                             T.C. Memo. 2017-83



                       UNITED STATES TAX COURT



                    LEROY MUNCY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*



      Docket No. 27807-11.                      Filed May 17, 2017.



      Leroy Muncy, pro se.

      Ann Louise Darnold and H. Elizabeth H. Downs, for respondent.



  SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION


      NEGA, Judge: This case is before us on remand from the U.S. Court of

Appeals for the Eighth Circuit, Muncy v. Commissioner, 637 F. App’x 276 (8th


      *
       This opinion supplements our previously filed opinion Muncy v.
Commissioner, T.C. Memo. 2014-251, vacated and remanded, 637 F. App’x 276
(8th Cir. 2016).
                                          -2-

[*2] Cir. 2016), vacating and remanding T.C. Memo. 2014-251. The Court of

Appeals vacated our decision, entered in accordance with our conclusions in

Muncy, that petitioner was liable for respondent’s deficiency determinations and

additions to tax under sections 6651(a)(2) and (f) and 6654(a).

      The case was remanded for a determination of whether Janet A. Miller, an

Internal Revenue Service (IRS) “Technical Services Territory Manager” who

issued the notice of deficiency on behalf of the Commissioner, had authority to

issue the notice of deficiency and thus whether this Court has proper subject

matter jurisdiction over petitioner’s action.

      We afforded the parties the opportunity to supplement the record on

remand. Accordingly respondent filed with the Court Delegation Order 4-8.

      Respondent determined deficiencies and additions to tax and asserted

increased deficiencies with respect to petitioner as follows:1

                                            Additions to tax
  Year     Deficiency1     Sec. 6651(f)     Sec. 6651(a)(2)      Sec. 6654(a)
 2000        $60,957          $44,194           $15,239            $3,279
 2001         53,915           39,088            13,479             2,155

      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All monetary amounts are rounded to the
nearest dollar.
                                          -3-

  [*3]
 2002           51,216          37,132            12,804             1,711
 2003           54,199          39,294            13,550             1,398
 2004           64,759          46,950            16,190             1,856
 2005           60,022          43,516            15,006             2,408

         1
         Respondent originally determined deficiencies of $10,924, $6,881, and
$7,435 for 2003, 2004, and 2005, respectively by reducing petitioner’s total
corrected tax liabilities for these years (the numbers above) by the amounts of
restitution ordered by the U.S. District Court for the Eastern District of Arkansas.
Respondent now asserts, in his amendment to answer, that the total corrected tax
liabilities unreduced by the restitution amounts are the appropriate tax deficiencies
for these years.

         The issues for decision are whether petitioner: (1) had unreported income

for the taxable years 2000 through 2005 (years at issue); (2) is liable for the

additions to tax for these years; and (3) is liable for a penalty under section 6673

on the grounds that petitioner’s arguments are frivolous and that the proceeding

was commenced and maintained primarily for delay.

                                 FINDINGS OF FACT

         For convenience, we repeat here the findings of fact in our prior

Memorandum Findings of Fact and Opinion describing the relevant history of

petitioner Leroy Muncy’s employment arrangements and criminal proceedings.

We also set forth below certain supplemental findings of fact that were not set
                                        -4-

[*4] forth in our prior Memorandum Findings of Fact and Opinion but which are

based on the record in the instant case and are relevant to the issues decided on

remand.

      Petitioner resided in Arkansas at the time the petition was filed. Petitioner

failed to file Federal income tax returns and pay estimated tax for tax years 2000

through 2005. Respondent prepared substitutes for returns (SFRs) for these years

pursuant to section 6020(b).

      From 1978 through 2005 petitioner worked as a wholesale tire salesman at

Beacon Tire, Inc. (Beacon Tire). Petitioner was treated as an employee of Beacon

Tire until 1994. Around this time petitioner was exposed to an antitaxation group

that convinced him that his wages were not taxable and that it was illegal for

Beacon Tire to withhold tax from his wages. At his insistence Beacon Tire

stopped withholding petitioner’s income tax.

      In 1998 petitioner began working with individuals who promoted tax-

avoidance schemes. The plan was to set up employment agencies to receive

petitioner’s wages so the wages would not be reported in his name or paid directly

to him. Accordingly, petitioner became a “contractor” for a company called

Contract Select, Inc. (Contract Select), and a contract was entered into between

Beacon Tire and Contract Select. Although petitioner was allegedly an
                                        -5-

[*5] “independent contractor” for Contract Select (which eventually became

Accurate Consulting), no other aspects of petitioner’s job or duties changed.

