                        T.C. Memo. 1998-52



                      UNITED STATES TAX COURT



                 ROBERT E. DUNHAM, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21581-94.               Filed February 9, 1998.



     Montfort S. Ray, for petitioner.

     Amy J. Sargent, Lloyd E. Mueller, and Rebecca D. Harris, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   In a notice of deficiency, respondent

determined deficiencies in petitioner Robert E. Dunham's Federal

income and self-employment taxes, additions to tax, and an

accuracy-related penalty as follows:
                                   - 2 -


                                Additions to Tax          Penalty
Year       Deficiency      Sec. 6651(f)    Sec. 6654    Sec. 6662(a)
1989         $39,942           ---            ---          $7,988
1990          32,812         $24,609        $2,159           ---
1991          34,411          25,808         1,979           ---
1992          40,963          30,722         1,786           ---

In the Answer, respondent made affirmative allegations seeking

additions to tax under section 6651(a)(1)1 for each of the

4 years in issue.       Respondent contends that section 6651(a)(1)

should apply alternatively for taxable years 1990, 1991, and

1992, if we decide that section 6651(f) additions to tax do not

apply for any of these years.       In the Amendment to the Answer,

respondent also alleged that section 6662(a) accuracy-related

penalties should apply alternatively for 1990, 1991, and 1992 if

we decide that section 6651(f) additions to tax do not apply.         At

trial, respondent moved for a penalty under section 6673.

       After concessions, the issues for our consideration are:

(1) Whether petitioner is liable for tax on his income from a

veterinary practice and other sources for each of the years in

issue; (2) whether petitioner is liable for self-employment tax

for each of the years in issue; (3) whether petitioner is liable

for additional tax under section 72 in 1989 for a premature

distribution of $30,000 from an individual retirement account;

(4) whether petitioner is liable for additions to tax under

       1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -


either section 6651(a)(1) or section 6651(f), and under section

6654 for the years in issue; and (5) whether a penalty should be

awarded under section 6673.   Respondent has conceded that

petitioner is not liable for section 6662(a) accuracy-related

penalties as determined in the notice of deficiency for 1989 and

as alleged in the Amendment to the Answer for 1990, 1991, and

1992.

                          FINDINGS OF FACT2

     At the time the petition was filed, petitioner resided in

Crossett, Arkansas.   During the years in issue, petitioner was a

veterinarian in a sole proprietorship doing business as the

Crossett Animal Clinic.   Petitioner received adjusted gross

income from his veterinary practice of $65,000 in each of the

years in issue.   In 1992, petitioner had a short-term capital

gain of $752.50 from the sale of stock.       In 1992, petitioner also

received interest income of $35 and dividend income of $65.

Petitioner failed to report the income from his veterinary

practice, the capital gain, or the interest and dividend income,

or to pay Federal income taxes on these amounts.      In 1989,

petitioner received a $30,000 premature distribution from his

individual retirement account (IRA).



     2
       The stipulation of facts and the attached exhibits are
incorporated therein by this reference.
                                - 4 -


     Petitioner did not maintain records of his income from his

veterinary practice.    Petitioner received payments for his

veterinary services primarily in cash or by check and did not

keep records of these payments.    On occasion, petitioner

permitted customers to establish a charge account.    When the

customer paid the account, petitioner destroyed records of the

account receivable.    Petitioner did not keep records of his

expenses from his veterinary practice, such as the costs of

medical or laboratory equipment, drugs, or medical supplies.      He

discarded invoices relating to these expenses.

     During the years in issue, petitioner maintained a bank

account in connection with his veterinary practice in the name

"Crossett Animal Hospital".    Petitioner made deposits to this

account totaling $507, $8,462, $43,339 and $87,705, in 1989,

1990, 1991, and 1992, respectively.     Petitioner was married and

had held his personal residence with his wife as tenants by the

entirety under Arkansas law.    In 1987, petitioner transferred his

interest in the residence to his wife for consideration of $1.

