                         T.C. Memo. 2005-112



                       UNITED STATES TAX COURT



         DENNIS E. RUNKLE AND DEBRA A. RUNKLE, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17192-02.                 Filed May 18, 2005.




     Dennis E. and Debra A. Runkle, pro sese.

     Timothy A. Lohrstorfer, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:    Respondent determined deficiencies in

petitioners’ Federal income tax for 1991 through and including

1995 (years at issue) and determined that petitioners were liable

for the addition to tax under section 6651(f)1 for fraudulent


     1
      All section references are to the Internal Revenue Code in
                                                   (continued...)
                               - 2 -

failure to file a timely income tax return and alternatively

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

also determined that petitioners were liable for the years at

issue for the penalty under section 6654 for failure to pay

estimated taxes.   After concessions, the issues to be decided

include whether petitioners are liable for the addition to tax

under section 6651(f) for fraudulent failure to file a timely

income tax return.   We hold that petitioners are liable.   We

therefore do not need to decide alternatively whether petitioners

are liable for the addition to tax under section 6651(a)(1).

     The second question we are asked to decide is whether

petitioner Dennis E. Runkle (Mr. Runkle) is entitled to deduct

business expenses in excess of the 19.2-percent deduction ratio

of expenses to income that respondent allowed in the notice of

deficiency (deficiency notice), dated August 7, 2002, based upon

the expenses Mr. Runkle claimed regarding his insurance-related

business on the 3 previous years’ tax returns.   We hold that he

is not.

     The third issue is whether petitioners are liable for the

years at issue for the addition under section 6654 for failure to

pay estimated taxes.   We hold that petitioners are liable.




     1
      (...continued)
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                               - 3 -

                        FINDINGS OF FACT

     Some of the facts have been stipulated.    The stipulation of

facts and accompanying exhibits are incorporated by this

reference, and the facts are so found.    Petitioners resided in

Fort Wayne, Indiana, when they filed the petition.

General Background of Petitioners

     Both petitioners were self-employed entrepreneurs with

financial and business experience.     Mr. Runkle was self-employed

in bicycle sales from 1972 to 1985, during which time he hired a

bookkeeper or certified public accountant to maintain the books

and records for the bicycle sales activity.

     Mr. Runkle then became involved in insurance sales as an

independent insurance agent in 1986 and has been a self-employed

insurance agent since 1986.   He has held a Life Underwriters

Training Counsel Fellow (LUTCF) certification since at least

1991.

     During the years at issue, Mr. Runkle also sold computers

and computer equipment, and he obtained a 2-year associate’s

degree as a paralegal through a correspondence school in the mid-

1990s.

     Mr. Runkle began operating DR Financial, Inc. in the 1990s

to promote the sale of insurance products and annuities.    He also

served on the financial commission of the Calvary Temple Church.
                                - 4 -

     Mrs. Runkle operated the Canyon Kennel as a sole

proprietorship since its inception in 1988 through at least 1995.

She provided dog and cat kenneling and grooming services through

Canyon Kennel.    She maintained a checking account and was

responsible for paying the Canyon Kennel’s bills and collecting

its income.

Filing of Tax Returns & American Institute Philosophy

     Petitioners timely filed their Federal income tax returns

for all years before 1990 and paid the related taxes due.     On

February 25, 1991, petitioners applied for a $25,000 home equity

loan line of credit with Garrett State Bank to pay their taxes

for 1990.2    Petitioners timely filed a joint return for 1990

showing a tax liability of $13,467, which they paid with the loan

proceeds from Garrett State Bank.

     In the fall of 1991, petitioners attended a seminar

sponsored by the American Institute for the Republic (American

Institute) at which it promoted its “untaxing” program.    The

American Institute purported to advise petitioners how to “opt

out of the system of paying taxes” and provided petitioners with

letters to send to respondent’s Service Center and agents in

petitioners’ effort to “opt out” of the taxing system.


     2
      Mr. Runkle showed his monthly gross income as $6,000 in the
home equity loan application and showed his monthly net income as
$4,500. Mrs. Runkle showed her monthly gross income as $1,731
and her monthly net income as $1,298.25.
                               - 5 -

Petitioners paid approximately $1,000 to the American Institute

and wrote “untaxing service” in the memo section of the checks

and “final payment for untaxing.”

     Petitioners did not file a Federal income tax return for any

year after 1990, nor have they made any estimated income tax

payments regarding those years with one lone exception.   Mr.

Runkle made a $1,987 payment towards his Federal income tax for

1991 on April 17, 1991.   Mr. Runkle made no payments for 12 years

until September 28, 2003, at which time he made separate $100

payments towards each of the years 1998, 1999, 2000, 2001, 2002,

and 2003.

American Institute’s Untaxing Service

     Instead of filing tax returns and making payments,

petitioners began sending correspondence typical of other

“untaxing” programs to respondent’s Cincinnati Service Center in

March 1992.   Specifically, petitioners sent a letter dated March

24, 1992, in which they stated that they “hold the sincere belief

that the federal income tax laws do not apply to [them]” and they

“firmly believe that the IRS is operating under secret

jurisdiction and, as such, is operating unlawfully.”   In a second

letter of the same date, petitioners stated that they recently

found that the IRS was operating under color of law and that the

IRS was attempting to extort money from them.   “This is a formal

demand that the [IRS] cease and desist from such activity at
                               - 6 -

once.”   Petitioners then sent an additional letter on May 27,

1993, to respondent’s Cincinnati Service Center advancing other

frivolous, tax-protester type arguments.   In this letter,

petitioners declared that they were not taxpayers under the Code

and dismissed the sections cited by respondent as not being

“positive law.”

