                        T.C. Memo. 2006-128



                      UNITED STATES TAX COURT



       CHESTER H. AND MICHELLE R. ROSSMAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20095-03.             Filed June 20, 2006.

          Ps failed to file Federal income tax returns for
     the 1997, 1998, 1999, and 2000 taxable years. R
     determined deficiencies and additions to tax under sec.
     6651(f), I.R.C., or alternatively, under sec.
     6651(a)(1), I.R.C.

          Held: P-H is liable for additions to tax for the
     years in issue under sec. 6651(f), I.R.C.


     Edward G. Marshall, for petitioners.

     Paul L. Dixon, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   Respondent’s statutory notice of deficiency

dated August 21, 2003, determined deficiencies and additions to
                              - 2 -

tax pursuant to section 6651(f)1 (or, alternatively, section

6651(a)(1)) and section 6651(a)(2) with respect to petitioners’

Federal income taxes for 1997 through 2000.     By stipulation, the

parties agreed to the following reduced tax deficiencies:

                    Year              Deficiency

                    1997              $14,062
                    1998               24,266
                    1999               87,662
                    2000               56,572

     After further concessions,2 the remaining issue for decision

is whether petitioner is liable for additions to tax under

section 6651(f) for the 1997, 1998, 1999, and 2000 taxable years.




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
     2
       By stipulation, the parties agreed that petitioner
Michelle R. Rossman (Ms. Rossman) is not liable for any of the
income tax deficiencies or additions to tax. Thus, all future
references to “petitioner” will be to Chester H. Rossman II.

     At trial, respondent agreed that the only remaining issue
was whether petitioner was liable for an addition to tax under
sec. 6651(f) or, in the alternative, sec. 6651(a)(1) for 1997
through 2000. In his pretrial memorandum, petitioner conceded
the applicability of sec. 6651(a)(1) to the stipulated
deficiencies if sec. 6651(f) does not apply. The parties
stipulated that petitioner is not liable for any additions to tax
under sec. 6651(a)(2) for 1997 through 2000.
                               - 3 -

                        FINDINGS OF FACT

Background

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

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.   At the time the petition

in this case was filed, petitioner resided in Cedar City, Utah.

     In 1992, petitioner started a business, Dependable Service

Group Trust (DSG) d.b.a. Trustees Training Services (TTS) and

Trust Support Group (TSG).   Petitioner was a trustee of DSG,

which was formed to introduce trust products promoted by National

Trust Services (NTS) and Fiduciary Management Group (FMG).3

These organizations hired petitioner to give seminars regarding

the creation and the operation of their trust products.

Petitioner also conducted consultations and training with regard

to the creation and operation of various trust products as a side

business and assisted personal acquaintances in forming trust

arrangements.




     3
       Michael D. Richmond and Rex E. Black d.b.a. FMG have
promoted abusive tax schemes. See e.g., United States v.
Richmond, 90 AFTR 2d 2002-6353, 2002-2 USTC par. 50,677 (N.D.
Ill. 2002). NTS and its representatives Roy Fritts and Rick
Prescott have also promoted abusive trust arrangements intended
unlawfully to avoid Federal and State income, estate, and gift
taxes. See, e.g., Kooyers v. Commissioner, T.C. Memo. 2004-281;
Bowen v. Commissioner, T.C. Memo. 2001-47; United States v.
Fritts, 97 AFTR 2d 2006-915 (N.D. Cal. 2005); United States v.
Green, 95 AFTR 2d 2005-572 (E.D. Va. 2004); Colby B. Found. v.
United States, 80 AFTR 2d 97-7689 (D. Or. 1997), affd. without
published opinion 166 F.3d 1217 (9th Cir. 1999).
                                - 4 -