Beacon Tire continued to reimburse petitioner for all his business expenses,

provided him with a company vehicle to drive, and determined his earnings.

Checks for earnings were sent to Contract Select (from 1999 to 2002) and

Accurate Consulting (from 2002 to 2005) and were either: (1) deposited or

transferred into a trust or a nominee account that petitioner created, (2) cashed by

petitioner, or (3) endorsed over to a third party. Petitioner made all decisions

regarding the receipt, deposit, or disbursement of income that Beacon Tire paid to

these entities. Upon petitioner’s insistence, no Forms W-2, Wage and Tax

Statement, nor any version of Form 1099 were issued to petitioner by Contract

Select or Accurate Consulting to report income paid to him for tax years 2000

through 2005.

      Petitioner was investigated by the Criminal Investigation Division of the

IRS after audits revealed that petitioner was using an abusive tax scheme and was

claiming to be a “sovereign, living soul” who was not a citizen of the United

States or the State of Arkansas and not a party to the United States Constitution.

During the investigation no valid business purpose was discovered to explain why

petitioner’s income was sent to Contract Select or Accurate Consulting. In an
                                         -6-

[*6] attempt to impede the investigation, petitioner filed over 70 Freedom of

Information Act requests with the IRS.

      In January 2010 petitioner pleaded guilty to one count2 of willful attempt to

evade and defeat his individual income tax for the 2004 tax year.3 His criminal

plea agreement stated: “Except to the extent otherwise expressly specified herein,

this Agreement does not bar or compromise any civil or administrative claim

pending or that may be made against the defendant, including but not limited to

tax matters.” The plea agreement also stated: “This Agreement is binding only

upon the United States Attorney’s Office for the Eastern District of Arkansas and

the defendant. It does not bind * * * any other federal, state or local prosecuting,

administrative, or regulatory authority.”

      In its judgment filed October 26, 2010, the District Court placed petitioner

on probation for three years and required him to file tax returns as a condition of


      2
        Specifically, the count states that petitioner “knowingly utilized various
shell entities and abusive trusts to prevent withholding by his employer, then
intentionally refused to file his tax returns, for the purpose of willfully avoiding
the payment of such individual income taxes that would have been due or owing.
Such taxes were substantial. Such conduct by * * * [petitioner] was in violation of
Title, 26, U.S.C., Section 7201.”
      3
        The Information Sheet states: “On or about April 15, 2005, * * *
[petitioner] willfully attempt[ed] to evade and defeat his individual income tax
imposed by law for the calendar year 2005.” We take this to mean that the charge
relates to the 2004 tax year.
                                         -7-

[*7] the probation. United States v. Muncy, No. 4:10-cr-00018-BSM (E.D. Ark.

filed Jan. 8, 2010). The judgment also deferred the full determination of

restitution, or what it called “criminal monetary penalties”, until a later date. Soon

after, a restitution report was filed determining restitution amounts of $43,275,

$57,878, and $52,587 for tax years 2003 through 2005, respectively. An order

was entered on January 25, 2011, reflecting this determination.

      On September 7, 2011, respondent mailed a notice of deficiency to

petitioner and attached a Form 4549-A, Income Tax Discrepancy Adjustments.

The notice of deficiency was signed on behalf of the Commissioner by Ms. Miller,

Technical Services Territory Manager, pursuant to Delegation Order 4-8, set forth

in Internal Revenue Manual (IRM) 1.2.43.9 (Feb. 10, 2004). In the notice

respondent calculated petitioner’s total corrected tax liability for each year. For

each of the tax years 2000 through 2002 petitioner’s deficiency amount was his

total corrected tax liability. For each of the tax years 2003 through 2005

respondent reduced petitioner’s total corrected tax liability by the amounts of

criminal restitution ordered for that year to come up with the deficiency amount.

On September 30, 2013, respondent made assessments of the restitution in his

internal records. On June 13, 2014, respondent filed a first amendment to answer

stating that petitioner’s deficiency for each of the tax years 2003 through 2005
                                         -8-

[*8] should be petitioner’s total corrected tax liability for that year unreduced by

the amount of criminal restitution for that year.

