                                T.C. Memo. 2012-99



                         UNITED STATES TAX COURT



                    ROBERT F. LAIN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 3480-10.                          Filed April 4, 2012.




      Robert F. Lain, pro se.

      Thomas Gilson Hodel, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      HAINES, Judge: This case arises from a petition for redetermination filed in

response to a notice of deficiency issued to petitioner for 1995, 1996, and 1998-
                                          -2-

2005 (years at issue). Respondent determined the following deficiencies and

additions to petitioner’s Federal income tax:1

                                                    Additions to tax
                                          Sec.            Sec.               Sec.
      Year          Deficiency           6651(f)       6651(a)(2)           6654

      1995             $7,519            $5,451            $1,880           $411
      1996             19,652            14,248             4,913          1,046
      1998             30,173            21,875             7,543          1,369
      1999              2,202             1,596               551            106
      2000              1,560             1,131               390             ---
      2001             43,892            31,822            10,973          1,754
      2002             82,664            59,931            20,666          2,762
      2003            104,140            75,502            26,035          2,687
      2004             90,879            65,887            22,720          2,604
      2005             95,503            69,240            23,876          3,831

      The issues for decision are: (1) whether petitioner failed to report income

from his oilfield service business for the years at issue; (2) whether petitioner’s

failure to file Federal income tax returns for the years at issue was “fraudulent”

within the meaning of section 6651(f); (3) whether the section 6651(a)(2) addition to

tax applies to petitioner’s failure to pay for the years at issue; and (4) whether the




      1
       All section references are to the Internal Revenue Code, as amended, and all
Rule references are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated. Amounts are rounded to the nearest dollar.
                                          -3-

section 6654 addition to tax applies to petitioner’s failure to pay estimated tax for

the years at issue.2

                                FINDINGS OF FACT

       Some of the facts have been stipulated and are so found.3 The stipulation of

facts, together with the attached exhibits, is incorporated herein by this reference.

At the time petitioner filed his petition, he lived in Wyoming.

       Petitioner is self-employed in the oilfield industry and has spent most of the

last 10 years working in environmental cleanup and drilling supervision. Petitioner

charges a daily rate for his services. During the years at issue petitioner provided

services to vendors under the names La Phoenix Research (La Phoenix) and White

Stone. Petitioner testified that La Phoenix and White Stone were trusts but did not

provide any trust documents to corroborate his testimony.

       2
        Respondent has conceded that the sec. 6651(a)(2) addition to tax does not
apply for 1995. Further, respondent argues that if the Court does not find petitioner
liable for the addition to tax pursuant to sec. 6651(f) for the years at issue, the Court
should find petitioner liable in the alternative for the sec. 6651(a)(1) addition to tax
for the years at issue.
       3
       On brief petitioner argues that he signed the stipulation of facts under duress
and objects to including the stipulation of facts in the record. Petitioner has not
presented any evidence to support this argument. Stipulations are generally treated
as “conclusive admission[s]”. Rule 91(e). However, we will disregard stipulations
where the facts as stipulated are “clearly contrary to facts disclosed by the record”.
Jasionowski v. Commissioner, 66 T.C. 312, 318 (1976). These circumstances are
not present here.
                                         -4-

      In 1995 and 1996 petitioner maintained a checking account with the Christian

Patriot Association (Christian Patriot). Christian Patriot operated what is known as

a “warehouse banking scheme” in Oregon. Under this scheme, Christian Patriot

commingled funds from various clients in a single bank account for the purpose of

concealing the sources of such funds. From 1998 to 2005 petitioner and his wife,

Amelia Lain, maintained two checking accounts with CITCO Federal Credit Union.

During the years at issue petitioner used multiple addresses for his bank accounts

and billing.

      Petitioner did not keep books and records of amounts received for his

services under his own name, La Phoenix, or White Stone during the years at issue.