     Petitioners did not conduct any independent research to

support the statements in petitioners’ letters to respondent.

     Petitioners maintained contact with the American Institute

from March 1992 through at least 1995.   In the course of

petitioners’ dealings with respondent, both administratively and

judicially, the American Institute provided petitioners with

rebuttal arguments to respondent’s positions.

Tax Planning Activities

     Sometime between 1990 and 1993, Mr. Runkle met certified

public accountant William Boeykens (Mr. Boeykens) for what Mr.

Runkle characterized as “mainstream tax planning” using

partnerships, living trusts, and “pour-over” wills.   Mr. Runkle

and Mr. Boeykens3 promoted and sold these partnership packages as

an income tax and estate tax planning program to their clients

during 1992 through 1995.   Mr. Runkle used his knowledge of


     3
      Mr. Boeykens advised Mr. Runkle that he was “crazy” for
becoming involved in the American Institute’s “untaxing service.”
Despite this advice, petitioners did nothing to “undo” their
involvement.
                                - 7 -

income, gift, and estate tax law to promote and sell these

programs to his clients.   Mr. Runkle failed to maintain records

of his income and expenses for this income and estate tax

planning activity.

Failure To Maintain Adequate Records

     Mr. Runkle also did not maintain books and records of his

income and expenses for his insurance sales activities, nor did

he maintain books and records for his computer sales activities

for the years at issue.    Although he maintained a check register

for the years at issue, Mr. Runkle threw away his check registers

after he balanced his checking account.   Mrs. Runkle destroyed

her books and records for the Canyon Kennel for the years at

issue, threw away the check registers she briefly maintained for

Canyon Kennel, and threw away the bank statements after she

balanced the bank account during the years at issue.

Petitioners’ Family Limited Partnership

     Petitioners formed the Elknur4 Family Limited Partnership on

August 19, 1994.5

     Petitioners have been the general partners of the Elknur

Family Limited Partnership, each holding a 2-percent interest as


     4
      “Elknur” is Runkle spelled backwards.
     5
      We note that this date is a mere 7 days after Revenue Agent
Andrews mailed Mr. Runkle a notification letter that respondent
was examining Mr. Runkle for failure to file returns for 1991,
1992, and 1993.
                               - 8 -

general partner and a 4.5-percent interest as limited partner.

Petitioners’ children, Daniel J. Runkle, Dustin S. Runkle, and

Dawn A. Runkle, each held 29-percent interests as limited

partners in the Elknur Family Limited Partnership from its

formation through at least December 31, 1995.

     Petitioners transferred title to their personal residence to

the Elknur Family Limited Partnership by quitclaim deed, dated

October 18, 1994, in accordance with their partnership agreement.

Petitioners received no consideration in exchange for their

transfer of their personal residence to the Elknur Family Limited

Partnership.   The quitclaim deed referenced the consideration as

“one dollar and other valuable consideration.”   Moreover, despite

their contribution to the partnership, petitioners remained

obligated to pay the outstanding obligations on the residence.

     Petitioners opened a business checking account for the

Elknur Family Limited Partnership on September 14, 1994, and Mr.

Runkle deposited insurance commission checks into the business

checking account for the Elknur Family Limited Partnership during

1994 and 1995.   Petitioners used the partnership’s checking

account to pay personal expenses, including doctor bills and loan

payments.   Petitioners caused the Elknur Family Limited

Partnership to file Form 1065, U.S. Partnership Return of Income,

for 1994 and every year thereafter.
                                - 9 -

     Petitioners submitted a purchase order to the R.V. Center,

Inc., on behalf of the Elknur Family Limited Partnership, for the

purchase of a 1995 Coachman recreational vehicle for $46,0006 on

April 27, 1995.   Petitioners caused the 1995 Coachman to be

titled in the name of the Elknur Family Limited Partnership,

although petitioners personally borrowed $32,320 from the Three

Rivers Federal Credit Union and traded in a 1994 Starcraft they

owned.   In the loan application with the credit union,

petitioners showed Mr. Runkle’s annual “take home pay” as $37,500

and Mrs. Runkle’s as $30,000.   Petitioners provided the credit

union selected information returns (Forms 1099) for 1993 and 1994

regarding income Mr. Runkle received.   Petitioners presented no

expense information to the credit union to offset the 1993 and

1994 income reported on the Forms 1099.

Audit Examination

     Mr. Runkle received correspondence from respondent during

1991 through 1995 advising him that he had a requirement to file

tax returns.    Mr. Runkle testified that he expected respondent to

convince him that his “untaxing” assertions were inaccurate

before he would cooperate with respondent’s examination of 1991

through 1995.

     When Revenue Agent Keith Andrews notified Mr. Runkle that

respondent was examining years 1991, 1992, and 1993 and scheduled

     6
      Amounts have been rounded to the nearest dollar.
                               - 10 -

a meeting on August 26, 1994, Mr. Runkle responded that he was

unavailable to meet on the scheduled date.    Mr. Runkle did not

propose an alternative date.   Similarly, when Revenue Agent

Andrews issued an examination letter to Mrs. Runkle for 1991,

1992, and 1993, Mrs. Runkle neither appeared at the scheduled

appointment nor rescheduled the appointment.