      Petitioner asserts that the restitution report and the order for restitution

represent the full settlement of his tax liabilities for 2003 through 2005. There is

no evidence that petitioner has satisfied his criminal restitution order or received

any discharge.

      On November 7, 2013, in response to petitioner’s informal discovery

request seeking information about the employment status and authority of IRS

personnel, respondent mailed to petitioner (1) a copy of Delegation Order 5-2,

which delegates authority to several IRS employees to prepare and execute returns

when taxpayers fail to file returns; (2) a copy of Delegation Order 4-8, which

delegates the authority to other IRS employees to issue notices of deficiency; and

(3) a copy of the Tax Court opinion in Roye v. Commissioner, T.C. Memo. 2012-

246, in which the notice of deficiency signed by Ms. Miller was valid.

                                      OPINION

I.    Petitioner’s Tax Liability

      Petitioner contends that respondent’s deficiency determinations for tax years

2000 through 2005 are “null and void” because the notice of deficiency was not

“issued and sent by a duly authorized delegate of the Secretary”. Petitioner’s
                                         -9-

[*9] argument regarding the authority of IRS employees is similar to those we

have previously rejected, held to be without merit, and characterized as frivolous.

See e.g., Roye v. Commissioner, at *15, *16 n.6; Cooper v. Commissioner, T.C.

Memo. 2006-241, 2006 WL 3257397, at *2. We nonetheless address petitioner’s

contention in accordance with the U.S. Court of Appeals for the Eighth Circuit’s

instructions that we establish jurisdiction over the present matter.

      Statutory notices of deficiency are valid only if issued by the Secretary of

the Treasury or his delegate. Kellogg v. Commissioner, 88 T.C. 167, 172 (1987);

see secs. 6212(a), 7701(a)(11)(B), (12)(A)(i). The technical services territory

manager position is part of the Small Business/Self-Employed (SB/SE) division of

the IRS. SB/SE territory managers were specifically delegated the authority to

send notices of deficiency in Delegation Order No. 77 (Rev. 28), 61 Fed. Reg.

30937 (June 18, 1996) (effective May 17, 1996). See, e.g., Tarpo v.

Commissioner, T.C. Memo. 2009-222, 2009 WL 3048627, at *4 (holding an IRS

employee with the title “Technical Services Territory Manager” had the authority

to sign and issue notices of deficiency, thus conferring jurisdiction on this Court).

That delegated authority was reauthorized without substantive changes in

Delegation Order 4-8, IRM pt. 1.2.43.9. Ms. Miller undoubtedly has the authority

to sign and issue notices of deficiency. See, e.g., Batsch v. Commissioner, T.C.
                                        - 10 -

[*10] Memo. 2016-140, at *9 (stating a valid notice of deficiency was signed by

the “Technical Services Territory Manager”, pursuant to Delegation Order 4-8).

We therefore hold that we have jurisdiction.

      Generally, the Commissioner’s determination of a deficiency is presumed

correct, and the taxpayer has the burden of proving it incorrect. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). However, the Commissioner

generally bears the burden of proof with respect to any increases in deficiency.

Rule 142(a).

      Petitioner also contends that respondent erred in determining deficiencies

for the taxable years 2003 through 2005 because the deficiencies contravene his

criminal plea agreement and judgment. Specifically, petitioner contends that the

District Court determined his tax liabilities for 2003 through 2005 and that

respondent is collaterally estopped from relitigating these amounts. Although the

District Court ordered specific restitution amounts for each of the tax years 2003

through 2005, petitioner’s tax liabilities for each of these years were not an

essential element of the Government’s case and were not actually litigated. See

sec. 7201; Morse v. Commissioner, 419 F.3d 829, 834 (8th Cir. 2005), aff’g T.C.

Memo. 2003-332; Peck v. Commissioner, 90 T.C. 162, 166-167 (1988) (holding

that “[t]he parties must actually have litigated the issues and the resolution of these
                                        - 11 -

[*11] issues must have been essential to the prior decision” in order for collateral

estoppel to apply), aff’d, 904 F.2d 525 (9th Cir. 1990); see also Senyszyn v.

Commissioner, T.C. Memo. 2013-274, at *9-*10 (“Although the existence of an

underpayment in tax is a necessary element of tax evasion under section 7201, the

determination of an exact liability evaded is not. Even where the taxpayer has

stipulated a specific amount of underpayment in a guilty plea, such stipulation--

though strong evidence of the deficiency amount--does not collaterally estop the

taxpayer from challenging that amount in a subsequent civil proceeding.”