     Petitioner described TTS as an educational program that

provided services enabling participants to “learn how to read

& study the law, interpret the IRS’ codes and publications, and

understand the ‘sophisticated’ manner in which Trustees should

carry on business and live within the framework of Complex

Trusts.”   The “complex trusts” to which petitioner referred

included the trusts that petitioner testified NTS would promote

and package together with an allegedly charitable trust to

provide tax benefits.    Petitioner spoke at NTS’s conferences in

1998, 1999, and 2000 and provided consultation services to the

principals4 of NTS.    Petitioner continued to engage in his DSG

consulting business during 1997 through 2000 and did not at any

time file any Federal income tax returns for DSG.5

Prior Taxable Years:    1987 Through 1992 and 1994 Through 1996

     Respondent’s agent, Jacob Riley (Agent Riley), beginning in

1997 conducted an examination of petitioner’s 1994 through 1996

taxable years.   He typically reviewed tax returns in the abusive

promotions and abusive returns area,6 and in connection with this

work, he determined that petitioner had not yet filed Federal tax



     4
       Petitioner testified that part of these consultation
services entailed clarifying issues in a dispute between NTS
principals Rick Prescott and Roy Fritts.
     5
       The parties stipulated that DSG is a disregarded entity
for Federal income tax purposes.
     6
       Petitioner and Agent Riley first met when petitioner
represented a trust during the audit of another taxpayer.
                               - 5 -

returns for the years beginning in 1987.7   There were, however,

existing assessed tax liabilities for the taxable years 1987

through 1992 arising from substitutes for tax returns prepared by

the Internal Revenue Service (IRS).    In 1997, Agent Riley

contacted petitioner via letter, informing petitioner that he had

not filed Federal income tax returns for the 1994 through 1996

taxable years and requesting that petitioner submit returns for

those years to him.

     Petitioner did not immediately reply to Agent Riley’s

request.   When petitioner later responded to Agent Riley,

he stated that he would meet with his accountant and would submit

returns for 1994 through 1996 sometime in early 1998.    During

this time, petitioner continued to conduct trust training

seminars advising people about their tax obligations.    Agent

Riley received letters from petitioner every 30 days promising

returns within the next 30 days or so.    However, petitioner did

not submit returns to Agent Riley during 1998, contending that he

was “still studying it out”.

     While waiting for petitioner to submit returns, Agent Riley

received a letter dated November 17, 1998, signed by both

petitioner and Edward G. Marshall (Mr. Marshall), the attorney

representing petitioner in this case.    The letter titled “Opinion

Letter” propounded arguments against the filing requirement and


     7
       Ultimately, petitioner filed Forms 1040, U.S. Individual
Income Tax Return, for 1994 through 1996 on May 11, 2000.
                               - 6 -

petitioner’s liability for income tax.   The letter contained

petitioner’s statement:

     In good faith, I have determined from written,
     reliable, legal advice from tax professionals and
     further research into the law, that I am not liable or
     subject to or for any tax under Title 26, and nothing I
     receive is subject to tax under Subtitle A. I am not a
     ‘taxpayer’ as defined in Section 7701(a)(14), and as
     defined in Section 1313(b).

     In the same letter, petitioner claimed to have determined

from the information he researched and studied that he should use

Form 2555, Foreign Earned Income,8 to file his taxes.   Agent

Riley did not respond to petitioner’s letter because the IRS did

not normally respond to protest letters.

     Although petitioner researched the law contained in the

letter over several years, believed his positions were accurate,

and considered sending the letter to Agent Riley, petitioner

testified the positions asserted in the letter were not his

positions.   Petitioner further contended that, while he and Mr.

Marshall signed the letter, he did not know how Agent Riley

received the letter because neither petitioner nor Mr. Marshall

sent the letter to Agent Riley.




     8
       The purpose of Form 2555, Foreign Earned Income, is for
U.S. citizens or U.S. resident aliens living in another country
to declare, among other things, their foreign earned income and
possibly qualify for certain tax benefits related to their
foreign earned income. There is no evidence in the record, nor
did petitioner assert, that any of his income was foreign earned
income.
                               - 7 -

     Petitioner stated that there was no letterhead page attached

to the letter when both petitioner and Mr. Marshall signed the

letter.   Therefore, petitioner postulated that an associate, Jim

Jensen (Mr. Jensen), also involved in TSG, sent the letter to

Agent Riley substituting a retyped page one containing Mr.

Marshall’s letterhead.   Mr. Jensen was not called and did not

testify at trial.

     Continuing his audit examination, in the absence of tax

returns or tax documents, Agent Riley issued summonses to banks

and mortgage companies in an attempt to obtain petitioner’s

financial information.   However, Agent Riley was unable to

procure petitioner’s financial information because there were no

bank accounts in petitioner’s or his wife’s name.     Agent Riley

then reconstructed petitioner’s income using Bureau of Labor

Statistics information and sent his examination report to

petitioner around the end of 1999.     Petitioner responded by

filing a protest and a request to go to the Salt Lake City, Utah

IRS Office of Appeals.

