                        T.C. Memo. 2004-247



                      UNITED STATES TAX COURT



                   RAY E. MASON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 14102-02.           Filed October 28, 2004.



     Kevin D. Watley and B. David Sisson, for petitioner.

     William F. Castor, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     KROUPA, Judge:   Respondent determined a deficiency of

$3,2191 in petitioner’s Federal income tax for 1995 and

determined that petitioner was liable for the addition to tax of



     1
      All dollar amounts are rounded to the nearest dollar.
                                - 2 -

$2,414 under section 6651(f)2 for fraudulent failure to file a

timely income tax return for 1995 and alternatively under section

6651(a)(1) for failure to file timely.   After concessions,3 the

issue to be decided is whether petitioner is liable for the

addition to tax under section 6651(f) for fraudulent failure to

file timely an income tax return for 1995.   We hold that

petitioner is liable.   We therefore do not need to decide

alternatively whether petitioner is liable for the addition to

tax under section 6651(a)(1).

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are incorporated

by this reference.   Petitioner and his late wife4 (the Masons)

resided in Noble, Oklahoma, when they filed the petition.

     The Masons owned interests in various business enterprises

during 1995, the year at issue.   They held a 50-percent interest

in an S corporation named Eagle Enterprise, Inc. (Eagle), which


     2
      All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
     3
      The deficiency in the statutory notice, $3,219, was based
on four adjustments: (1) A capital gain adjustment of $1,386,
which respondent conceded; (2) a Schedule A investment expense
adjustment of $10,995, which petitioner conceded; (3) a
computational Schedule A miscellaneous expense adjustment; and
(4) a computational alternative minimum tax adjustment.
     4
      Petitioner’s wife, Ellen M. Mason, died on Feb. 12, 2002.
The Court dismissed the Est. of Ellen M. Mason from this action
for lack of jurisdiction on Dec. 8, 2003.
                                 - 3 -

did business as a smoke shop in Oklahoma.    They also owned El

Dorado Investments, Inc. (El Dorado), and Cornerstone Capital

Resources, Inc. (Cornerstone), two S corporations that held

interests in four Sonic Drive-In restaurants (Sonic restaurants)

located in Tennessee, Kentucky, and Kansas.    The Masons also

owned two commercial properties that they leased to Sonic

restaurants located in Tennessee.

     Sometime before 1995 the Masons met Dan Meador (Meador), the

chairman of a tax-protester group that questions the legality of

the Federal income tax system.    Meador was convicted of felony

obstruction of justice charges relating to a 1995 Federal

investigation of two other Oklahoma-based tax protesters.    When

respondent initiated a collection action during 1995 against Mrs.

Mason regarding her 1991 tax liability, petitioner and his wife

each sent a letter to respondent on May 24, 1995, attempting to

revoke their status as United States citizens.    Mrs. Mason then

sent an additional letter on July 14, 1995, advancing other

frivolous, tax-protester type arguments.

     The Masons, also during 1995, transferred their residence

and business interests to various trusts they controlled.

Petitioner did not maintain a bank account in his name, but,

rather, used accounts in his wife’s name and in the name of El

Dorado.   In addition, petitioner did not make estimated tax

payments in 1995.
                                - 4 -

     The Masons consistently filed timely income tax returns for

almost 40 years, then stopped in 1987.    They did not file their

income tax return for 1987 until May 1991 and did not file

another income tax return after that until October 1997 when they

filed an income tax return for 1996.    They did not file timely

income tax returns for 1988 through 1995 despite having

significant taxable income in each of these years.    When the

Masons eventually filed these income tax returns, they reported

adjusted gross income of $107,336 in 1993, $148,221 in 1994, and

$97,064 in 1995.

     The Masons did not file their income tax return for 1995

until 3 years after it was due, and then only after respondent

initiated a criminal investigation for the Masons’ failure to

file.    Petitioner pleaded guilty in May 2000 to willfully failing

to file a Federal income tax return for 1995 under section 7203.

     Respondent determined a deficiency and a fraudulent failure

to file addition to tax under section 6651(f) for 1995.

Petitioner timely filed a petition with this Court for a

redetermination.   The parties stipulated that there is a

deficiency in income tax for 1995 of $2,859.5   The only issue we

have to decide is whether petitioner’s failure to file an income

tax return for 1995 was fraudulent.