(Citations omitted.)). Furthermore, petitioner’s plea agreement expressly states

that it “does not bar or compromise any civil or administrative claim pending or

that may be made against the defendant, including but not limited to tax matters.”4

Therefore, respondent is not collaterally estopped from determining deficiencies

relating to tax years 2003 through 2005.

      In the alternative, petitioner contends that the increased deficiencies

asserted in respondent’s amendment to answer for tax years 2003 through 2005


      4
       The plea agreement states that it is “binding only upon the United States
Attorney’s Office for the Eastern District of Arkansas and the defendant” and
“does not bind * * * any other federal, state or local prosecuting, administrative or
regulatory authority.” The criminal judgment refers to the restitution payments as
“criminal monetary penalties” and makes no mention of civil liabilities or
penalties. There is no overpayment for the Court to consider under sec. 6512(b).
                                        - 12 -

[*12] should be reduced by the amounts of restitution ordered for these years.

Essentially, petitioner contends that the amounts originally determined in the

notice of deficiency are the correct amounts of deficiencies.

      Initially, respondent determined deficiencies for tax years 2003 through

2005 by calculating petitioner’s total corrected tax liability for each of these years

and subtracting the respective amounts of restitution ordered by the District Court.

Subsequently, in his amendment to answer, respondent asserted that the amounts

of restitution should not be subtracted from the calculated total corrected tax

liability for each of these years.

      Respondent met his burden of proof with respect to these “increases in

deficiencies” asserted in his amended answer. Specifically, respondent offered

into evidence invoices from Contract Select and Accurate Consulting to Beacon

Tire as well as canceled checks from Beacon Tire to these agencies documenting

payments for petitioner’s wages. These documents verify that petitioner received

income in the amounts respondent determined. Petitioner conceded at trial that he

received income from Contract Select and Accurate Consulting, and it was his

responsibility to show that the amounts he received from these agencies were

nontaxable. See Dodge v. Commissioner, 981 F.2d 350, 354 (8th Cir. 1992), aff’g
                                        - 13 -

[*13] in part, rev’g in part 96 T.C. 172 (1991). Petitioner did not show that these

amounts were in error or were not taxable.

        This leaves us with the question of whether respondent should reduce his

deficiency determinations by amounts of restitution previously ordered by the

District Court. The restitution statute expressly contemplates that a civil claim

may be brought after the criminal prosecution by providing that the amount paid

under a restitution order “shall be reduced by any amount later recovered as

compensatory damages for the same loss by the victim in * * * any Federal civil

proceeding”. 18 U.S.C. 3664(j)(2)(A) (2012). The reverse applies as well: Any

amount paid to the IRS as restitution for taxes owed must be deducted from any

civil judgment the IRS obtains to collect the same tax deficiency. United States v.

Tucker, 217 F.3d 960, 962 (8th Cir. 2000). Accordingly, a civil judgment must be

entered before the IRS reduces a taxpayer’s tax liability by amounts of restitution

paid.

        Furthermore, section 6211(a) defines a “deficiency” as the correct tax for a

year minus “amounts previously assessed * * * as a deficiency”. Before the

enactment of sections 6201(a)(4) and 6213(b)(5), the Court held that amounts paid

to satisfy restitution ordered by a District Court are not amounts “previously
                                       - 14 -

[*14] assessed[5] * * * as a deficiency” for purposes of section 6211(a)(1) and do

not reduce a deficiency determination. Weber v. Commissioner, T.C. Memo.

1995-125, 1995 WL 128456, at *6.

      The enactment of sections 6201(a)(4) and 6213(b)(5) follows the logic of

both the restitution statute and the Court’s prior holding. Section 6201(a)(4)

applies to restitution orders entered after August 16, 2010, and provides that the

Secretary “shall assess and collect the amount of restitution under an order * * *

for failure to pay any tax imposed under * * *[title 26] in the same manner as if

such amount were such tax.”

      Section 6201(a)(4) provides that the IRS shall assess and collect restitution

previously ordered by a District Court “in the same manner as if such amount were

such tax.” (Emphasis added.) This is almost identical to section 6305(a), which

provides that the IRS shall assess and collect amounts certified by the Secretary of

Health and Human Services as delinquent spousal and child support payments “in

the same manner * * * as if such amount were a tax imposed by subtitle C”.