     Petitioner stated that he was confused as to whether he

should file a Form 1040, U.S. Individual Income Tax Return, or a

Form 2555.   He testified that Agent Riley asked him “to fill out

1040 returns” but that petitioner’s “studies” showed the form

used by the Office of Management and Budget that was “assigned

[to] collect the tax on income” appeared to be Form 2555.     On May
                               - 8 -

11, 2000, petitioner submitted Forms 1040 for 1994 through 1996,

to an Appeals officer.

     Because of the information disclosed by the tax returns, the

examination of 1994 through 1996 was sent back to the examination

function by Appeals and reassigned to Agent Riley.   Agent Riley

issued petitioner an Information Document Request (IDR) asking

petitioner to provide documentation and support for the income

and deductions shown on his tax returns.

     After issuing the IDR, Agent Riley eventually received a

response including information from another attorney, then

representing petitioner, Brian Morris.   Utilizing this

information and the tax returns, Agent Riley discovered two bank

accounts under the names Oneida Family Trust (OFT) and DSG.

Petitioner possessed signature authority on both accounts.

Following a bank deposits analysis, Agent Riley determined that

petitioner understated his gross receipts on his 1994 through

1996 Federal tax returns.   During a meeting with petitioner and

Mr. Marshall on May 14, 2001, Agent Riley produced three binders

containing photocopies of every check drawn on the two bank

accounts for these years.   As the expenditures exceeded the

income shown on the 1994 through 1996 tax returns, Agent Riley

asked how the additional funds were derived.   Petitioner replied

that he acquired the funds from gifts by family members.

     After completing the examination and allowing a number of

previously disputed deductions, Agent Riley then sent the case to
                               - 9 -

his supervisor.   On May 29, 2002, the IRS issued to petitioner a

statutory notice of deficiency for 1995 and 1996.   In response,

petitioner filed a petition with the Court on September 3, 2002,

at docket No. 14104-02.   On December 3, 2003, pursuant to a

stipulation of the parties, this Court entered a decision in that

case that petitioner owed a deficiency and addition to tax and

penalty under sections 6651(a)(1) and 6662(a) for 1995 and a

deficiency and an addition to tax under section 6651(a)(1) for

1996.

Years in Issue:   1997, 1998, 1999, and 2000

     Petitioner had gross receipts from consulting for the years

1997, 1998, 1999, and 2000 of $76,090, $178,747, $303,225, and

$198,990, respectively.   On August 21, 2003, when respondent

issued petitioner a statutory notice of deficiency for each of

these years, petitioner had not yet filed a Federal income tax

return for any of them.   Petitioner filed a timely petition on

November 24, 2003, and thereafter provided Forms 1040 for 1997

through 2000 to respondent in March and April, 2004.

     The Forms 1040 reported less tax due than had been

determined by the notice of deficiency.   Following prolonged

negotiation and petitioner’s presentation of additional evidence

and substantiation in support of his reporting positions, the

parties agreed to the following:   The 1997 deficiency of $28,074

was reduced to $14,062; the 1998 deficiency of $66,821 was
                                - 10 -

reduced to $24,266; the 1999 deficiency of $119,278 was reduced

to $87,662; and the 2000 deficiency of $75,531 was reduced to

$56,572.    Thus, the aggregate reduction in petitioner’s total tax

due from the amount determined in the statutory notice of

deficiency was $107,142.

     The submitted Forms 1040 tax returns for 1997 through 2000

assisted the tax resolution process by identifying claimed

deductions subject to substantiation, but they were not free from

material errors.     For example, petitioner’s Form 1040, Schedule C

for 2000 reflected gross income from DSG and its related entities

of $61,655; the parties now agree the correct amount of gross

income was $198,990.9

                                OPINION

I.   General Rules

     Section 6651(f) imposes an addition to tax of up to 75

percent of the amount of tax required to be shown on the tax

return when the failure to file a Federal income tax return

timely is due to fraud.

     In a case involving fraud, respondent bears the burden of

proof of establishing fraud with clear and convincing evidence.

Sec. 7454(a); Rule 142(b).    There are two elements of fraud under

the Code:   (1) Existence of an underpayment and (2) fraudulent



     9
       The record does not contain petitioner’s Forms 1040 for
1997 through 1999.
                              - 11 -

intent with respect to some part of the underpayment.      Sec.

