told the revenue officer that he had only approximately $2,000 to

$3,000 of income for 1992.

     At the March 1996 meeting, petitioner told the revenue

officer that he had asked the Service many times to show him what

provision in the Code required him to file returns, and he asked

the revenue officer to specify the sections in the Code and the

regulations that required him to file returns.   The revenue

officer pointed out to petitioner that a notice issued by the

Service, which petitioner had brought with him to the March 1996

meeting, informed taxpayers that sections 6011 and 6012 required

taxpayers to file returns.   The revenue agent was not able to

cite for petitioner at the March 1996 meeting the specific

sections of the regulations under those Code sections that

elaborated on those filing requirements.

     The revenue officer told petitioner at the March 1996

meeting to send him a written request for abatement of the civil

penalties, which showed reasonable cause as to why the Service

should abate those penalties, and to submit his delinquent

returns for 1992, 1993, and 1994.   The revenue officer informed

petitioner that he would request that petitioner's request for

abatement and delinquent returns be assigned to him, since he was

having the March 1996 meeting with petitioner and thus was

familiar with those matters.

     3
        (...continued)
return for 1995 was not yet due.
                              - 11 -

     After the March 1996 meeting, the revenue officer opened a

case file on petitioner.   The revenue officer never received from

petitioner a request for abatement of the civil penalties or his

delinquent returns for 1992, 1993, and 1994.   However, the

revenue officer did receive on a date not disclosed by the record

a letter from petitioner in which he raised questions about who

has the authority to sign a return for him and about the Code of

Federal Regulations.   The revenue officer sent petitioner a

response to that letter in which he informed petitioner (1) that

he had decided not to abate the civil penalties, since petitioner

had not provided him with reasonable cause for abating those

penalties, and (2) that petitioner had the right to appeal that

decision.

     On May 28, 1997, respondent issued a notice of deficiency

(notice) to petitioner in which respondent determined, inter

alia, that petitioner is liable for the addition to tax under

section 6651(f) for fraudulent failure to file a return for each

of the years at issue.   In the notice, respondent determined that

petitioner's filing status for those years is married, filing

separately.

     On April 30, 1998, the Service filed separate notices of

Federal tax lien with the Register of Deeds, Jackson County,

Gainsboro, Tennessee, in favor of the United States on all

property and rights to property belonging to petitioner and Ms.

Leggett, respectively, for the civil penalties.
                                - 12 -

                                OPINION

     At trial, petitioner refused to take a position on res-

pondent's determination in the notice that his filing status for

the years at issue is married, filing separately.    Petitioner

presented no evidence at trial to show that that determination is

incorrect.    On brief, petitioner makes no reference to respon-

dent's determination with respect to his filing status.    On the

record before us, we find that petitioner has failed to show that

respondent's determination in the notice about his filing status

is wrong.

     The only issue remaining for our decision is whether pe-

titioner is liable for the addition to tax under section 6651(f)

for fraudulent failure to file a return for each of the years at

issue.    In order for that addition to tax to apply, we must

consider essentially the same elements that are involved in

determining whether a taxpayer is liable for the additions to tax

for fraud under section 6663 and its predecessor provision,

section 6653(b).    See Clayton v. Commissioner, 102 T.C. 632, 653

(1994).     Respondent must prove by clear and convincing evidence

under section 6651(f) that petitioner's tax liability for each

year at issue exceeds his prepayment credits and that his failure

to file a return for each such year was due to fraud.     See secs.

7454(a), 6651(a)(1), (b)(1); Rule 142(b); see also Clayton v.

Commissioner, supra.
                                 - 13 -

         Although petitioner does not dispute that his tax lia-

bility for each of the years 1993, 1994, and 1995 exceeds his

prepayment credits for each of those years, he alleges on brief

that "Respondent has not established * * * an underpayment of

tax" for 1992.    We disagree.   Although petitioner initially

claimed that there was an overpayment for 1992, he ultimately

conceded before the trial in this case that there is no over-

payment for 1992.    Moreover, the record establishes, and we have

determined, that, after taking into account the concessions by

the parties with respect to 1992, petitioner has a tax liability

for that year which is in excess of the prepayment credits that

he has for that year (viz., estimated tax payments totaling

$6,300).