Section 6305(b) goes on to state that delinquent spousal and child support

payments assessed and collected by the IRS “as if” they were a tax under that


      5
     “Previously assessed” means assessed before our decision. See Winter v.
Commissioner, 135 T.C. 238, 244 n.4 (2010).
                                         - 15 -

[*15] provision are not subject to judicial review by the Tax Court--or any other

Federal Court, for that matter. In other words, delinquent spousal and child

support payments assessed under section 6305 “as if” they were a tax are not

assessed “as a deficiency”. See Murray v. Commissioner, 24 F.3d 901, 903 (7th

Cir. 1994) (“Unlike a summary assessment, a deficiency assessment requires the

IRS to follow a number of statutory steps before it may undertake to collect the

deficiency.”); see also Prestwich v. IRS, 796 F.2d 582, 584 (1st Cir. 1986)

(“Section 6305(b) therefore reflects the logical intent of Congress to keep the IRS

from becoming embroiled in matters between states and individuals in which the

federal agency has no direct involvement.”).

      Another reference point for the analysis of section 6201(a)(4) is section

6665(a)(1), which provides that additions to tax, additional amounts, and civil

penalties “shall be assessed, collected, and paid in the same manner as taxes”.

(Emphasis added.) We believe the distinction between “as if” and “as” is

significant. Although this provision requires deficiency procedures for some

additions to tax (e.g., for failure to report tips under section 6652(b)), section

6665(b) goes on to say that certain additions to tax are not assessed, collected, and

paid in the same manner as taxes and the regular deficiency procedures for

assessment and collection do not apply to them. See sec. 6665(b) (“For purposes
                                        - 16 -

[*16] of subchapter B of chapter 63 * * * subsection (a) [of section 6665] shall not

apply to any addition to tax under section 6651, 6654, [or] 6655[.]”). Instead,

these other additions to tax are summarily assessed. Meyer v. Commissioner, 97

T.C. 555, 559-560 (1991).

      Similarly, section 6213(b)(5), which applies to notices of assessments of

restitution, provides that regular deficiency procedures do not apply to amounts of

restitution assessments. See sec. 6213(b)(5)(B) (“If the taxpayer is notified that an

assessment has been or will be made pursuant to section 6201(a)(4) * * *

subsection (a) [of section 6213, pertaining to the procedures to challenge a

deficiency in Tax Court] shall not apply with respect to the amount of such

assessment.”). Although neither section 6201(a)(4) nor section 6213(b)(5)

explicitly provides that assessed restitution amounts may not be considered in the

definition of a deficiency under section 6211, we believe common sense dictates

that they not be included as “amounts previously assessed * * * as a deficiency”

for purposes of that section.

      Furthermore, the legislative history of section 6201(a)(4) supports this

reasoning. Specifically, the legislative history states that section 6201(a)(4) will

allow the IRS “to assess and collect, in the same manner as delinquent taxes * * *,

mandatory orders of restitution”. 156 Cong. Rec. 12032 (2010) (emphasis added).
                                       - 17 -

[*17] That being said, we believe the “as if such amount were such tax” wording

of section 6201(a)(4) is significant and does not share the same meaning as “in the

same manner as taxes.” Instead, the “as if” wording was intended to empower the

IRS to collect court-ordered restitution for criminal tax cases without following

regular deficiency procedures.

      The Joint Committee on Taxation’s general explanation, also known as the

Blue Book, provides some guidance on the question as well.6 See Staff of J.

Comm. on Taxation, General Explanation of Tax Legislation Enacted in the 111th

Congress, at 459-461 (J. Comm. Print 2011). The Joint Committee states that

although an “amount of restitution ordered is computed by reference to the taxes

that would have been owed but for the criminal offenses charged, restitution is not

itself a determination of tax within the meaning of the Code and does not provide

a basis on which tax may be assessed.” Id. at 461. Thus, a taxpayer’s tax liability

is assessed separately from restitution and in fact may exceed amounts of

restitution ordered for the year or years in question. See Morse v. Commissioner,

419 F.3d at 834; Gillum v. Commissioner, T.C. Memo. 2010-280, aff’d, 676 F.3d

633 (8th Cir. 2012). This comports with the purpose of the statute, which is not

      6
        We note that the Blue Books are not legislative history, though they can
sometimes be relevant if persuasive. United States v. Woods, 571 U.S. __, __, 134
S. Ct. 557, 568 (2013).
                                        - 18 -