     During April 1990, petitioner filed an unsigned Form 1040,

U.S. Individual Income Tax Return, for 1989.    On the unsigned

1989 return, petitioner reported $30,000 in income from the

premature IRA distribution.    In a letter attached to the return,

petitioner stated that he intentionally did not sign the return

because signing the return under penalties of perjury, as
                               - 5 -


provided on the form, would be a waiver of his constitutional

rights.   Petitioner attached two opinion letters to the return,

one from an attorney and the other from an accountant, which

advised that by signing a Form 1040, a taxpayer waives

constitutional rights or subjects himself to criminal sanctions.

Petitioner consulted and received advice from a number of tax

professionals, including the two whose letters were enclosed with

the 1989 return.   The tax professionals each held tax protester

beliefs similar to petitioner's.   The opinions of tax

professionals had been obtained by petitioner from outside of his

own area.   Petitioner had sought the advice of a local

professional who declined involvement with petitioner's tax

protest returns.

     In 1992, the Internal Revenue Service (IRS) began an

examination of petitioner's 1989 tax liability.   The audit

expanded to include 1990, 1991, and 1992.   Petitioner became

aware of the audit by October 1992.    In April 1993 and November

1994, after he was notified of the audit, petitioner submitted

Forms 1040NR, U.S. Nonresident Alien Income Tax Return, for each

of the years in issue, including the taxable year 1989 for which

petitioner had filed the unsigned Form 1040.   On the Forms

1040NR, dated April 12, 1993, petitioner provided his name and

signed each of the forms, but he did not list his Social Security

number.   Petitioner provided his street address and identified
                               - 6 -


his country as "Arkansas and the States united with it by and

under the Constitution of the USA".    The Forms 1040NR contained

the word "NONE" or character "N/A" in pertinent spaces for

income, deductions, taxes owed, and payments.   On the return,

petitioner reported that he was not a U.S. citizen.   As part of

the return, petitioner attached a statement to each form that

reported that he was "a domiciled inhabitant of an American

State" and that his "tax home was within an American Union

State".   Petitioner reported that he did not receive any gross

income effectively connected to a U.S. trade or business.    He

further reported that he had American earned income of

approximately $65,000 which was foreign gross income excludable

and exempt from U.S. taxation under section 911(a)(1).

     On August 30, 1994, respondent mailed a notice of deficiency

to petitioner.   Respondent determined that petitioner did not

file valid tax returns for each of the years in issue.   After he

received the notice of deficiency, petitioner submitted a second

set of Forms 1040NR for taxable years 1990, 1991, and 1992, dated

November 15, 1994.   Petitioner provided his name and Social

Security number on the forms and signed each of them.    As a part

of the address, petitioner identified his country as "Arkansas,

USA".   The second set of Forms 1040NR contained "NONE" or "N/A"

in pertinent spaces.   On line 23 of the forms, petitioner

reported that he received $65,000 in income that was exempt from
                                - 7 -


tax by treaty.    In a statement attached to the forms, petitioner

reported that he resided in Arkansas, USA.    Petitioner denied

that he was a U.S. citizen or a resident of a State subject to

U.S. sovereignty.    He also denied that he was a nonresident alien

engaged in a trade or business within the United States.

Petitioner reported that the $65,000 in income that he received

was "exempted from U.S. tax imposition pursuant to the United

States tax convention of September 17, 1787" (citing U.S. Const.

art. I, sec. 2; sec. 894 (Income Affected by Treaty)).

     In September 1995, petitioner submitted a fourth set of

documents to the IRS for each of the years in issue.    The

documents were entitled "Statement in Lieu of Return" and

reported that petitioner received $65,000 per year in Federal

Reserve Notes.    Among other declarations, petitioner stated that

the Federal Reserve Notes were not income because they were not

redeemable in gold or silver and do not constitute payment in

U.S. dollars.    Petitioner deducted a $65,000 fair market value

from the amount of Federal Reserve Notes that he received and

calculated "0" income and no tax owed.

     The petition in this case does not allege any factual basis

that establishes error in respondent's deficiency determination.