     In response to the revenue agent’s summons directing Mrs.

Runkle to produce her books and records for 1991, 1992, and 1993,

Mr. Runkle advised Revenue Agent Andrews that Mr. Runkle would

accompany Mrs. Runkle to her summons appointment.    Four witnesses

who refused to disclose their identities also attended the

summons conference with petitioners.    At petitioners’ request,

both petitioners and Revenue Agent Andrews taped the summons

conference.   At the summons conference, Mrs. Runkle demanded that

Revenue Agent Andrews provide her with his personal residence

address as a prerequisite to her complying further with the

summons.   When Revenue Agent Andrews refused to provide his

personal address, Mrs. Runkle advised him that the summons

conference was done as far as she was concerned.    She also

advised Revenue Agent Andrews that she did not bring any books

and records with her.

     At the summons conference, Mr. Runkle demanded that Revenue

Agent Andrews provide him with the Code section that makes him

liable for taxes, to which Revenue Agent responded that section
                              - 11 -

6001 requires taxpayers to maintain books and records.   Mr.

Runkle advised Revenue Agent Andrews that he had researched

section 6001 and there was no requirement to file a tax return

under section 6001.   Mr. Runkle encouraged Revenue Agent Andrews

to take more time to research what part of the Code made

petitioners subject to taxation.   Revenue Agent Andrews declined

Mr. Runkle’s offer.   Revenue Agent Andrews testified that he was

intimidated by Mr. Runkle’s questioning on tape in the presence

of four unnamed witnesses.

     Revenue Agent Andrews also testified that he concluded,

after the summons conference, that he would need to issue

information request letters to third parties who filed income

information returns with respondent reporting income these third

parties paid to petitioners in 1991, 1992, and 1993.   Revenue

Agent Andrews issued summonses on November 2, 1994, to third-

party payors to obtain income and expense information regarding

petitioners.

     Petitioners filed a petition with the United States District

Court for the Northern District of Indiana (Indiana Federal

District Court) to quash the summonses issued to the third-party

payors.   The Indiana Federal District Court denied petitioners’

petition to quash the summonses issued to the third-party payors.

To save costs, Revenue Agent Andrews agreed that Garrett State

Bank need provide only the deposit items for petitioners’
                              - 12 -

accounts for 1991, 1992, and 1993.     This included deposit

information for both Mrs. Runkle’s Canyon Kennel account and

petitioners’ joint personal checking account.

     Based upon this deposit information, Revenue Agent Andrews

concluded that petitioners had sufficient income to require each

of them to file tax returns for 1991, 1992, and 1993.

     Neither petitioner produced any documentation to Revenue

Agent Andrews during the course of his examination of each

petitioner’s income tax liabilities for 1991, 1992, and 1993.

Criminal Investigation

     Revenue Agent Andrews referred each petitioner’s case to

respondent’s Criminal Investigation Division.     Criminal

Investigation Division Special Agent Matthew Fabina (Special

Agent Fabina) was assigned to investigate Mr. Runkle’s failure to

file income tax returns.   Special Agent Fabina and Special Agent

David Diffenbach attempted to interview Mr. Runkle at his

personal residence on January 11, 1996.     Mr. Runkle exercised his

Fifth Amendment rights and refused to speak with Special Agents

Fabina and Diffenbach.

     After Mr. Runkle refused to be interviewed, Special Agent

Fabina contacted banks, insurance companies, and third-party

income sources to determine Mr. Runkle’s income, and Special

Agent Fabina issued summonses to these third parties.     Special

Agent Fabina caused summonses to be served on banks for specific
                              - 13 -

bank account and loan documents pertaining to Mr. Runkle and the

Elknur Family Limited Partnership for the years at issue (the

bank summonses).   Mr. Runkle filed another petition with the

Indiana Federal District Court to quash the bank summonses.     The

Indiana Federal District Court again issued an order denying Mr.

Runkle’s petition to quash the bank summonses.

     In its order, however, the Indiana Federal District Court

granted the Elknur Family Limited Partnership’s unopposed motion

to intervene in the summons enforcement action.   Mr. Runkle

testified that he considered the court’s granting the

partnership’s motion to intervene to be a victory.   Mr. Runkle

shared this information with the American Institute, and the

American Institute assisted Mr. Runkle in contesting, on behalf

of the partnership, the bank summonses.   On October 28, 1996, the

Elknur Family Limited Partnership, through Mr. Runkle as one of

its general partners, filed its petition to quash the Garrett

State Bank summonses.   On January 6, 1997, the Indiana Federal

District Court issued its order rejecting as “simply meritless”

the partnership’s arguments to quash the bank summonses.

     Special Agent Fabina also caused summonses to be served on

Southwestern Life Insurance Co. and Union Bankers Insurance Co.

for information regarding insurance policies sold by and

compensation paid to Mr. Runkle for 1991 through and including

1995 (the insurance company summonses).   On March 21, 1996, Mr.
                               - 14 -

Runkle filed a petition with the Federal District Court for the

Northern District of Texas (Texas Federal District Court) to

quash the insurance company summonses.   A magistrate judge for

the Texas Federal District Court issued findings and

recommendations denying Mr. Runkle’s petition to quash the

insurance company summonses.    The magistrate judge for the Texas

Federal District Court found that Mr. Runkle’s arguments to quash

the insurance company summonses were “not supported by the

statute or case law.”