     5
      Because the stipulated deficiency amount is different from
the deficiency amount in the statutory notice, a Rule 155
computation must be done.
                                  - 5 -

                                 OPINION

     Individuals whose gross income exceeds certain levels for a

taxable year are required to file an income tax return.       Sec.

6012(a).   If an individual fails to file an income tax return,

the Commissioner may impose an addition to tax of up to 5 percent

per month of the amount required to be shown, up to a maximum of

25 percent.   Sec. 6651(a)(1).    If the failure to file is

fraudulent, the addition to tax is 15 percent per month of the

amount required to be shown up to a maximum of 75 percent.       Sec.

6651(f).

     Petitioner stipulated that he did not file a timely income

tax return for 1995.   We must determine whether his failure to

file timely 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.
                                 - 6 -

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

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

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.     Niedringhaus v. Commissioner, 99

T.C. 202 (1992); 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 of fraud",

from which the requisite fraudulent intent can be inferred.      They

include:   (1) Failing to file income tax returns, (2)

understating income, (3) concealing assets, (4) failing to

cooperate with tax authorities, (5) making frivolous arguments,

(6) failing to make estimated tax payments, (7) giving

implausible or inconsistent explanations of behavior, and (8)

being convicted of willful failure to file an income tax return.
                                 - 7 -

Douge v. Commissioner, 899 F.2d 164, 168 (2d Cir. 1990); Bradford

v. Commissioner, supra; Recklitis v. Commissioner, 91 T.C. 874,

910 (1988).     This list is nonexclusive.   Niedringhaus v.

Commissioner, supra.     Although no single factor is necessarily

sufficient to establish fraud, the existence of several indicia

may constitute persuasive circumstantial evidence of fraud.     See

Bradford v. Commissioner, supra.

        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 such returns.     Petzoldt v. Commissioner, 92 T.C. 661 (1989);

see also Stalker v. Commissioner, T.C. Memo. 1981-544.     Here, the

Masons had a history of consistently filing income tax returns

for almost 40 years.    They did not file their joint income tax

return for 1987 until May 1991.     After that, they did not file an

income tax return until October 1997 when they filed a return for

1996.     While the record does not reflect petitioner’s educational

background, he was experienced in business affairs.     He and his

wife held interests in four Sonic restaurants and owned two

commercial properties.    Respondent contends, and we agree, that

given petitioner’s business background and other facts in the

record, he was aware of his obligation to file income tax

returns.

     Failure to file income tax returns, even over an extended

period of time, does not per se establish fraud.      Grosshandler v.
                               - 8 -

Commissioner, 75 T.C. 1 (1980); Coulter v. Commissioner, T.C.

Memo. 1992-224.   An extended pattern of failing to file income

tax returns, however, may be persuasive circumstantial evidence

of fraud.   Marsellus v. Commissioner, 544 F.2d 883, 885 (5th Cir.

1977), affg. T.C. Memo. 1975-368; Stoltzfus v. United States, 398

F.2d 1002 (3d Cir. 1968); Grosshandler v. Commissioner, supra;

Coulter v. Commissioner, supra.     Further, when a taxpayer’s

failure to file for several years is viewed in 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 (1985).    As discussed in the preceding

paragraph, the Masons did not file income tax returns after their

return for 1987 until they filed their return for 1996 in October

1997.   They failed to file their income tax return for 1995 until

March 1999, and then only after respondent began a criminal

investigation against the Masons for failure to file.       The

Masons’ pattern of failing to file when viewed in light of their

history of filing timely income tax returns for almost 40

consecutive years is evidence of petitioner’s fraudulent intent

to evade tax liability.   Further, given the Masons’ association

with Meador, we reject petitioner’s argument that their failure

to file was reasonable because they lacked sufficient funds to

pay the tax and they believed taxpayers were only required to
                                 - 9 -

file if they could pay the tax owing.    Respondent contends, and

we are persuaded, that petitioner’s failure to file an income tax

return for 1995 is evidence of fraud.

     Consistent failure to report substantial amounts of income

over a number of years is, standing alone, highly persuasive

evidence of fraudulent intent.    See Kurnick v. Commissioner, 232

F.2d 678 (6th Cir. 1956), affg. T.C. Memo. 1955-31; Temple v.