Instead, the petition, along with other pleadings, contains tax

protester arguments.    Petitioner did not cooperate with

respondent during the preparation of this case.    During the audit
                               - 8 -


of the years in issue, petitioner did not meet with respondent's

agents and failed to provide records to respondent in connection

with the examination of his tax liability.    Petitioner's answers

to respondent's discovery were inadequate.    In addition,

petitioner submitted six discovery requests to respondent that

concerned irrelevant tax protester matters that have no

meaningful relationship to respondent's determination of

petitioner's income tax liability, additions to tax, and

penalties.   Petitioner maintained tax protester arguments in the

documents he submitted to the IRS and in his testimony at trial

even though he knew that this Court has held the arguments to be

frivolous.

                              OPINION

     At trial, petitioner conceded that if the Court finds him

subject to Federal income tax, he had adjusted gross income from

his veterinary practice of $65,000 in each of the years in issue.

Petitioner also conceded that he received interest and dividend

income and short-term capital gain in 1992.    At trial, petitioner

expressed various tax protester arguments that are without merit

and have often been rejected by this Court.    Petitioner did not

present any evidence concerning respondent's determination that

he is subject to self-employment tax under section 1401 on the

$65,000 income from his veterinary practice for each of the years
                                - 9 -


in issue.    Accordingly, petitioner is liable for Federal income

and self-employment taxes for each of the years in issue.

     Petitioner received a $30,000 premature distribution from

his IRA.    Section 72(t)(1) imposes a tax of 10 percent of the

amount of an early distribution from a qualified retirement

account.    Section 72(t)(2) provides for certain exceptions to the

general rule contained in paragraph (1).     Petitioner has not

argued that any of the statutory exceptions apply.     Accordingly,

petitioner is liable for the 10-percent additional tax on the

$30,000 early distribution under section 72(t).

     For 1989, petitioner filed an unsigned Form 1040.

Respondent determined that the form was not a valid return and

that petitioner was liable for a section 6651(a) addition to tax

for 1989.    Section 6651(a)(1) imposes an addition to tax equal to

5 percent of the tax due for each month that a return is

delinquent, not to exceed 25 percent.     The section 6651(a)(1)

addition to tax does not apply if the failure to timely file is

due to reasonable cause and not due to willful neglect.

Reasonable cause exists if the taxpayer exercised ordinary

business care and prudence and was nevertheless unable to file a

return within the prescribed time.      Crocker v. Commissioner, 92

T.C. 899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin.

Regs.   Respondent asserted the section 6651(a)(1) addition for
                                - 10 -


1989 in the Answer and, thus, has the burden of proof on this

issue.     Rule 142(a).

       An unsigned Form 1040 is not a valid return.    Cupp v.

Commissioner, 65 T.C. 68, 78 (1975), affd. without published

opinion 559 F.2d 1207 (3d Cir. 1977); Kelly v. Commissioner, T.C.

Memo. 1987-352, affd. without published opinion 858 F.2d 743

(11th Cir. 1988).     Petitioner's failure to file a valid tax

return for 1989 was not due to reasonable cause.      Rather,

petitioner enclosed a letter with the return that stated he

intentionally did not sign his return based on tax protester

arguments.     Moreover, petitioner admitted that he knew these

arguments have been repeatedly rejected by this Court as

frivolous.     Accordingly, petitioner is liable for a section

6651(a)(1) addition to tax for 1989.

       Respondent determined that petitioner also failed to file

returns for 1990, 1991, and 1992 and that for these years the

failure to file was fraudulent.     Where a taxpayer's failure to

file a return is fraudulent, the addition to tax is equal to 15

percent of the tax due for each month that the return is

delinquent, up to a maximum of 75 percent.     Sec. 6651(f)(1) and

(2).     Petitioner contends that the two sets of Forms 1040NR and

the "Statements in Lieu of Return" constitute valid tax returns

for purposes of section 6651.
                              - 11 -


     We first consider whether any of the documents submitted by

petitioner constitute valid tax returns under section 6651.    If

not, we then consider whether petitioner's failure to file a

return in 1990, 1991, and 1992 was fraudulent.   The two sets of

Forms 1040NR were not submitted to the IRS until April 1993 and

November 1994, respectively, and the "Statements in Lieu of

Return" were not submitted until September 1995.    Accordingly,

none of these documents were filed in time to prevent the

imposition of the maximum addition to tax under section

6651(a)(1) or section 6651(f) for the taxable years 1990 and

1991.   We find that petitioner failed to file returns for 1990

and 1991.