As a result, the Internal Revenue Service (IRS) used the “specific item” method to

reconstruct petitioner’s income for the years at issue. As part of this process the

IRS issued summonses to banks and other third parties. Petitioner tried to block

IRS efforts through a petition to quash summons or grant a motion for evidentiary

hearing (petition to quash) filed on September 8, 2004, in the U.S. District Court for

the District of Wyoming (District Court). On September 9, 2005, the District Court

denied petitioner’s motion to quash, holding that his argument was “utterly

meritless”.
                                          -5-

        The IRS third-party summonses revealed the following payments for services

rendered:

        (1)   Enron Oil & Gas Co. paid La Phoenix $27,310, $4,684, $7,000, and

$2,100 in 1995, 1996, 1998, and 1999, respectively;

        (2)   Jordan Drilling Fluids, Inc., paid petitioner $1,375 in 1996;

        (3)   Cross Timbers Operating Co. paid La Phoenix and White Stone a

combined $78,363, $7,673, and $7,512 in 1998, 1999, and 2000, respectively;

        (4)   Ultra Resources, Inc., paid White Stone $33,112, $24,399, and

$13,007 in 2001, 2002, and 2003, respectively;

        (5)   Alpine Operating Co., LLC, paid White Stone $24,780 in 2001;

        (6)   EOG Resources, Inc., paid White Stone $31,083, $35,156, $201,981,

and $271,475 in 2001, 2003, 2004, and 2005, respectively;

        (7)   Infinity Oil & Gas of Wyoming, Inc., paid White Stone $59,387 in

2002;

        (8)   Burlington Resources, Inc., paid White Stone $7,322 in 2003;

        (9)   XTO Energy, Inc., paid White Stone $103,774 and $10,366 in 2003

and 2004, respectively;

        (10) Andarko Petroleum Corp. paid White Stone $32,945, $137,757, and

$134,480 in 2001, 2002, and 2003, respectively; and
                                            -6-

       (11) Cabot Oil & Gas Corp. paid White Stone $46,357 in 2004. Petitioner

does not dispute the authenticity of these payments.

       Petitioner is familiar with tax return filing requirements and has filed Federal

tax returns and paid taxes for years before the years at issue. Nonetheless, for the

years at issue petitioner did not file Federal income tax returns or make any

estimated tax payments for himself, La Phoenix, or White Stone. Petitioner also did

not file a Federal income tax return for 1994.

       The IRS prepared a substitute for return pursuant to section 6020(b) for each

of the years at issue. The notice of deficiency was issued on November 10, 2009,

and petitioner timely filed his petition.

                                       OPINION

I.     Petitioner’s Income

       The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving that those

determinations are incorrect. Rule 142(a)(1). Section 61 defines gross income to

include “all income from whatever source derived”.

       The “specific item” method is an indirect method of income reconstruction

that consists of evidence of specific amounts of income received by a taxpayer and

not reported on the taxpayer’s return. Estate of Beck v. Commissioner, 56 T.C.
                                          -7-

297, 353, 361 (1971). It is well settled that taxpayers are required to report every

item of income received and maintain records to establish the correct amounts of

income, deductions, and credits required to be shown on their tax returns. Petzoldt

v. Commissioner, 92 T.C. 661, 687 (1989). Petitioner failed to maintain books and

records to establish income. Thus, respondent was justified in using the “specific

item” method of proof to determine petitioner’s tax liabilities for the years at issue.

See Estate of Beck v. Commissioner, 56 T.C. at 353-354 (“[t]here is no restriction

on the method or theories by which respondent may test his views that unreported

income exists provided they are reasonably calculated to disclose the presence or

absence of unreported income”).

      The Court of Appeals for the Tenth Circuit, to which an appeal in this case

would lie, has determined that a presumption of correctness generally attaches to a

deficiency determination when the Commissioner establishes a timely assessment of

the tax due, supported by a “minimal evidentiary foundation.” See United States v.

McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991). The Commissioner’s burden

requires the introduction of “substantive evidence” demonstrating that the taxpayer

received unreported income. Id. This presumption of correctness permits judgment

in the Commissioner’s favor unless the taxpayer produces substantial evidence

overcoming it. Id.
                                         -8-

      Petitioner concedes that he performed services for and charged a daily rate to

various vendors in the oilfield industry during the years at issue under his own name,

La Phoenix, and White Stone. Respondent has presented documents from these

vendors providing the amounts and years of payments made to petitioner, La

Phoenix, and White Stone. Petitioner does not dispute the authenticity of these

documents. Rather, petitioner sets forth a series of frivolous and misguided

arguments regarding this Court’s jurisdiction, the burden of proof, and obstruction

of justice. Petitioner’s only authority for his arguments is a convoluted reading of

various provisions of the Internal Revenue Code, the Internal Revenue Manual, and

cases cited out of context. Petitioner has never raised a reasonable dispute with

respect to the income reported by third parties for the years in issue.

      Accordingly, respondent has established a presumption of correctness through

clear and convincing evidence of petitioner’s unreported income, and petitioner has

failed to present any evidence to overcome it. We therefore sustain respondent’s

determinations with respect to petitioner’s deficiencies for the years at issue.
                                          -9-

II.   Additions to Tax

      The Commissioner has the burden of production with respect to any penalty,

addition to tax, or additional amount. Sec. 7491(c). The Commissioner satisfies

this burden of production by coming forward with sufficient evidence indicating

that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C.

438, 446 (2001). Once the Commissioner satisfies this burden of production, the

taxpayer must persuade the Court that the Commissioner’s determination is in error

by supplying sufficient evidence of an applicable exception. Id. The Commissioner

has the burden of proof by clear and convincing evidence with respect to a

determination of fraud. See sec. 7454(a); Rule 142(b).

      A.     Section 6651(f)--Failure To File

      Petitioner did not file tax returns or pay taxes, including estimated taxes, for

the years at issue. Sections 6011 and 6012 require every individual who has gross

income in excess of certain amounts for a taxable year to file an income tax return.

Section 6651(a)(1) provides for an addition to tax for failure to file a timely return,

equal to 5% of the amount required to be shown as tax on the return, for each month

or fraction thereof during which such failure continues, not exceeding 25% in the

aggregate. If, however, the failure to file any return is fraudulent, section 6651(f)

imposes an increased addition to tax equal to 15% of the amount required to be
                                          - 10 -

shown as tax on the return for each month or fraction thereof during which such

failure continues, not exceeding 75% in the aggregate (instead of the 5%/maximum

25% addition under section 6651(a)(1)). Respondent has determined that

petitioner’s failures to file for the years at issue were fraudulent.

       In ascertaining whether petitioner’s failure to file was fraudulent under

section 6651(f), the Court considers the same elements that are considered in

imposing the fraud penalty under section 6663 and former section 6653(b). Clayton

v. Commissioner, 102 T.C. 632, 653 (1994). Those two elements of fraud are: (1)

the existence of an underpayment, and (2) fraudulent intent with respect to some

portion of the underpayment. See Petzoldt v. Commissioner, 92 T.C. at 699.

       The existence of an underpayment is not in question here because we have

determined that respondent has presented clear and convincing evidence of

petitioner’s unreported income, petitioner has not overcome respondent’s

presumption of correctness, and petitioner has failed to pay taxes for the years at

issue. Fraudulent intent is a question of fact that must be considered on the basis of

an examination of the entire record and petitioner’s entire course of conduct. Id.