7454(a); Rule 142(b); Conti v. Commissioner, 39 F.3d 658, 664

(6th Cir. 1994), affg. 99 T.C. 370 (1992) and T.C. Memo. 1992-

616; Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989); Recklitis

v. Commissioner, 91 T.C. 874, 909 (1988); Stone v. Commissioner,

56 T.C. 213, 223 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105

(1969).

     Respondent determined tax deficiencies on the basis of

petitioner’s failure to report taxable income for each of the

1997 through 2000 taxable years.   Petitioner stipulated

unreported gross income and deficiency amounts for 1997 through

2000, confirming an underpayment for each taxable year.

     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).    Determining the

existence of fraud is a question of fact and is resolved upon

consideration of the entire record.    Niedringhaus v.

Commissioner, 99 T.C. 202, 210 (1992).

     Fraud is established by proving that the taxpayer engaged in

intentional wrongdoing designed to evade tax believed to be owing

by conduct intended to conceal, mislead, or prevent the

collection of such tax.   Petzoldt v. Commissioner, supra at 698;
                              - 12 -

Recklitis v. Commissioner, supra.   Respondent need not establish

that tax evasion was a taxpayer’s primary motive but may satisfy

his burden by showing a tax-evasion motive played a part in

taxpayer’s conduct.   Recklitis v. Commissioner, supra.

      Fraud is not to be imputed or presumed but must be

established by some independent evidence of fraudulent intent.

Niedringhaus v. Commissioner, supra; Stone v. Commissioner, supra

at 224.   A mere understatement of tax does not establish fraud.

Estate of Upshaw v. Commissioner, 416 F.2d 737, 741 (7th Cir.

1969), affg. T.C. Memo. 1968-123; Otsuki v. Commissioner, supra.

While a taxpayer’s failure to file a tax return may be an

indication of fraud, it does not, by itself, establish fraud.

Recklitis v. Commissioner, supra at 910; Kotmair v. Commissioner,

86 T.C. 1253, 1261 (1986).   However, when a taxpayer’s failure to

file is combined with other signs or circumstances establishing

an intent to conceal, mislead, or otherwise prevent collection of

tax, an inference of fraud is justified.   Recklitis v.

Commissioner, supra at 911; see Kotmair v. Commissioner, supra at

1261.

II.   Contentions of the Parties

      Petitioner asserts that respondent has not met his burden of

proof under Rule 142(b) and section 7454(a).   Petitioner contends

that his failure to file tax returns timely for the years in

issue resulted from the delay by Agent Riley in examining
                              - 13 -

petitioner’s 1994 through 1996 tax returns.   Petitioner contends

it was prudent to learn whether his claimed deductions for 1994

through 1996 were allowable on the basis of the audit for these

years before submitting tax returns for 1997 through 2000 on

which he hoped to claim similar deductions.   Tactically, he

believed this could assist in his presentation of claimed

deductions and avoidance of penalties.

     Petitioner argues that he made his 1994 through 1996 tax

records available to Agent Riley, but the IRS nevertheless

delayed in accepting petitioner’s claimed deductions for those

years, and Agent Riley never told petitioner that many of his

claimed deductions were eventually allowed by respondent.

Consequently, he contended that he could not complete and file

his 1997 through 2000 Federal income tax returns until March or

April 2004.   Petitioner believes that but for his health problems

and time pressures due to the trial date he would have been able

to substantiate more of his claimed expenses and further reduce

his tax deficiencies.   Petitioner denies any role in the delivery

of a frivolous tax protester letter to the IRS.   He maintains

that his trust promotion and sales activity were directed at

properly educating seminar participants regarding their tax

obligations, thereby supporting the IRS’s tax law enforcement

goals.
                              - 14 -

     Respondent determined that petitioner was liable for

additions to tax under section 6651(f) for his fraudulent failure

to file income tax returns for 1997 through 2000.    As badges of

his fraudulent failure to file, respondent maintains that

petitioner attempted to hide his income through the following

methods:   Materially understating his income on the late-filed

Federal tax returns; intentionally delaying filing his Federal

tax returns; failing to cooperate in the examination process;

establishing sham trusts; participating actively through 2000 in

the sale and dissemination of abusive tax avoidance trusts; and

advancing frivolous tax protester arguments including the letter

received by respondent’s agent.