     Special Agent Fabina also caused a summons to be served on

Rodman & Renshaw, Inc. on March 8, 1996, regarding income

information and distributions made to Mr. Runkle for 1991 through

and including 1995 (the Rodman summons).    Mr. Runkle filed a

petition with the U.S. District Court for the Northern District

of Illinois (Illinois Federal District Court) to quash the Rodman

summons on April 3, 1996.    Special Agent Fabina served a second

summons on Rodman & Renshaw, Inc. on April 28, 1997 (second

Rodman summons).   Mr. Runkle filed a petition with the Illinois

Federal District Court to quash the second Rodman summons on May

13, 1997.   The Illinois Federal District Court rejected Mr.

Runkle’s efforts to quash the Rodman summons and the second

Rodman summons.    Thereafter, Rodman produced the requested

documents to respondent.
                                - 15 -

     Special Agent Fabina learned that Mr. Runkle, on behalf of

the Elknur Family Limited Partnership, purchased a Kawasaki jet

ski and a trailer for approximately $2,000 from R&D Motorsports,

Inc. (R&D), on June 23, 1995.    Shortly thereafter, Special Agent

Fabina served a summons on R&D for their books and records

pertaining to all transactions involving Mr. Runkle and the

Elknur Family Limited Partnership for the years at issue.    Mr.

Runkle advised Randy Bills of R&D that respondent was prevented

by court order from obtaining records of the Elknur Family

Limited Partnership, and Mr. Runkle threatened to sue Mr. Bills

if Mr. Bills gave any documents to Special Agent Fabina, even

though Mr. Runkle knew that there was never a court order that

prevented respondent from summonsing and receiving documents and

information pertaining to the Elknur Family Limited Partnership.

     In addition to all the actions to quash the various

summonses, petitioners filed a motion to dismiss this case on

February 17, 2004.    Petitioners testified that they filed their

motion to dismiss as a “tool” to force respondent to concede the

fraudulent failure to file additions under section 6651(f) for

the years at issue.

Deficiency Notices

     By deficiency notices dated August 7, 2002, respondent

determined deficiencies in, and additions to, each petitioner’s

Federal income taxes as follows:
                                  - 16 -

                                Mr. Runkle

                                             Addition to Tax
     Year          Deficiency           Sec. 6651(f)   Sec. 6654

     1991          $28,258                  $19,703          $1,136
     1992           20,162                   15,122             879
     1993           20,643                   15,482             865
     1994           10,475                    7,856             540
     1995           10,100                    7,575             551


                                Mrs. Runkle

                                             Addition to Tax
     Year          Deficiency           Sec. 6651(f)   Sec. 6654

     1991          $12,881                    $9,661           $562
     1992            8,983                     6,737            392
     1993           15,206                    11,405            637
     1994           20,180                    15,135          1,040
     1995           10,951                     8,213            598


     Petitioners timely filed a petition with this Court for a

redetermination.

                                  OPINION

     This case presents a brazen challenge to respondent’s

determinations that the failure of two married, self-employed

individuals to file returns was fraudulent.            Mr. Runkle, a tax,

financial and insurance planner, and his wife, Mrs. Runkle, a pet

kennel operator, have persistently failed to file Federal income

tax returns for 14 years since 1990.         They acknowledged at trial

that the “untaxing” program they asserted throughout this case

from 1991 until as recently as their motion to dismiss, filed

February 17, 2004, has no merit.      At trial, petitioners
                               - 17 -

proclaimed that they want to again participate in the Federal

income tax system.

     We note that their wish to reenter is not without

conditions, however.   Instead, they have set their own terms for

reentry.   First, their terms of reentry include absolving them

from the fraudulent failure to file addition under section

6651(f) and rather finding them liable for the failure to file

addition under section 6651(a)(1).      Second, Mr. Runkle seeks

additional business deductions, which he cannot substantiate.

Third, petitioners ask us to absolve them of the addition to tax

for failure to pay estimated taxes under section 6654(a) even

though petitioners failed to produce any evidence challenging

respondent’s determinations.   In essence, petitioners, having

conceded respondent’s deficiency determinations, now condition

their reentry to the Federal tax system on their own terms, not

those by which all other taxpayers must comply.

     We begin with whether petitioners’ failure to file Federal

income tax returns was fraudulent under section 6651(f).      We then

decide whether Mr. Runkle is entitled to business expenses in

excess of those allowed by respondent in the deficiency notice,

and then whether petitioners are liable for the estimated tax

addition under section 6654(a).
                              - 18 -

A.   Fraudulent Failure To File Returns

      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 up to 5 percent

per month of the amount required to be shown as tax, 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 as tax up to a maximum of 75 percent.

Sec. 6651(f).

      The record reflects that petitioners did not file timely

income tax returns for the years at issue.    In fact, the record

reflects that petitioners, as of the trial date, have yet to file

their returns for the years at issue.     We must determine whether

their 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
                               - 19 -

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

7454(a); Rule 142(b); Clayton v. Commissioner, supra.

     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) failing to maintain adequate records,

(4) concealing assets, (5) failing to cooperate with tax

authorities, (6) asserting frivolous arguments and objections to
                              - 20 -

the tax laws, (7) giving implausible or inconsistent explanations

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

     1.   Failing To File Income Tax Returns

     A taxpayer’s intelligence, education, and tax expertise are

relevant in determining fraudulent intent.     Stephenson v.

Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th

Cir. 1984); Iley v. Commissioner, 19 T.C. 631, 635 (1952).

Respondent argues that given petitioners’ business background and

other facts in the record, they were aware of their obligation to

file income tax returns.   We agree.

     Mr. Runkle operated a bicycle sales business for 14 years

and has been a self-employed independent insurance agent.      He has

held an LUTCF life insurance certification since at least 1992,

and he obtained an associate’s degree as a paralegal through a

correspondence school in the mid-1990s.    By his own testimony he

     7
      We address petitioners’ failure to pay estimated tax
payments infra under the subheading entitled “Estimated Tax
Addition.”
                               - 21 -

became involved in what he considers “mainstream” tax planning

and promoted the sale of income and estate tax planning programs

using partnerships, wills, living trust, and other legal

instruments.    As further evidence of Mr. Runkle’s financial

expertise, Mr. Runkle also formed DR Financial, Inc. to promote

the sale of insurance and annuities and served on a church’s

financial commission.   In addition, Mrs. Runkle successfully

operated the Canyon Kennel as a sole proprietorship for many

years.

     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. 661 (1989); see

also Stalker v. Commissioner, T.C. Memo. 1981-544.    Petitioners

had a history of consistently filing income tax returns and

paying the tax liability before the years in issue.    The last

year for which they filed a return, 1990, petitioners had a

Federal tax liability of $13,467, which they timely paid with

funds borrowed from Garrett State Bank.    Thereafter, petitioners

embarked on a course to avoid disclosing and paying their Federal

tax liability.    This occurred after petitioners attended a

seminar in Cancun, Mexico, and bought the “untaxing” propaganda

of the American Institute that established petitioners’ “firm

belief” there was no requirement to file returns.
                              - 22 -

     Failure to file income tax returns, even over an extended

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

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).

     Petitioners’ asserted “firm belief” that they were not

required to file income tax returns is implausible and

inconsistent with their own actions.    Petitioners had a

consistent history of filing returns and paying taxes yet they

failed to file an income tax return for each of the years at

issue despite respondent’s numerous requests to file returns.

Further, the record establishes that both petitioners knew they

were required to file income tax returns.    For example, Mrs.

Runkle timely filed a Federal income tax return for her deceased

father for 1993 as his personal representative.    Petitioners also
                                - 23 -

caused tax returns for the Elknur Family Limited Partnership to

be filed for each year 1994 through 2003.    Respondent contends,

and we are persuaded, that petitioners’ pattern of failing to

file when viewed in light of their history of filing timely

income tax returns for themselves and for others is evidence of

petitioners’ fraudulent intent to evade tax liability.

     2.   Understating Income

     Moreover, 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, by petitioners’ own

concessions at the time of trial, Mr. Runkle had adjusted gross

income8 of $89,913 for 1991, $62,223 for 1993, $50,313 for 1993,

$38,661 for 1994, and $38,211 for 1995 and Mrs. Runkle had

adjusted gross income of $33,851 for 1991, $24,936 for 1992,

$26,452 for 1993, $55,383 for 1994, and $27,024 for 1995.

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

substantial income is evidence of fraud.




     8
      The adjusted gross income amount is subject to Mr. Runkle’s
claim that he is entitled to business expenses in excess of those
allowed by respondent in the deficiency notice, infra.
                               - 24 -

     3.    Failing To Maintain Adequate Records

     A taxpayer’s destruction of books and records of his or her

income-producing activity further demonstrates a willful attempt

to defeat and evade taxes.    Spies v. United States, 317 U.S. at

499; Toushin v. Commissioner, 223 F.3d 642, 647 (7th Cir. 2000),

affg. T.C. Memo. 1999-171.    Mr. Runkle failed to maintain books

and records for any of his income-producing activities for the

years at issue.    In fact, Mr. Runkle testified he regularly threw

away his records of income and expenses once he determined

whether he had a profit or loss or upon balancing his checkbook.

While Mr. Runkle maintained check registers for the years at

issue, he threw them away after he balanced the checkbook.

Likewise, Mrs. Runkle destroyed her books and records for the

Canyon Kennel for the years at issue.    While she briefly retained

check registers for the kennel activity, she also threw away

these records.    She testified that she threw away the bank

statement after she balanced the checkbook during the years at

issue.    Through these actions, respondent argues, and we agree,

that petitioners sought to conceal their income tax income

liability and succeeded in delaying respondent’s determination

for the years at issue.    Petitioners’ conscious decisions not to

maintain books and records, coupled with their individual

decisions to destroy any available records, demonstrates their
                              - 25 -

intent to fraudulently evade their 1991 through 1995 income tax

liabilities.

     4.   Concealing Assets

     Concealing assets or income is also an indicium of fraud.

Douge v. Commissioner, 899 F.2d at 168; Bradford v. Commissioner,

796 F.2d 303 (9th Cir. 1986); Recklitis v. Commissioner, 91 T.C.

at 910.   Respondent contends, and we agree, that petitioners took

affirmative steps to conceal their income and assets.