Fraud is never presumed and must be established by independent evidence of

fraudulent intent. Id.
                                         - 11 -

      Courts have developed a nonexclusive list of factors, or “badges of fraud”,

that demonstrate fraudulent intent. Niedringhaus v. Commissioner, 99 T.C. 202,

211 (1992). They include: (1) failing to file income tax returns; (2) understating

income; (3) failing to maintain adequate records; (4) concealing income or assets;

(5) failing to cooperate with tax authorities; (6) asserting frivolous arguments

and objections to the tax laws; (7) lack of credibility in testimony; and (8) failing to

make estimated tax payments. See id.; Recklitis v. Commissioner, 91 T.C. 874, 910

(1988); Kotmair v. Commissioner, 86 T.C. 1253 (1986). No single factor is

necessarily sufficient to establish fraud. Niedringhaus v. Commissioner, 99 T.C. at

211. However, the existence of several indicia may constitute persuasive

circumstantial evidence of fraud. See id.; Petzoldt v. Commissioner, 92 T.C. at 700.

We now address these badges of fraud with respect to the instant case.

             1.     Failing To File Tax Returns

      A taxpayer's filing of income tax returns in prior years is evidence that the

taxpayer was aware of his or her obligation to file returns. Petzoldt v.

Commissioner, 92 T.C. at 701. Failure to file income tax returns, even over an

extended period, does not per se establish fraud. Grosshandler v. Commissioner, 75

T.C. 1, 19 (1980); Coulter v. Commissioner, T.C. Memo. 1992-224. However, an

extended pattern of failing to file income tax returns may be persuasive
                                          - 12 -

circumstantial evidence of fraud. Marsellus v. Commissioner, 544 F.2d 883, 885

(5th Cir. 1977), aff’g T.C. Memo. 1975-368; Grosshandler v. Commissioner, 75

T.C. at 19. Further, when a taxpayer’s failure to file for several years is viewed in

the light of his or her previous filing of income tax returns for prior years, the

taxpayer’s nonfiling weighs heavily against him or her because the taxpayer is

aware of the requirement. Castillo v. Commissioner, 84 T.C. 405, 409 (1985).

       Petitioner was familiar with tax return filing requirements during the years at

issue and has filed Federal tax returns and paid taxes for previous years. Therefore,

this factor weighs heavily against petitioner.

              2.    Understating Income

       Consistent failure to report substantial amounts of income over a number of

years is, standing alone, highly persuasive evidence of fraudulent intent. See

Temple v. Commissioner, T.C. Memo. 2000-337, aff’d, 62 Fed. Appx. 605 (6th Cir.

2003); see also Holland v. United States, 348 U.S. 121 (1954). Petitioner failed to

report taxable income for the 10 years at issue. Therefore, this factor weighs against

petitioner.
                                        - 13 -

             3.     Failing To Maintain Adequate Records

      Petitioner failed to maintain books and records of amounts received for his

services rendered during the years at issue under his name, La Phoenix, or White

Stone. Therefore, this factor weights against petitioner.

             4.     Concealing Income or Assets

      In 1995 and 1996 petitioner participated in the Christian Patriot warehouse

banking scheme. Therefore, petitioner attempted to conceal income or assets in

1995 and 1996. Further, throughout the years at issue petitioner operated his

business through La Phoenix and White Stone. Petitioner has not presented any

business reason for doing so. A nominee is an entity or individual who holds bare

legal title to assets owned by another entity or individual. See Oxford Capital Corp.

v. United States, 211 F.3d 280, 284 (5th Cir. 2000); Criner v. Commissioner, T.C.

Memo. 2003-328; Beck v. Commissioner, T.C. Memo. 2001-270. Placing title to

assets in the name of a nominee evidences a taxpayer’s fraudulent intent. See

Leggett v. Commissioner, T.C. Memo. 1999-100, aff’d without published opinion,

221 F.3d 1357 (11th Cir. 2000). Therefore, this factor weighs against petitioner.
                                         - 14 -

             5.     Failing To Cooperate With Tax Authorities

      Petitioner did not cooperate with respondent’s investigations. In fact,

petitioner filed the petition to quash, an action the District Court described as

“utterly meritless”. Therefore, this factor weighs against petitioner.

             6.     Asserting Frivolous Arguments

      As discussed above, petitioner’s arguments are frivolous, irrelevant, and

otherwise totally lacking in merit. Therefore, this factor weighs against petitioner.