       To prove fraudulent intent, respondent must prove by clear

and convincing evidence that the taxpayer intended to evade tax

that he or she believed to be owing by conduct intended to

conceal, mislead, or otherwise prevent the collection of such

tax.    See Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d

Cir. 1968); Parks v. Commissioner, 94 T.C. 654, 661 (1990);

Laurins v. Commissioner, 889 F.2d 910, 913 (9th Cir. 1989), affg.

Norman v. Commissioner, T.C. Memo. 1987-265.     The existence of

fraud is a question of fact to be resolved upon consideration of

the entire record.    See DiLeo v. Commissioner, 96 T.C. 858, 874

(1991), affd. 959 F.2d 16 (2d Cir. 1992); Recklitis v. Commis-

sioner, 91 T.C. 874, 909 (1988); Gajewski v. Commissioner, 67
                              - 14 -

T.C. 181, 199 (1976), affd. without published opinion 578 F.2d

1383 (8th Cir. 1978).   Fraud is never presumed or imputed and

should not be found in circumstances which create at most only

suspicion.   See Toussaint v. Commissioner, 743 F.2d 309, 312 (5th

Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v. Commissioner,

92 T.C. 661, 700 (1989); Katz v. Commissioner, 90 T.C. 1130, 1144

(1988).   Direct evidence of the requisite fraudulent intent is

seldom available.   See Petzoldt v. Commissioner, supra at 699;

Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).   Consequently,

respondent may prove fraud by circumstantial evidence.   See

Toussaint v. Commissioner, supra at 312; Marsellus v. Commis-

sioner, 544 F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-

368; Rowlee v. Commissioner, supra at 1123.

     The courts have identified a number of badges of fraud from

which fraudulent intent may be inferred.   Those badges include

(1) consistent and substantial understatement of income,

(2) failure to file a return, (3) lack of credibility of the

taxpayer's testimony, (4) dealing in cash, (5) concealing assets,

and (6) failing to cooperate with respondent's representatives.

See Laurins v. Commissioner, supra at 913; Bradford v.

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

Memo. 1984-601; Ruark v. Commissioner, 449 F.2d 311, 312-313 (9th

Cir. 1971), affg. per curiam T.C. Memo. 1969-48; Niedringhaus v.

Commissioner, 99 T.C. 202, 211 (1992); Parks v. Commissioner,

supra at 664-665; Miller v. Commissioner, 94 T.C. 316, 334
                              - 15 -

(1990); Recklitis v. Commissioner, supra at 910; Castillo v.

Commissioner, 84 T.C. 405, 409 (1985); Rowlee v. Commissioner,

supra at 1125.   In addition, the taxpayer's background and the

context of the events in question may be considered circumstan-

tial evidence of fraud.   See Plunkett v. Commissioner, 465 F.2d

299, 303 (7th Cir. 1972), affg. T.C. Memo. 1970-274; Niedringhaus

v. Commissioner, supra at 211.   Although no single factor is

necessarily sufficient to establish fraud, the existence of

several indicia constitutes persuasive circumstantial evidence of

fraud.   See Bradford v. Commissioner, supra at 307; Petzoldt v.

Commissioner, supra at 700.

     The record in this case is replete with indicia of fraud by

petitioner.   Prior to the years at issue, petitioner had a

history of filing returns and paying taxes.   He thus knew that he

was required to file returns and pay taxes.   Nonetheless, peti-

tioner willfully did not file a return or report income for any

of the years at issue, thereby establishing a pattern of sub-

stantial and consistent understatement of income.   We did not

find petitioner's explanations of his behavior to be credible.

On or about June 30, 1993, petitioner submitted to Biddle a false

Form W-8 in which he claimed not to be a U.S. citizen and to be

exempt from backup withholding rules.4   Except for estimated tax

     4
        Petitioner claims that Biddle hired petitioner as an
independent contractor and that therefore there was no with-
holding to be made by Biddle at the time in June 1993 when
                                                   (continued...)
                               - 16 -

payments totaling $6,300 for 1992, petitioner did not make

estimated tax payments for the years at issue.    No amounts were

withheld by Biddle for any of the years at issue from the com-

pensation that Biddle paid petitioner during those years.    On

March 4, 1994, petitioner submitted to the Service false Forms

1040NR seeking refunds of taxes previously paid for 1984 through

1992.    Petitioner dealt primarily in cash during the years at

issue and concealed certain real properties that he and Ms.

Leggett owned by transferring them to nominees.    Petitioner

failed to cooperate with respondent's representatives during

respondent's audit of him.