Petitioners formed the Elknur Family Limited Partnership and

transferred legal title to their personal residence to the

partnership.   Petitioners formed the partnership a mere 7 days

after Revenue Agent Andrews notified Mr. Runkle that the years

1991, 1992, and 1993 were under examination.   Petitioners also

caused the Elknur Family Limited Partnership to acquire assets

that have inherent personal recreational value to petitioners,

including the Coachman recreational vehicle for $46,000, a

Kawasaki jet ski, and a trailer.   They also created a partnership

checking account to which Mr. Runkle deposited insurance

commission checks and from which petitioners paid personal

expenses, including doctor bills and personal loan payments.   As

the general partners of the Elknur Family Limited Partnership,

petitioners had continued control of the partnership, and we find

that petitioners used the partnership to conceal their assets and

frustrate respondent’s collection efforts.
                               - 26 -

     5.   Failing To Cooperate With Tax Authorities

     We next consider petitioners’ 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.   Petitioners did not cooperate with

respondent’s investigations.   Petitioners actively sought to

delay respondent’s investigation by refusing to meet with

respondent’s agents or refusing to offer alternative dates on

which to meet.   Failing to appear at a scheduled interview caused

Revenue Agent Andrews to issue a summons to Mrs. Runkle to appear

on October 31, 1994, with her books and records.      When Mr. Runkle

phoned Revenue Agent Andrews to advise him that Mr. Runkle would

accompany his wife to the summons conference, Mr. Runkle declined

the revenue agent’s offer to reschedule a meeting to examine Mr.

Runkle’s records, a meeting that Mr. Runkle previously refused to

attend.

     At the summons conference, Mrs. Runkle was accompanied by

Mr. Runkle and four other individuals who refused to identify

themselves.   Mrs. Runkle failed to bring any of the requested

books and records as summoned.   Mrs. Runkle claimed she needed

the personal residence address of Revenue Agent Andrews before

she would comply with the summons.      When the revenue agent

provided his business address rather than personal address, Mrs.
                              - 27 -

Runkle declared that she considered the conference concluded.

Further, petitioners insisted on taping the interview, and Mr.

Runkle insisted on the revenue agent’s telling Mr. Runkle what

Code section required him to file tax returns.   Revenue Agent

Andrews testified that he found this questioning, in the presence

of four witnesses who refused to identify themselves, to be

intimidating.

     Neither petitioner produced any documents or records to

Revenue Agent Andrews during the course of his examination for

1991, 1992, and 1993.   After concluding that petitioners would

not comply with his requests, Revenue Agent Andrews had to resort

to contacting third parties to verify income information and,

after referring each petitioner’s case to respondent’s Criminal

Investigation Division, petitioners continued their tactics of

failing to attend meetings that necessitated Special Agent Fabian

to issue third-party summonses.   Petitioners on no less than four

separate occasions filed petitions to quash respondent’s

summonses and prevent respondent’s access to this information.      A

taxpayer’s efforts to quash the Commissioner’s summonses may be

indicia of fraudulent intent when the taxpayer otherwise refuses

to cooperate with the Commissioner.    Wedvik v. Commissioner, 87

T.C. 1458, 1470 (1986).

     Mr. Runkle also sought to dissuade third parties from

complying with the summonses by threatening to sue the third
                                - 28 -

party if the third party complied with the summons.    For example,

Mr. Runkle threatened to sue Mr. Bills of R&D if Mr. Bills

provided documents of the Elknur Family Limited Partnership

pursuant to the third-party summons issued to R&D.

     Respondent argues, and we agree, that petitioners’ actions

demonstrate that petitioners intended to impede respondent’s

examination and investigation.    We find that petitioners refused

to cooperate with respondent’s agents, and their efforts to quash

summonses and otherwise hamper his investigation are further

indicia of fraudulent intent.

     6.   Asserting Frivolous Arguments

     Petitioners also relied on frivolous and meritless arguments

to impede or otherwise hinder respondent’s ability to determine

the correct amount of tax liability.     Petitioners included these

arguments in correspondence to respondent9 as well as in support

of their numerous petitions to quash respondent’s summonses and

in their motion to dismiss this case, filed February 17, 2004.

For example, petitioners asserted in their submissions that the


     9
      The Court of Appeals for the Third Circuit takes the
minority view that merely notifying the Commissioner that the
taxpayer will not comply with filing and payment obligations is
inconsistent with an intent to defraud. See Granado v.
Commissioner, 792 F.2d 91 (7th Cir. 1986), affg. T.C. Memo. 1985-
237; Raley v. Commissioner, 676 F.2d 980 (3d Cir. 1982), revg.
T.C. Memo. 1980-571; Price v. Commissioner, T.C. Memo 1996-204.
This minority view has not been followed in other circuits
including the Seventh Circuit, to which this case is appealable.
See Granado v. Commissioner, supra.
                                - 29 -

Code provisions upon which respondent relied are not “positive

law.”     Courts have rejected positive law arguments as frivolous,

baseless, specious, and preposterous.     United States v. Maczka,

957 F. Supp. 988, 991 (W.D. Mich. 1996); Sloan v. United States,

621 F. Supp. 1072, 1076 (N.D. Ind. 1985), affd. in part and

dismissed in part 812 F.2d 1410 (7th Cir. 1987).

        Moreover, Mr. Runkle explained in his opening statement at

trial that he understood that the arguments he raised in quashing

the summonses and in filing the motion to dismiss were frivolous.

See, e.g., Oscanyan v. Arms Co., 103 U.S. 261, 263 (1881) (a

party may be bound by admissions made in the party’s opening

statement); United States v. McKeon, 738 F.2d 26, 30 (2d Cir.