             7.     Lack of Credibility of the Taxpayer's Testimony

      Petitioner presented frivolous arguments at trial. Therefore, this factor

weighs against petitioner.

             8.     Failing To Make Estimated Tax Payments

      Petitioner did not make any estimated tax payments for the years at issue.

Therefore, this factor weighs against petitioner.

      Considering all of the facts and circumstances, we find that respondent has

proved by clear and convincing evidence that petitioner’s failure to file income tax

returns for the years at issue was fraudulent. Accordingly, petitioner is liable for the

section 6651(f) addition to tax for each of the years at issue.
                                         - 15 -

      B.      Section 6651(a)(2)--Failure To Pay

      Section 6651(a)(2) imposes an addition to tax for failure to pay the amount

shown as tax on the taxpayer’s return on or before the date prescribed unless the

taxpayer can establish that the failure is due to reasonable cause and not due to

willful neglect. The addition is calculated as 0.5% of the amount shown as tax on

the tax return but not paid, with an additional 0.5% for each month or fraction

thereof during which the failure to pay continues, up to a maximum of 25%.4 If the

amount required to be shown as tax on the return is less than the amount actually

shown on the return, the addition to tax is calculated by reference to the lesser

amount. See sec. 6651(c)(2). For purposes of computing the section 6651(a)(2)

addition for any month, the amount of tax shown on the return is reduced by the

amount of any part of the tax paid before the beginning of the month and by the

amount of any credit against the tax which may be claimed on the return. See sec.

6651(b)(2).

      The addition to tax under section 6651(a)(2) applies only if an amount of tax

is shown on a return. Wheeler v. Commissioner, 127 T.C. 200, 208 (2006), aff’d,

521 F.3d 1289 (10th Cir. 2008). Substitutes for returns filed by the IRS under


      4
        The amount of the addition to tax under sec. 6651(a)(2) reduces the amount
of the addition to tax under sec. 6651(a)(1) for any month to which an addition to
tax applies under both paragraphs. See sec. 6651(c)(1).
                                         - 16 -

section 6020(b) are treated as returns for section 6651(a)(2) purposes. See sec.

6651(g)(2).

      Petitioner concedes that he did not pay the amount shown as tax on any of his

returns on or before the date prescribed. Therefore, respondent’s burden of

production under section 7491(c) with respect to the section 6651(a)(2) addition to

tax has been satisfied. Petitioner neither argued nor established reasonable cause

for this failure. Consequently, petitioner has not met his burden of persuasion, and

respondent’s determinations are sustained.

      C.      Section 6654--Failure To Pay Estimated Tax

      A taxpayer generally has an obligation to pay estimated income tax for a

particular year only if he or she has a required annual payment for that year. See

sec. 6654(d). The required annual payment is equal to the lesser of (1) 90% of the

tax shown on the individual’s return for that year (or if no return is filed, 90% of the

tax for such year) or (2) 100% of the tax shown on the return if the taxpayer filed a

return for the immediately preceding tax year. See sec. 6654(d)(1)(B). If the

taxpayer did not file a return for the preceding year, then clause (2) does

not apply. Id.

      Because he did not file a Federal tax return for the year preceding each year

at issue, petitioner’s “required annual payment” for each year at issue is equal to
                                         - 17 -

90% of his tax for each of those years. We have sustained respondent’s

determination that petitioner had a Federal income tax liability for each of the years

at issue. Petitioner does not dispute that he did not make any estimated tax

payments for the years at issue. Therefore, respondent’s burden of production under

section 7491(c) with respect to the section 6654(a) addition to tax has been

satisfied. Petitioner neither argued nor established any of the defenses enumerated

in section 6654(e). Because petitioner has not met his burden of persuasion,

respondent’s determinations are sustained.

         The Court, in reaching its holdings, has considered all arguments made, and,

to the extent not mentioned, concludes that they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                     Decision will be entered

                                              under Rule 155.