III. Section 6651(f) Addition to Tax

     In Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir.

1986), affg. T.C. Memo. 1984-601, the Court of Appeals for the

Ninth Circuit observed that because “fraudulent intent is rarely

established by direct evidence, this court has inferred intent

from various kinds of circumstantial evidence”.    See also Spies

v. United States, 317 U.S. 492, 499 (1943); Niedringhaus v.

Commissioner, supra; Stone v. Commissioner, supra; Otsuki v.

Commissioner, supra at 106.   Thus, over the years, courts have

developed a nonexclusive list of indicia as circumstantial

evidence of fraudulent intent.    As relevant to this report, we

discuss the following “badges of fraud”:    (1) Understating
                                - 15 -

income, (2) failing to maintain adequate records, (3) failing to

file tax returns, (4) giving implausible or inconsistent

explanations of behavior, (5) concealing assets, (6) failing to

cooperate with tax authorities, (7) engaging in illegal

activities, and (8) failing to make estimated tax payments.

Spies v. United States, supra at 499-500; Conti v. Commissioner,

39 F.3d at 662; Bradford v. Commissioner, supra at 307-308;

Niedringhaus v. Commissioner, 99 T.C. at 211; Runkle v.

Commissioner, T.C. Memo. 2005-112.       While no single factor is

essential to establishing fraud, the existence of several “badges

of fraud” may constitute compelling circumstantial evidence of

fraud.    See Bradford v. Commissioner, supra.

             1. Understating Income

       This Court has held that consistent understatements of

income in substantial amounts over a number of years by

knowledgeable taxpayers, standing alone, may be considered

persuasive evidence of fraud.     Otsuki v. Commissioner, 53 T.C. at

108.    For the 1995 and 1996 taxable years, respondent discovered

that petitioner understated gross receipts deposited in the OFT

and DSG bank accounts, over which petitioner had signatory

authority.    After respondent’s discovery, petitioner agreed to

deficiencies for those taxable years.      For the years in issue,

petitioner received compensation for his teaching and speaking
                               - 16 -

services at NTS and FMG conferences, providing consulting

services, and engaging in several business activities.

       Petitioner never filed tax returns for any of his

businesses.    Ultimately, he reported some of the business income

on his own returns.    He did not file any returns for the years in

issue until 2004, several months after the statutory notice of

deficiency underlying this case had been mailed determining

deficiencies in his income tax and section 6651(f) additions to

tax.

       By stipulation, petitioner conceded gross receipts from his

consulting business DSG of $76,090 for 1997, $178,747 for 1998,

$303,225 for 1999, and $198,990 for 2000, and at trial,

petitioner admitted he significantly understated gross income for

2000 on the Form 1040 he submitted to respondent in March or

April of 2004.    Furthermore, when Kevin Davis (Agent Davis), an

IRS agent, performed an examination of petitioner’s records, the

examination revealed that petitioner’s tax liability should have

been higher than the amounts shown on his Forms 1040 for 1998

through 2000.10   Lastly, petitioner’s self-serving statement that

he agreed to the stipulated deficiency amounts for the years in

issue only because he was “worn out” from his dealings with the

IRS fails to persuade the Court that the acknowledged tax



       10
       At trial, Agent Davis could not remember whether this
situation also pertained to the 1997 taxable year.
                                - 17 -

deficiencies and failure to file timely returns are irrelevant to

the fraud issue.   Thus, petitioner’s failure:   (1) To fully

substantiate claimed deductions, (2) to report substantial

amounts of income for the years in issue, and (3) to report

income in prior taxable years is a pattern of conduct probative

of fraud.   See Estate of Upshaw v. Commissioner, 416 F.2d at 741.

            2. Failing To Maintain Adequate Records

     Petitioner admitted he was a poor bookkeeper.    Although he

claimed to “keep everything”:    “I have every receipt.   I have

everything.   I just don’t have it organized, and I didn’t get a

chance to substantiate”, he did not, however, maintain his bank

records.    Petitioner did not attempt to obtain bank records for

2000 because he claimed that in 2004 it was too costly for him to

do so.   The extent of petitioner’s record maintenance was

described by Agent Davis as three plastic tubs containing records

spanning various years.