1984).     He explained that his intent in asserting these arguments

was to use them as a negotiation “tool” to force respondent to

concede the fraudulent failure to file additions.

        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.

Petitioners took or made affirmative acts designed to evade their

tax liability.     These affirmative acts include failing to file

income tax returns, failing to maintain adequate records,

understating substantial income, concealing assets, failing to
                                - 30 -

make estimated tax payments for the years at issue, and failing

to cooperate with tax authorities.       Accordingly, we find that

petitioners’ affirmative acts are evidence of fraud.

     7.    Giving Implausible or Inconsistent Explanations

     Since approximately 1992, petitioners have given implausible

and inconsistent explanations why they have not filed income tax

returns.   Shortly after purchasing an “untaxing service” from the

American Institute, petitioners began sending letters to

respondent claiming that they were not required to file tax

returns and pay taxes.   Petitioners asserted in letters to

respondent that they “are not taxpayers” as defined by the Code,

and, though knowledgeable about their taxpaying responsibilities,

consciously decided to “opt out” of the system.       Petitioners also

declared to respondent that “we no longer volunteer our

involvement with your agency or any of its subdivisions” and

claimed that respondent was “operating under color of law, and

have been attempting to extort money from us.”

     In addition, despite being fully aware of their legal duty

to file a return and after having filed a return each year for

more than 20 years before the years at issue, petitioners

asserted that they had a “firm belief” that they no longer had a

requirement to file a return.    They acquired this firm belief

without consulting with any tax adviser and even after learning
                                - 31 -

that Mr. Boykens, a certified public accountant, thought that

their “untaxing” idea was “crazy.”

     We find petitioners’ explanations of their “firm belief” not

credible.   Mr. Runkle had a paralegal degree and had the

intelligence to research the law and understand the statutes.     He

demonstrated this ability at the summons conference when he

explained that he had already researched section 6001 and this

section did not require him to file a return.    Petitioners’

actions and correspondence reveal that their belief was not an

honest misunderstanding of complex provisions of the Code.

Instead, it reveals they knew they were required to file returns

but failed to do so.   Their asserted belief that the tax law

should not apply is an insufficient defense to fraud.    See Cheek

v. United States, 498 U.S. 192, 205-206 (1991); Niedringhaus v.

Commissioner, 99 T.C. at 219.

     8.     Summary of the Badges of Fraud

     Most of the badges of fraud upon which this Court

customarily relies are present in this case.    Petitioners engaged

in a pattern of failing to file income tax returns despite having

the business acumen and knowledge they had sufficient income to

require them to file tax returns.    They filed tax returns for

others but not themselves during the years at issue, and they

stopped filing tax returns for themselves after more than 20

years filing for themselves.    In addition, they deliberately
                              - 32 -

decided not to maintain books and records, and they destroyed any

records they had for the years at issue.   They concealed their

assets through the use of their nominee, the Elknur Family

Limited Partnership, and they refused to cooperate with

respondent’s agents.   They not only refused to cooperate with

respondent’s agents, but they made unsuccessful efforts to quash

or otherwise interfere with respondent’s summonses.    They

intimidated the revenue agent by appearing at the summons

conference and questioning him in the presence of four other

individuals who refused to identify themselves.   They also relied

upon frivolous arguments to impede or otherwise hinder

respondent’s income tax determinations and this Court’s

consideration of this case.

     Considering all of the facts and circumstances of this case,

we find that respondent has proven by clear and convincing

evidence that petitioners’ failure to file an income tax return

for the years at issue was fraudulent.   Accordingly, petitioners

are liable for the section 6651(f) addition to tax for the years

at issue.

     Because of our holding regarding the addition to tax under

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

address whether petitioners are liable for the addition to tax

under section 6651(a)(1) for failure to file timely.
                               - 33 -

B.   Expenses Beyond Those Allowed in Deficiency Notice

      Mr. Runkle has been a self-employed insurance salesman since

1986, and, as previously discussed, Mr. Runkle refused to

cooperate with respondent during the examination for the years

1991, 1992, and 1993.   Lacking his cooperation, respondent

determined Mr. Runkle’s net income for insurance-related sales

from third-party information of deposits and checks obtained

pursuant to third party summonses.      As to expenses for Mr.

Runkle’s insurance-related activities, respondent determined

deductions based on insurance-related expenses Mr. Runkle claimed

on petitioners’ income tax returns for 1988, 1989, and 1990.

From this analysis, respondent determined that Mr. Runkle was

entitled to deductions against self-employment insurance income

at the rate of 19.2 percent.

      Mr. Runkle argues that, despite not having any documents to

substantiate his expenses, he is entitled to deductions at the

rate of 52.6 percent based on what he claims is an industry

average.   We are thus asked to decide whether Mr. Runkle is

entitled to insurance-related expenses in excess of the amounts

that respondent allowed in the deficiency notice.

      We begin with two fundamental principles of tax litigation.

First, as a general rule, the Commissioner’s determinations are

presumed correct, and the taxpayer bears the burden of proving
                               - 34 -

that those determinations are erroneous.10     Rule 142(a); see

INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     Second, deductions are a matter of legislative grace, and

the taxpayer must show that he or she is entitled to any

deduction claimed.    Rule 142(a); Deputy v. duPont, 308 U.S. 488,

493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934); Welch v. Helvering, supra.      This includes the burden of

substantiation.    Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).