     Petitioner filed one of the Forms 1040NR for 1992 on April

12, 1993; that form would have been timely filed if it

constituted a valid return.   Accordingly, we must address whether

the nonresident alien form is a valid tax return.    Petitioner

argues that the Form 1040NR, U.S. Nonresident Alien Income Tax

Return, is a valid tax return for purposes of section 6651

because it accurately reported his income from his veterinary

practice as $65,000.   Petitioner argues that respondent has

conceded that petitioner accurately reported the amount of his

income on the form by stipulating that petitioner had annual

adjusted gross income from his veterinary practice of $65,000.
                               - 12 -


     Section 6011(a) requires taxpayers to file a return or

statement according to the forms and regulations prescribed by

the Secretary.    The Supreme Court has on a number of occasions

considered the essential elements of a valid tax return, usually

for purposes of the statute of limitations.    Badaracco v.

Commissioner, 464 U.S. 386 (1984); Commissioner v. Lane-Wells

Co., 321 U.S. 219 (1944); Zellerbach Paper Co. v. Helvering, 293

U.S. 172 (1934); Florsheim Bros. Drygoods Co. v. United States,

280 U.S. 453 (1930).    The essential elements of a valid return,

developed from Supreme Court precedent, are set forth in Beard v.

Commissioner, 82 T.C. 766, 777 (1984), affd. 793 F.2d 139 (6th

Cir. 1986) as follows:

     First, there must be sufficient data to calculate tax
     liability; second, the document must purport to be a
     return; third, there must be an honest and reasonable
     attempt to satisfy the requirements of the tax law; and
     fourth, the taxpayer must execute the return under
     penalties of perjury. [Id. at 777.]

     In this case, the question of whether the Form 1040NR is a

valid return turns on the third requirement, whether petitioner

made an honest and reasonable attempt to satisfy the requirements

of the tax law.    At trial, petitioner admitted that at the time

he submitted the Forms 1040NR, he knew this Court had held his

arguments to be frivolous.    Petitioner, nevertheless, attempted

to advance his frivolous tax protester arguments that he was not

a U.S. citizen by purposefully filing a nonresident alien form.

Petitioner is a well-educated, articulate, and knowledgeable
                               - 13 -


individual.    He intentionally chose to submit the Form 1040NR,

rather than the Form 1040 that he knew was appropriate for his

circumstances, to advance his protester position in an effort to

deceive the Government.    Petitioner knew that the position he was

taking in submitting the Forms 1040NR was frivolous.

Accordingly, we find that petitioner did not make an honest and

reasonable attempt to comply with the requirements of the tax

law.    The Forms 1040NR submitted by petitioner are not valid

returns for purposes of section 6651.

       Having found that petitioner did not file tax returns for

1990, 1991, and 1992, we must consider whether petitioner's

failure to file was fraudulent within the meaning of section

6651(f).    In determining whether a taxpayer's failure to file is

fraudulent, we consider the same elements that are considered in

imposing the fraud penalty under section 6663.    Clayton v.

Commissioner, 102 T.C. 632, 653 (1994).    Fraud is an intentional

wrongdoing designed to evade tax known or believed to be owing.

Edelson v. Commissioner, 829 F.2d 828, 833 (9th Cir. 1987), affg.

T.C. Memo. 1986-223; Bradford v. Commissioner, 796 F.2d 303, 307

(9th Cir. 1986), affg. T.C. Memo. 1984-601.    Respondent has the

burden of proving fraud by clear and convincing evidence.      Sec.

7454(a); Rule 142(b); Clayton v. Commissioner, supra at 652-653.