     Despite the foregoing indicia of fraud on the part of

petitioner that are established by the record, petitioner claims

that he did not intend to evade taxes for the years at issue.     He

contends that his failure to file returns and pay taxes due for

those years was based on his good-faith misunderstanding that the


     4
        (...continued)
petitioner submitted the false Form W-8 to Biddle. The parties
stipulated that petitioner worked for Biddle during the years at
issue as an employee, and not as an independent contractor.
However, it is not clear from the record how Biddle treated
petitioner during those years. In this connection, Biddle and
petitioner entered into a purported contract in January 1995,
which stated that petitioner was neither an employee nor an
independent contractor of Biddle. Moreover, although petitioner
made estimated tax payments totaling $6,300 for 1992, at the time
in June 1993 when he submitted the false Form W-8 to Biddle, he
had stopped making estimated tax payments. We believe that the
submission of that false form was an attempt by petitioner to
make sure that Biddle did not withhold any amounts from the
compensation that he paid petitioner.
                                - 17 -

tax law did not require him to file such returns and pay such

taxes.    According to petitioner, despite repeated inquiries, the

Service never informed him of his responsibility to file returns,

and his independent research and consultation with various

attorneys, predominately criminal defense attorneys, about the

requirement to file returns showed that there were "confusing and

conflicting case authorities" on that question.

     A good-faith misunderstanding of the tax laws could negate

fraud under section 6653(b).    See Niedringhaus v. Commissioner,

supra at 217.    However, "There is a difference * * * between a

good-faith misunderstanding of the law and a good-faith belief

that the law is invalid or a good-faith disagreement with the

law".    Id.   Based on our observation of petitioner's demeanor at

trial, we did not find him credible and do not accept his ex-

planations as to why he did not file returns and pay taxes due

for the years at issue and why he and Ms. Leggett transferred

certain of their real properties to nominees.    We are convinced

on the record before us that petitioner did not have a good-faith

misunderstanding of the tax law.5    By way of illustration, after

respondent commenced collection efforts in early 1994 against

     5
        At best, petitioner had a good-faith belief that the tax
law is invalid, or he had a good-faith disagreement with the tax
law. Even if petitioner had believed that he did not have to
file returns because the tax law requiring such filing is un-
constitutional, a belief that the tax law is unconstitutional and
should not apply is not a sufficient defense to fraud. See Cheek
v. United States, 498 U.S. 192, 205-206 (1991); Niedringhaus v.
Commissioner, 99 T.C. 202, 219 (1992).
                                - 18 -

petitioner and Ms. Leggett with respect to the civil penalties

that respondent had assessed around January 1994, petitioner

wrote a letter to the Service's District Director in Jackson-

ville, Florida, which stated in pertinent part:

     It has come to my attention that your thugs/agents
     locally have been making their rounds to local Natural
     Free Citizens to extort money from them, and to steal
     their property. The returns that you refer to in your
     4/18/94 data have been Lawfully revoked as of 4/20/93
     (Lawful Affidavit) and corrected Lawfully. My 4/29/94
     NOTICE OF OBJECTION, NOTICE TO ABATE (enclosed) still
     stands. Any action on or against my property will be
     deemed as Fraud and WILLFUL TRESPASS.

By way of further illustration, when petitioner met with re-

spondent's agents at the September 1995 meeting, he made friv-

olous arguments about why he was not required to file returns,

questioned the authority of the Service over him, and refused to

provide the information that those agents requested in an effort

to determine his tax liability or otherwise to cooperate with

respondent's representatives.    At the March 1996 meeting that

petitioner had with the revenue officer, petitioner asked him to

specify the sections in the Code and the regulations that re-

quired him to file returns.   The revenue officer pointed out to

petitioner that the notice issued by the Service, which peti-

tioner had brought with him to the March 1996 meeting, informed

taxpayers that sections 6011 and 6012 required taxpayers to file

returns.   Nonetheless, petitioner never filed returns for the

years at issue.
                              - 19 -

     Based on our examination of the entire record in this case,

we find that respondent has established by clear and convincing

evidence that petitioner intended to evade tax for each of the

years 1992 through 1995, which he believed to be owing, by

conduct intended to conceal, mislead, or otherwise prevent the

collection of such tax.   We further find on that record that

petitioner is liable for the addition to tax under section

6651(f) for each of those years.

     To reflect the foregoing and the concessions of the parties,

                                         Decision will be entered

                                    under Rule 155.