[*18] intended to be a radical departure from the way restitution was previously

collected for criminal tax cases for failure to pay tax imposed under title 26. See

H.R. 5552, 111th Cong., Preamble (2010) (“to provide for the assessment by the

Secretary of the Treasury of certain criminal restitution”). Rather, the statute is

intended to enhance the IRS’ and the Treasury Department’s collection

capabilities when restitution is ordered. 156 Cong. Rec. 12031 (“The bill would

also allow the IRS to collect restitution debt that has been court ordered to be paid

in criminal tax cases.”). Before the enactment of the statute, collection

responsibilities were shared among the District Court that ordered restitution, the

Financial Litigation Unit of the local U.S. Attorney’s Office, and the IRS. See

Staff of J. Comm. on Taxation, supra, at 460. Now, in addition to that collection

mechanism, the statute allows the IRS to immediately assess the restitution

without issuing a statutory notice of deficiency and collect (as if it were a tax) the

court-ordered restitution. See secs. 6201(a)(4), 6213(b)(5).

      Petitioner was ordered to pay restitution for failure to pay tax imposed under

title 26 for tax years 2003 through 2005. Because the order was entered after

August 16, 2010, section 6201(a)(4) applies. Firearms Excise Tax Improvement

Act of 2010, Pub. L. No. 111-237, sec. 3(c), 124 Stat. at 2498. Although

respondent assessed the restitution before our decision--that is, the restitution was
                                        - 19 -

[*19] “previously assessed”, respondent did not assess the restitution “as a

deficiency”.7 Instead, the restitution was summarily assessed. Therefore, we

conclude and hold that petitioner’s criminal plea agreement and judgment ordering

restitution did not discharge, and do not reduce, petitioner’s deficiencies for tax

years 2003 through 2005. We sustain respondent’s deficiency determinations on

the notice of deficiency for tax years 2000 through 2002 and sustain the increased

deficiencies asserted in respondent’s Amendment to Answer for tax years 2003

through 2005.

II.   Additions to Tax and Penalty

      Petitioner asserts that the doctrines of res judicata and collateral estoppel

preclude respondent from seeking civil fraud additions to tax.8 For the reasons

described above, we conclude that those doctrines do not apply. See also Morse v.


      7
      Even if we were to assume arguendo that the restitution had been collected
without assessment, it would not have been collected “as a deficiency”.
      8
        Petitioner also contends in his petition that the Double Jeopardy Clause of
the Fifth Amendment of the U.S. Constitution bars the Commissioner from
imposing civil fraud penalties and additions to tax in the notice of deficiency. We
note that the double jeopardy clause “protects only against the imposition of
multiple criminal punishments for the same offense.” Hudson v. United States,
522 U.S. 93, 99 (1997). Furthermore, the civil tax penalty for fraud is not a
punishment for purposes of the Double Jeopardy Clause of the Fifth Amendment.
Helvering v. Mitchell, 303 U.S. 391, 398 (1938); Morse v. Commissioner, T.C.
Memo. 2003-332, aff’d, 419 F.3d 829 (8th Cir. 2005); Roberts v. Commissioner,
T.C. Memo. 1997-216.
                                        - 20 -

[*20] Commissioner, 419 F.3d at 834 (“[T]he government does not surrender its

right to seek civil fraud penalties by undertaking a criminal tax prosecution.”).

Therefore, we review respondent’s determination that petitioner is liable for

additions to tax for tax years 2000 through 2005.

      A.     Fraudulent Failure To File a Tax Return

      The addition to tax in cases of fraud is a civil sanction provided primarily as

a safeguard for the protection of revenue and to reimburse the Government for the

heavy expense of investigation and loss resulting from the taxpayer’s fraud.

Helvering v. Mitchell, 303 U.S. 391, 401 (1938); see also Price v. Commissioner,

T.C. Memo. 1996-204. To sustain the 75% addition to tax provided by section

6651(f), respondent has the burden of proving by clear and convincing evidence

that petitioner underpaid his income tax and that some part of the underpayment

was due to fraud. See sec. 7454(a); Rule 142(b); see also Clayton v.

Commissioner, 102 T.C. 632, 646 (1994); Jones v. Commissioner, T.C. Memo.

2014-101; Good v. Commissioner, T.C. Memo. 2012-323.