       The existence of fraud is a question of fact to be resolved

upon consideration of the entire record.    DiLeo v. Commissioner,
                               - 14 -


96 T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Estate

of Pittard v. Commissioner, 69 T.C. 391 (1977).     Fraud is never

presumed and must be established by independent evidence that

establishes fraudulent intent.    Edelson v. Commissioner, supra;

Beaver v. Commissioner, 55 T.C. 85, 92 (1970).    Fraud may be

proven by circumstantial evidence because direct evidence of the

taxpayer's fraudulent intent is seldom available.     Spies v.

United States, 317 U.S. 492 (1943); Rowlee v. Commissioner, 80

T.C. 1111 (1983); Gajewski v. Commissioner, 67 T.C. 181, 199

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

1978).    The taxpayer's entire course of conduct may establish the

requisite fraudulent intent.     Stone v. Commissioner, 56 T.C. 213,

223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106

(1969).

     Courts have developed several indicia, or "badges", that

tend to establish fraud.   They include:   (1) Understatement of

income, (2) inadequate books and records, (3) failure to file tax

returns, (4) implausible or inconsistent explanations of

behavior, (5) concealment of assets, (6) failure to cooperate

with tax authorities, (7) filing false Forms W-4, (8) failure to

make estimated tax payments, (9) dealing in cash, (10) engaging

in illegal activity, and (11) attempting to conceal illegal

activity.   Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir.

1990); Bradford v. Commissioner, supra at 307; Recklitis v.
                                - 15 -


Commissioner, 91 T.C. 874, 910 (1988).    This list is

nonexclusive.   Miller v. Commissioner, 94 T.C. 316, 334 (1990).

     During the years in issue, petitioner failed to file valid

tax returns and failed to report substantial amounts of income

from his veterinary practice.    Petitioner intentionally did not

maintain records of his income or business expenses and

intentionally discarded the minimal records that he received.

The $65,000 amount, although stipulated in this case, cannot be

shown to be the actual amount of income earned in petitioner's

veterinary practice.   Moreover, petitioner did not cooperate with

respondent during the administrative or judicial phases of this

case.   Petitioner refused to meet with respondent's agent and

responded to requests for meetings with tax protester rhetoric.

Petitioner submitted numerous correspondence to respondent that

attempted to advance his tax protester position and did not

address the factual accuracy of respondent's determination.

During testimony at trial, petitioner admitted that he was aware

that the Tax Court has held the tax protester arguments to be

frivolous.

     Petitioner took affirmative steps to conceal his income and

assets.   From 1987 until 1991, petitioner substantially avoided

use of commercial banks for depositing income and paying expenses

from his veterinary practice.    Petitioner dealt extensively in

cash for payment of expenses and did not retain receipts of the
                                - 16 -


expenses.    In addition, in 1987, petitioner transferred his

interest in his primary residence to his wife for nominal

consideration.

       Petitioner argues that the transfer of the personal

residence to petitioner's wife was not fraudulent as a matter of

law.    Petitioner contends that respondent could not have reached

the property because he held the property with his wife as

tenants by the entirety under the laws of the State of Arkansas

prior to the transfer.    Under Arkansas law, a judgment creditor

of one spouse cannot force the partition and sale of property

held by husband and wife as tenants by the entirety.     Lowe v.

Morrison, 289 Ark. 459, 460-461, 711 S.W.2d 833, 834 (1986).

However, a debtor-spouse's interest in an entirety estate and

entitlement to one-half the rents and profits from the property

may be executed upon to satisfy a judgment against the debtor-

spouse, subject to the nondebtor-spouse's right of survivorship.

Morris v. Solesbee, 48 Ark. App. 123, 127, 892 S.W.2d 281, 283

(1995).     Petitioner's transfer of the personal residence held as

tenants by the entirety to his wife for nominal consideration can

be fraudulent under Arkansas law.    Under Arkansas law, a Federal

tax lien filed to collect a spouse's separate tax liability is a

lien against the spouse's interest in the entirety estate.

Petitioner attempted to remove his residence from the reach of

respondent by quitclaiming his interest in the entirety estate to
                              - 17 -


his wife.   We find that the transfer of the personal residence to

petitioner's wife is evidence of fraud.