     A taxpayer must substantiate amounts claimed as deductions

by maintaining the records necessary to establish he or she is

entitled to the deductions.    Sec. 6001; Hradesky v. Commissioner,

supra.    A taxpayer shall keep such permanent records or books of

account as are sufficient to establish the amount of deductions

claimed on the return.    Sec. 6001; sec. 1.6001-1(a), (e), Income

Tax Regs.    The Court need not accept taxpayer's self-serving

testimony when the taxpayer fails to present corroborative


     10
      This principle would not be affected by sec. 7491(a) even
if it applied to this case, which it does not because sec. 7491
applies to examinations begun post-July 22, 1998. Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3001(c), 112 Stat. 727. Sec. 7491 would not shift
the burden of proof to respondent because Mr. Runkle failed to
comply with the substantiation requirements and failed to
maintain adequate records. See sec. 7491(a)(2)(A) and (B); see
also Higbee v. Commissioner, 116 T.C. 438 (2001).
                                - 35 -

evidence.     Beam v. Commissioner, T.C. Memo. 1990-304 (citing

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)), affd. 956 F.2d

1166 (9th Cir. 1992).

     If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the deduction, this Court may approximate the amount of allowable

business deductions, bearing heavily against the taxpayer whose

inexactitude is of his or her own making.     Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930).     For the Cohan rule to

apply, however, a basis must exist on which this Court can make

an approximation.     Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).     Without such a basis, any allowance would amount to

unguided largesse.     Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957).

     We now address whether Mr. Runkle is allowed to deduct

insurance-related expenses in excess of the amount respondent

allowed in the deficiency notice.     Mr. Runkle argues strenuously

that, despite having no records, the Cohan rule allows him to

deduct expenses in excess of the amount respondent already

allowed.     We disagree.

     Although the Cohan rule allows us to estimate the amount of

deductible expenses in certain situations, no such situation

exists here.     First, Mr. Runkle failed to maintain books and

records of his income and expenses, and he also destroyed what
                              - 36 -

income and expense records he had.     In addition, Mr. Runkle’s

actual gross receipts for the years at issue may have been

greater than the amounts respondent determined.     Mr. Runkle

admitted at trial that he had no idea whether respondent

identified all of Mr. Runkle’s income because Mr. Runkle failed

to keep records.   Therefore, we are not obliged to speculate as

to the amount of his expenses.   Buelow v. Commissioner, 970 F.2d

412 (7th Cir. 1992), affg. T.C. Memo. 1990-219; Lerch v.

Commissioner, 877 F.2d 624, 628 (7th Cir. 1989), affg. T.C. Memo.

1987-295; Pfluger v. Commissioner, 840 F.2d 1379 (7th Cir. 1988)

(a taxpayer who will pay more tax than if he or she had been more

forthright should not cause a court to bend the law in the

taxpayer’s favor), affg. T.C. Memo. 1986-78; Norgaard v.

Commissioner, T.C. Memo. 1989-390 (Cohan rule not applicable to

estimate gambling losses where taxpayer failed to establish

actual gambling gross receipts), affd. on this issue and revd. in

part 939 F.2d 874 (9th Cir. 1991).

     Mr. Runkle presented no evidence to support his claim to

additional expense deductions.   Instead, he vaguely referred to

an industry average, the basis for which is not in evidence.       Mr.

Runkle introduced no credible evidence to substantiate any

expenses, let alone expenses in excess of the amount respondent

allowed in the deficiency notice.    Accordingly, based on the

record as a whole, we hold that Mr. Runkle is not entitled to
                                 - 37 -

deduct any insurance-related expenses in excess of those allowed

by respondent in the deficiency notice.

C.   Estimated Tax Addition

      Respondent also determined each petitioner was liable for an

addition to tax under section 6654(a) for failure to make

estimated tax payments for each of the years at issue.     Section

6654(a) provides for an addition to tax where an individual

underpays estimated tax.      The estimated tax addition is mandatory

unless a statutory exception in section 6654(e) applies.     See

Recklitis v. Commissioner, 91 T.C. at 913; Grosshandler v.

Commissioner, 75 T.C. at 20-21; see also Estate of Ruben v.

Commissioner, 33 T.C. 1071, 1072 (1960) (reasonable cause and

lack of willful neglect are not relevant considerations for

estimated tax addition).

      The record reflects that Mr. Runkle made one estimated tax

payment of $1,987 towards his tax liability for 1991, and since

that payment in April 1991, neither petitioner has made any other

estimated tax payments for the years at issue.     Petitioners

failed to present any evidence to contradict respondent’s

determination, and none of the statutory exceptions under section

6654(e) applies.   We therefore find that petitioners are liable
                              - 38 -

for the addition to tax under section 6654(a) for underpaying

estimated tax for each of the years at issue.11

D.   Conclusion

      We have considered petitioners’ other arguments, and to the

extent they are not addressed, we find them to be irrelevant,

moot, or meritless.

      To reflect the foregoing and the concessions of the parties,


                                         Decision will be entered

                                    under Rule 155.




      11
      The failure to make estimated tax payments is also a badge
of fraud evidencing the taxpayer’s fraudulent intent. Clayton v.
Commissioner, 102 T.C. 632, 647 (1994); Bradford v. Commissioner,
796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo. 1984-601.