      In applying the addition to tax under section 6651(f), we consider the same

elements, or long-recognized “badges of fraud”, discussed in cases applying

section 6663 or former section 6653(b)(1). Clayton v. Commissioner, 102 T.C. at

647-653; see Niedringhaus v. Commissioner, 99 T.C. 202, 211-213 (1992). Fraud
                                         - 21 -

[*21] may be proved by circumstantial evidence, and the taxpayer’s entire course

of conduct may establish the requisite fraudulent intent. Rowlee v. Commissioner,

80 T.C. 1111, 1123 (1983). Circumstantial evidence of fraud present here

includes the pattern of failure to file returns, failure to report substantial amounts

of income, concealing assets, engaging in illegal activities, failure to cooperate

with the taxing authorities in determining petitioner’s correct liability, and failure

to make estimated tax payments. See, e.g., Bradford v. Commissioner, 796 F.2d

303, 307-308 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Powell v. Granquist,

252 F.2d 56, 60-61 (9th Cir. 1958); Clayton v. Commissioner, 102 T.C. at 647;

Grosshandler v. Commissioner, 75 T.C. 1, 19-20 (1980); Gajewski v.

Commissioner, 67 T.C. 181, 199-202 (1976), aff’d without published opinion, 578

F.2d 1383 (8th Cir. 1978).

      Respondent contends, first, that petitioner is estopped to deny fraud for tax

year 2004 by his guilty plea to a violation of section 7201. A conviction for

Federal income tax evasion, either upon a plea of guilty, or upon a jury verdict of

guilt, conclusively establishes fraud in a subsequent civil tax fraud proceeding

through application of the doctrine of collateral estoppel. Weber v.

Commissioner, T.C. Memo. 1995-125. Petitioner was convicted of criminal tax

evasion under section 7201 pursuant to a plea agreement in the District Court in
                                          - 22 -

[*22] which he pleaded guilty to one count of tax evasion for the 2004 taxable

year. Because the conviction required showing that petitioner willfully attempted

to evade tax, petitioner is collaterally estopped from contesting that he is liable for

the addition to tax for fraud with respect to the 2004 taxable year. See DiLeo v.

Commissioner, 96 T.C. 858, 885 (1991), aff’d, 959 F.2d 16 (2nd Cir. 1992). We

therefore hold that petitioner is liable for the fraud addition to tax for the 2004 tax

year.

        Petitioner did not file returns for any of the years in issue, and he did not

dispute any of the facts establishing his receipt of substantial taxable income

during the years in issue. Petitioner engaged in a complex scheme to conceal his

income and assets during the years in issue. He was convicted of engaging in that

conduct in order to defeat the payment of taxes due for 2004, and the obvious

purpose of engaging in the scheme was to evade taxes for the previous years (and

subsequent year) as well. The objective facts are clear and convincing evidence of

fraud sufficient to satisfy respondent’s burden of proof. The additions to tax for

fraud have frequently been imposed on taxpayers like petitioner “who were

knowledgeable about their taxpaying responsibilities * * * [and] consciously

decided to unilaterally opt out of our system of taxation.” Miller v.

Commissioner, 94 T.C. 316, 335 (1990) (citing numerous relevant cases); see
                                        - 23 -

[*23] Niedringhaus v. Commissioner, 99 T.C. at 212-213. Accordingly, we hold

that petitioner is liable for the additions to tax under section 6651(f) and sustain

respondent’s determinations as set forth in the notice of deficiency.

      B.     Failure To Pay Tax

      Section 6651(a)(2) provides for an addition to tax when a taxpayer fails to

timely pay the tax shown on a return unless the taxpayer proves that the failure

was due to reasonable cause and not due to willful neglect. Respondent has

satisfied his burden of production with respect to the additions to tax under section

6651(a)(2). See sec. 7491(c). Respondent prepared SFRs in accordance with

section 6020(b) for all of the years at issue, and petitioner did not pay the amounts

shown as due. See sec. 6651(g); Cabirac v. Commissioner, 120 T.C. 163, 170-173

(2003), aff’d without published opinion, 2004 WL 7318960 (3d Cir. 2004). As a

result, respondent’s burden of producing evidence that supports an addition to tax

for failure to timely pay tax due under section 6651(a)(2) is satisfied. Petitioner

has not offered any arguments alleging reasonable cause for failure to pay the

amounts shown as due on the substitute returns and so is liable for the addition to

tax under section 6651(a)(2) for each of the years at issue.
                                        - 24 -