     Most of the badges of fraud that are relied on by the Court

are present in this case.   There is a pattern of failure to file

personal income tax returns, concealment of assets and income,

failure to cooperate with IRS agents, failure to keep records of

income-producing activities, destruction of tax records, dealing

in cash, and fraudulent transfer of assets.   Respondent has

proven by clear and convincing evidence that petitioner’s failure

to file returns for taxable years 1990, 1991, and 1992 was

fraudulent.

     Petitioner argues that he did not act fraudulently in

submitting the Forms 1040NR (U.S. Nonresident Alien Income Tax

Return) rather than a Form 1040 (U.S. Individual Tax Return)

because he disclosed his income of $65,000 to respondent in the

various documents that he submitted to the IRS.   Petitioner

argues that the documents state the amounts of income stipulated

by the parties and refute that petitioner was concealing his

income from respondent.   We do not think that these documents

preclude a finding of fraud in this case.   Petitioner submitted

these documents to the IRS only after he was notified of the IRS

audit.   Moreover, petitioner did not submit the second set of

Forms 1040NR and documents entitled "Statement in Lieu of Return"

until after the notice of deficiency was mailed to him.
                              - 18 -


     We believe that petitioner submitted these documents

primarily to advance his frivolous tax protester arguments rather

than to report honestly and accurately his income to respondent.

He purposefully did not keep records of his income and expenses

with an intent to deceive the IRS.     After the IRS began the

audit, petitioner realized that his deceptive practices of not

filing returns had been uncovered and that he was caught.

Because he had failed to keep records of his income, petitioner

had to guess at the amount of income he earned.    He reported the

same amount as his income for each of the years in issue.

Because of petitioner's fraudulent failure to keep records, it

was difficult to determine the actual amount of petitioner's

income.   Moreover, subsequent voluntary disclosure does not

absolve a taxpayer of antecedent fraud.     Badaracco v.

Commissioner, 464 U.S. at 394; George M. Still, Inc. v.

Commissioner, 19 T.C. 1072, 1077 (1953), affd. 218 F.2d 639 (2d

Cir. 1955).   Petitioner cannot rely on the Forms 1040NR and

Statements in Lieu of Return as a shield from a fraud penalty,

especially with the presence in this case of most of the

enumerated badges of fraud.   Accordingly, petitioner is liable

for section 6651(f) additions to tax for 1990, 1991, and 1992.

     Section 6654(a) imposes an addition to tax for failure to

make timely estimated income tax payments.     Where prepayments of

tax do not equal the percentage of total liability required to be
                               - 19 -


paid as estimated tax, the addition is automatically imposed

unless the taxpayer proves that a statutory exception applies.

Sec. 6654; Habersham-Bey v. Commissioner, 78 T.C. 304, 319-320

(1982).   Petitioner has not proven that an exception applies and

is liable for the section 6654 addition to tax in each of the

years in issue.

     Respondent has moved that we impose a penalty on petitioner

under section 6673.   Section 6673(a)(1) authorizes the Court to

require a taxpayer to pay the United States a penalty not

exceeding $25,000 when the taxpayer institutes or maintains a

proceeding primarily for delay or where the taxpayer’s position

is frivolous or groundless.   Petitioner knew that this Court has

held the tax protester arguments that he was asserting to be

frivolous.    Nevertheless, petitioner continually asserted the tax

protester arguments in his petition and other pleadings,

responses to respondent's discovery requests, requests for

discovery from respondent, and testimony at trial.   Petitioner

did not cooperate with respondent during audit or the appeals

conference.

     We find that petitioner maintained frivolous positions with

respect to his income tax liability and instituted and maintained

this proceeding primarily for delay.    Accordingly, we find that

petitioner's conduct justifies that award of damages.   In view of

the number of years in issue and the amount of unreported income,
                              - 20 -


we award a penalty to the United States of $10,000 under the

provisions of section 6673.

     To reflect the foregoing and concessions by the parties,

                                   An appropriate order will

                              be issued and a decision will be

                              entered under Rule 155.