     Although petitioner kept some records, he did not give any

records to Agent Riley regarding his income when Agent Riley

asked petitioner to file returns for the years in issue.     When

the records were eventually provided to the IRS, they were

insufficient to substantiate many claimed deductions.     For

example, when Agent Davis examined petitioner’s records with

respect to contributions and meals and travel expenses for the

years in issue, he allowed only some of the deductions, noting
                              - 18 -

that petitioner had substantiation problems with other claimed

deductions.   Petitioner failed to comply with repeated requests

from Agent Riley for records, and his actions show no apparent

effort to maintain adequate records from which Agent Davis could

develop an accurate accounting of petitioner’s finances.

          3. Failing To File Tax Returns

     Petitioner failed to file timely tax returns for 1994

through 2000, and his excuse for not filing timely returns for

the years in issue was that his “intent was to get an

understanding on 1994, 1995 and 1996 and that I would file the

1997, 1998, 1999 and 2000 as soon as I could, but that I had [an]

intention of getting those all cleared up this [2003] year.”

Petitioner did not file returns for 1994 through 1996 until May

11, 2000, and did not file returns for 1997 through 2000 until

March or April 2004.   In both cases, the tax returns were filed

only after respondent issued statutory notices of deficiency to

petitioner.

     In determining fraudulent intent, the Court considers as

relevant a taxpayer’s intelligence, education, and tax expertise.

Iley v. Commissioner, 19 T.C. 631, 635 (1952).   While the record

does not indicate that petitioner received any special education

or training in the tax laws, he promoted himself as a business

person skilled in providing seminars on trusts and tax planning.
                               - 19 -

     Petitioner admitted that he knew he had a Federal income tax

“liability or a responsibility” to file a Federal income tax

“return or a statement”.   By his own testimony, petitioner

purported to advise people on timely filing returns and timely

paying taxes.    Thus, petitioner should have been and was aware of

his obligations to file a tax return and pay taxes timely.

Petitioner’s actions over several years established a pattern of

failing to file returns.   Petitioner’s reasons for failing to

file do not constitute mere negligence; rather, they are an

indicator of intentional effort to delay payment of the income

tax due.

           4. Giving Implausible or Inconsistent Explanations of

Behavior

     Petitioner testified that he was an advocate for the IRS in

his consulting business encouraging seminar participants to

timely file their tax returns.   Yet, petitioner did not file his

returns or pay his taxes timely.   Petitioner’s claimed position

concerning the IRS and the filing and the payment of taxes is

inconsistent with his behavior during the 1994 through 2000

taxable years.    Furthermore, petitioner’s explanation that he was

waiting for resolution on his 1994 through 1996 tax returns in

order to file tax returns for 1997 through 2000 is not

persuasive, given his business background and his familiarity

with the timely filing requirement.
                                - 20 -

     Taxpayers must file tax returns each and every year for

which gross income exceeds a certain threshold amount.     Sec.

6012(a)(1).    Each tax year represents a new liability and a

separate cause of action.     Commissioner v. Sunnen, 333 U.S. 591,

598-599 (1948).    Petitioner is not entitled to use Agent Riley’s

investigation of previous tax years’ returns as an excuse for

failing to file current year returns.     Moreover, the Court does

not agree that petitioner’s alleged confusion as to whether to

file a Form 1040 or Form 2555 is a valid excuse to delay filing

either form.

     Petitioner believed NTS and FMG had promoted “a lot of very

big misconceptions to taxpayers”.     As a result, he claimed that

he started educating people about NTS’s and FMG’s fallacies and

misconceptions in 1992.     Despite petitioner’s asserted beliefs

regarding NTS’s and FMG’s promoted misconceptions, petitioner was

hired independently by NTS and FMG to conduct seminars sponsored

by them.   He also assisted in the formation of the NTS and FMG

promoted trusts.    Petitioner’s tax returns for 1997 through 2000

revealed that he continued to promote for profit abusive trust

schemes marketed by NTS and FMG through at least 2000.     The Court

finds petitioner’s testimony to be self-serving and contradicted

by his actions.    The Court deems petitioner’s reasons for failing

to file timely his tax returns to be manufactured and not

a defense to fraud.
                              - 21 -

          5. Concealing Assets

     For the taxable years 1994 through 1996, petitioner took

affirmative steps to conceal his assets and income, forcing

respondent to serve summonses on banks and mortgage companies,

to use Bureau of Labor Statistics information, and to implement

a bank deposits analysis in order to discover bank accounts,

recreate petitioner’s income, and eventually determine

understatements of income.