[*24] C.     Failure To Pay Estimated Tax

      Respondent determined that petitioner is liable for additions to tax under

section 6654. Section 6654(a) and (b) provides for an addition to tax in the event

of a taxpayer’s underpayment of a required installment of estimated tax. As it

relates to this case, each required installment of estimated tax is equal to 25% of

the “required annual payment”, which in turn is equal to the lesser of (1) 90% of

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

of his or her tax for such year) or (2) 100% of the tax shown on the taxpayer’s

return for the immediately preceding taxable year. Sec. 6654(d)(1)(A) and (B).

      The Commissioner’s burden of production under section 7491(c) requires

him to produce, for each year for which the addition is asserted, evidence that the

taxpayer had a “required annual payment” under section 6654(d). To do so, the

Commissioner must establish the tax shown on the taxpayer’s return for the

preceding year or demonstrate that the taxpayer filed no such return. See Wheeler

v. Commissioner, 127 T.C. 200, 212 (2006), aff’d, 521 F.3d 1289 (10th Cir.

2008); Schlussel v. Commissioner, T.C. Memo. 2013-185.

      Respondent introduced evidence to prove that petitioner was required to file

Federal income tax returns for 2000 through 2005, that petitioner did not file

returns for 2000 through 2005, and that petitioner did not make estimated tax
                                         - 25 -

[*25] payments for 2000 through 2005. However, respondent did not introduce

evidence sufficient to prove that petitioner had an obligation to make any

estimated tax payments for 2000. See Wheeler v. Commissioner, 127 T.C. at 211.

Respondent was required to produce sufficient evidence that petitioner had a

required annual payment for 2000 under section 6654(d), and respondent failed to

do so.

         Instead, respondent produced evidence establishing that petitioner did not

file a return for 2000 and that petitioner had an income tax liability for that year.

This evidence was sufficient to permit the Court to make the analysis required by

section 6654(d)(1)(B)(i). However, in order to permit the Court to make the

analysis required by section 6654(d)(1)(B)(ii) and to conclude that respondent had

met his burden of producing evidence that petitioner had a required annual

payment for 2000 payable in installments under section 6654, respondent also had

to introduce evidence showing whether petitioner had filed a return for the

preceding taxable year and, if he did, the amount of tax shown on that return.

Respondent did not do so. Without that evidence, we cannot identify the number

equal to 100% of the tax shown on petitioner’s 1999 return, we cannot complete

the comparison required by section 6654(d)(1)(B), and we cannot conclude that

petitioner had a required annual payment for 2000 that was payable in installments
                                         - 26 -

[*26] under section 6654. Consequently, respondent’s determination regarding

the section 6654 addition to tax for the 2000 tax year is not sustained.

      Petitioner did not file returns for tax years 2001 through 2005; he did not

file returns for the years immediately preceding these years; and he did not pay

estimated tax in these years. There are exceptions to the obligation to make

estimated tax payments set forth in section 6654, but petitioner has not shown that

he meets the criteria for those exceptions. See sec. 6654(e); McLaine v.

Commissioner, 138 T.C. 228, 249 (2012) (“The burden of proof is on petitioner to

show that he is covered by one of the relief provisions of section 6654[.]”).

Therefore, petitioner is liable for the addition to tax under section 6654 for tax

years 2001 through 2005 calculated with respect to the required annual payment--

90% of the tax due for those years.

      D.     Section 6673 Penalty for Frivolous Arguments

      The Court may penalize a taxpayer if the taxpayer institutes or maintains

proceedings primarily for delay or if the taxpayer’s position is frivolous or

groundless. Sec. 6673(a)(1). In the exercise of our discretion we will not impose

a section 6673(a)(1) penalty on petitioner at this time, however we warn petitioner

that if, in the future, he maintains frivolous positions in this Court, he runs the risk

that we will sanction him under section 6673(a)(1). Now that such a warning has
                                       - 27 -

[*27] been issued, the Court expects that petitioner will not continue to make

frivolous arguments in this or other Tax Court proceedings or relitigate a settled

case.

        In reaching our decision, we have considered all arguments made by the

parties, and to the extent not mentioned or addressed, they are irrelevant or

without merit.

        To reflect the foregoing,


                                                An appropriate decision will be

                                       entered.