Commissioner, T.C. Memo. 2000-337, affd. 62 Fed. Appx. 605 (6th

Cir. 2003).   Here, when the Masons’ income tax returns for 1993,

1994, and 1995 were eventually filed, they reported adjusted

gross income of $107,336, $148,221, and $97,064 respectively.

Respondent argues, and we agree, that this failure to report such

substantial income is evidence of fraud.

     Concealing assets or income is also an indicium of fraud.

Douge v. Commissioner, supra; Bradford v. Commissioner, 796 F.2d

303 (9th Cir. 1986); Recklitis v. Commissioner, supra at 910.

Respondent contends, and we agree, that petitioner took

affirmative steps to conceal his income and assets.   Petitioner

had no bank account in his name.    He used bank accounts solely in

his wife’s name or in the name of El Dorado.   He also transferred

all of his various business interests and his residence to

various trusts to conceal his assets and frustrate respondent’s

collection efforts.
                                - 10 -

     We next consider petitioner’s level of cooperation with

respondent.   Failure to cooperate with the Internal Revenue

Service (IRS) is an indicium of fraud.     Douge v. Commissioner,

supra; Bradford v. Commissioner, supra at 307; Recklitis v.

Commissioner, supra.     Petitioner did not cooperate with

respondent’s investigation during 1995.    The Masons responded to

respondent’s inquiries with tax protester rhetoric and submitted

numerous letters to respondent that advanced tax protester

arguments.    Although tax protester arguments may not be evidence

of fraud in and of themselves, they may be indicative of fraud if

made in conjunction with affirmative acts designed to evade

paying Federal income tax.    See Kotmair v. Commissioner, 86 T.C.

1253 (1986); Fleischner v. Commissioner, T.C. Memo. 1995-389.

Here, petitioner took or made affirmative acts designed to evade

his tax liability.   They include failure to file an income tax

return, failure to make estimated tax payments for the year at

issue, concealment of assets, and understatement of substantial

income.   Accordingly, we find that petitioner’s affirmative acts

are evidence of fraud.

     Petitioner claims that the transfer of his personal

residence and his various business interests to different trusts

over which he retained complete control is not evidence of fraud.

Petitioner’s explanation that the transfers were made as part of

his estate plan does not withstand scrutiny, however.
                               - 11 -

Petitioner’s explanation is implausible in light of his testimony

that he does not have a will and his wife did not have a will

when she died.   Removing assets from respondent’s reach by

transferring them to a trust has been held to be an affirmative

act of fraud.    See Simmons v. Commissioner, T.C. Memo. 1997-269.

We find that the transfer of the personal residence and business

interests to the trusts and his implausible explanation are both

evidence of fraud.

     Petitioner next argues that transferring his assets to

various trusts was not fraudulent because he used his own Social

Security number as the trusts’ taxpayer identification number and

he continued to live in the residence after the conveyance to the

trust.   These contentions do not persuade us, however, that

petitioner’s intent was to comply with respondent’s collection

efforts when considered in conjunction with all of petitioner’s

actions during the relevant period.     We find that petitioner

transferred his assets to various trusts to hinder respondent’s

collection efforts, and such action therefore is evidence of

fraud.

     Most of the badges of fraud that this Court customarily

relies on are present in this case.     There is a pattern of

failing to file income tax returns, understating income, failing

to cooperate with tax authorities, making frivolous arguments,

failing to make estimated tax payments, concealing assets and
                              - 12 -

income, giving implausible explanations, and pleading guilty to

willful failure to file an income tax return under section 7203.

     Considering all of the facts and circumstances of this case,

we find that respondent has proven by clear and convincing

evidence that petitioner’s failure to file an income tax return

for 1995 was fraudulent.   Accordingly, petitioner is liable for

the section 6651(f) addition to tax for 1995.

     Because of our holding regarding the addition to tax under

section 6651(f) for fraudulent failure to file, we need not

address whether petitioner is liable for the addition to tax

under section 6651(a)(1) for failure to file timely.

     We have considered petitioner’s other arguments and find

them to be irrelevant, moot, or meritless.

     To reflect the concessions of the parties,


                                         Decision will be entered

                                    under Rule 155.