     For taxable years 1997 through 2000, petitioner continued to

conduct business in the name of DSG.   By not correctly reporting

the income earned by DSG, a disregarded trust, either on DSG’s

own return or on petitioner’s Form 1040, and continuing to

operate under DSG, there is a strong inference that petitioner

did so with the intent to conceal his income.

          6. Failing To Cooperate With Tax Authorities

     Petitioner did not cooperate with Agent Riley’s attempts to

obtain tax returns or financial information for the years in

issue.   On December 2, 2002, petitioner informed Agent Riley that

returns were being prepared, when, in fact, they were not.    When

respondent issued a notice of deficiency on August 21, 2003,

petitioner had still not filed the relevant tax returns.   He

appeared to have eventually submitted Forms 1040 only to obtain

deductions to decrease the deficiencies owed.
                               - 22 -

     During an October 2004 meeting, petitioner finally provided

records to Agent Davis.   The Court concludes that petitioner’s

tardy actions in providing records to Agent Davis were an attempt

to forestall further investigation and substantiate his

deductions on his late-filed returns.    Petitioner’s pattern of

noncompliance is indicative of a fraudulent failure to file for

the taxable years in issue.

          7. Engaging in Illegal Activities or Attempting to

Conceal Illegal Activities

     Petitioner established DSG as a trust that purported to act

as his business entity.    He disclosed the trust’s income and

expenses for the first time on Forms 1040 submitted woefully

late, after a notice of deficiency for the years in issue had

already been received.    The Court may infer fraudulent conduct

based on petitioner’s activities involving trusts.    See Muhich v.

Commissioner, T.C. Memo. 1999-192 (holding that trusts designed

to avoid Federal income tax were sham trusts), affd. 238 F.3d 860

(7th Cir. 2001).

     Taxpayers are generally allowed to arrange and conduct their

affairs and structure their transactions to minimize any adverse

tax implications.   See Gregory v. Helvering, 293 U.S. 465, 469

(1935); Markosian v. Commissioner, 73 T.C. 1235, 1241 (1980).

However, where a sham transaction has no economic effect other
                                - 23 -

than creation of income tax losses, it will not be recognized for

tax purposes.     Zmuda v. Commissioner, 731 F.2d 1417, 1421 (9th

Cir. 1984) (citing Thompson v. Commissioner, 631 F.2d 642, 646

(9th Cir. 1980), affg. 66 T.C. 1024 (1976)), affg. 79 T.C. 714

(1982).

     Petitioner is not a stranger to disregarded trusts.      In

Castro v. Commissioner, T.C. Memo. 2001-115, this Court held that

a trust created by DSG for Kevin Castro was a “flagrant tax

avoidance scheme” and properly disregarded for Federal tax

purposes because it lacked economic substance.11    Petitioner’s

involvement, himself and through DSG, in disregarded trusts as in

Castro and in the instant case demonstrates his continued

association with sham transactions and is further evidence of

fraudulent conduct.

             8. Failing To Make Estimated Tax Payments

     Petitioner did not file estimated tax forms or timely pay

his taxes due for the years in issue.    When asked at trial

whether petitioner could recall whether he made any estimated tax

payments for the years at issue, petitioner replied:     “No, I did

not.”     Moreover, there is no evidence in the record that

petitioner made any payments for estimated taxes.


     11
       The Court notes that counsel for petitioners in Castro v.
Commissioner, T.C. Memo. 2001-115, and in the instant case is the
same individual.
                              - 24 -

IV.   Conclusion

      On the basis of the record and considering all the facts and

circumstances in this case, petitioner’s actions demonstrate a

majority of the indicia of fraud considered by this Court.

Respondent has met his burden of proof by providing clear and

convincing evidence that petitioner not only established a

pattern of failing to file income tax returns, but he also

created trusts designed to conceal his income, thereby knowingly

attempting to evade taxes.   Thus, respondent has shown that at

least some portion of the underpayment for each of the years in

issue was due to fraud.   Moreover, petitioner did not demonstrate

that any portion of the underpayment was not attributable to

fraud.   Accordingly, the Court finds that petitioner is liable

for an addition to tax under section 6651(f) for 1997 through

2000.

      The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.   To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

      To reflect the foregoing and concessions made by respondent,



                                         Decision will be entered

                                    under Rule 155.
