                       T.C. Memo. 2000-11



                      UNITED STATES TAX COURT



                   JOHN W. MARSH, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27202-96.           Filed January 11, 2000.



     Stephen P. Pingree and Richard P. McClellan III, for

petitioner.

     Henry E. O'Neill, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION



     RUWE, Judge:   Respondent determined deficiencies in

petitioner's Federal income taxes and additions to tax as

follows:
                                                    - 2 -

                                                        Additions to Tax
                         Sec. 6651       Sec.        Sec. 6653 Sec. 6653    Sec. 6653   Sec.
Year        Deficiency   (a)(1)          6651(f)     (b)(1)(A) (b)(1)       (b)(1)(B)   6654
                                                                              1
1986        $54,593           ---            ---     $40,945     ---              ---    ---
                                                                              2
1987         73,676           ---            ---      55,257     ---              ---   $2,791

1988         85,992           ---            ---       ---     $64,494            ---    5,158

1989        132,429           ---        $94,988       ---       ---              ---    8,522

1990         40,064          $8,650          ---       ---       ---              ---    2,238

1991         14,052           1,961          ---       ---       ---              ---      412

1992         91,232          21,592          ---       ---       ---              ---    3,427

1993         20,040           4,896          ---       ---       ---              ---      818

1994          3,515             879          ---       ---       ---              ---      182

1995          3,371             843          ---       ---       ---              ---      186

   1
       50 percent of the interest due on $49,421.
   2
       50 percent of the interest due on $68,449.

        If we do not sustain respondent's determination of additions

to tax for fraud pursuant to sections 6653(b)1 and 6651(f) for

the years 1986 through 1989, respondent alternatively determined

the following additions to tax for negligence or intentional

disregard of rules and regulations (section 6653), and failure to

file within the time prescribed by law (section 6651):

                                             Additions to tax
                                Sec. 6651          Sec. 6653    Sec. 6653
                      Year      (a)(1)             (a)(1)(A)      (a)(1)
                      1986      $12,355            $2,730          ---
                      1987          17,112          3,684          ---
                      1988          20,296           ---         $4,300
                      1989          31,663           ---           ---




        1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 3 -

     The issues for decision are:   (1) Whether petitioner, a

resident of Hawaii and descendant of indigenous Hawaiians, is

subject to Federal income tax on income derived from sources

within the United States; (2) whether $105,000 received by

petitioner in 1989 from an uninsured motorist claim constitutes

taxable income to petitioner or is excluded under section 104(a);

(3) whether petitioner is liable for additions to tax for fraud

in the years 1986 through 1988 and fraudulent failure to file for

1989, and if not, whether petitioner is liable for alternative

additions to tax; and (4) whether petitioner is liable for

additions to tax for failure to make estimated tax payments for

the years 1987 through 1995.

                          FINDINGS OF FACT

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

the time the petition was filed, petitioner resided in Pearl

City, Oahu, Hawaii.   Petitioner was born on March 20, 1944, in

Hawaii.   Petitioner graduated from high school in 1962.   From

1965 until 1992, petitioner was employed as a police officer by

the Honolulu Police Department.   When he retired in 1992, he held

the rank of sergeant.    Petitioner resided in the United States,

and all his income was derived from sources within the United

States during the years in issue.   During the years 1986 through

1989, petitioner received the following amounts of income from

the described sources:
                                           - 4 -

                                1986        1987          1988          1989

        Wages (HPD)           $41,004      $45,605       $44,315       $49,495
        Non-employee              364        1,000          -0-           -0-
        compensation

        Interest                  425          539           349           455

        Dividends                 226        -0-           -0-           -0-
        State income tax        1,719        -0-           -0-           -0-
        refund

        Pension annuity         -0-            61          -0-           -0-
        Gambling winnings       -0-          1,600         -0-           -0-
        (Horseshoe Casino)

        Cash deposits           9,300        5,000         8,500         -0-



     Beginning in 1977, petitioner also operated a sole

proprietorship masonry contracting business under the name S&H

Masonry.     Petitioner operated this business through at least

1993.    For the years 1986 through 1989, petitioner received the

following amounts and incurred the following expenses in

connection with the operation of S&H Masonry:

                                  1986         1987          1988          1989

   Gross receipts              $110,632      $268,309      $312,446      $380,315

   Wages (per statutory         (43,664)     (127,895)      (85,777)
   notice)                                                               (91,211)

   Additional expenses          (54,786)      (65,557)     (138,779)
                                                                         (94,466)

   Net                           12,182        74,857        87,890       194,638


Some of the receipts generated by this business were paid to

petitioner in cash.           Around August of 1989, petitioner stopped

using his business checking account in favor of conducting

business in cash.          Petitioner drew 279 checks against his

business account from January to July 1989 (approximately 40

checks per month).           From August to September of the same year,
                                      - 5 -

petitioner drew only 29 checks against the business account

(approximately 15 checks per month).            This drop in activity was

due to the fact that petitioner started paying his employees in

cash as of July 21, 1989, rather than by check.

     Petitioner received the following amounts of income, as set

forth in the notice of deficiency, for the years 1990 through

1995:

          1990        1991      1992     1993          1994       1995
        $118,651    $58,296   $119,633 $66,839       $26,978    $28,883

     The State of Hawaii imposes a general excise tax on gross

receipts, which is required to be collected by the recipient and

remitted to the State of Hawaii.         For the years 1986 through

1989, petitioner charged and collected from masonry customers the

following amounts of general excise tax:

                   1986        1987           1988       1989
               $947.78        $808.00    $4,668.88    $9,598.13

Petitioner did not remit any of the general excise tax he

collected to the State of Hawaii during 1986 through 1989.

     For the years 1965 through 1985, petitioner filed joint

Federal and State of Hawaii income tax returns with his wife.

Petitioner has not filed a Federal or State of Hawaii income tax

return for any year after 1985.

     Petitioner’s 1985 return was selected for audit.              Petitioner

refused to cooperate with respondent's personnel during the audit
                               - 6 -

leading respondent to issue a notice of deficiency for the year

1985.   The 1985 deficiency was assessed on February 22, 1988.

After receiving the bill for the assessment, petitioner retained

an Enrolled Agent, Carol Baptista, who requested that respondent

grant audit reconsideration.   Ms. Baptista discovered that

petitioner had not filed income tax returns for 1986 and 1987 and

explained to petitioner that he was legally required to file such

returns.   On March 24, 1989, Ms. Baptista wrote a letter to the

District Director, Internal Revenue Service, Honolulu, Hawaii

regarding the “Tax Audit and Filing Position of John Marsh.”

That letter was signed by Ms. Baptista and petitioner and stated:

            Re:   Tax Audit and Filing Position of John Marsh

     Gentlemen:

          This letter is to clarify the compliance and
     filing position of Mr. John Marsh.

          As you are aware, the Internal Revenue Service
     audited Mr. Marsh for the year 1985. Mr. Marsh was
     represented by Mike Kailing, who was then, apparently,
     an enrolled agent. Mr. Marsh is, obviously, not a tax
     expert, and did not realize that some of Mr. Kailing’s
     positions were, to say the least inappropriate. Mr.
     Kailing apparently refused to comply with Internal
     Revenue Service requests, giving rise to a substantial
     assessment against Mr. Marsh.

          Mr. Marsh is now, however, represented by Janell
     Israel & Associates, and complete information has been
     presented to support the 1985 return. However, on
     audit reconsideration, it appears to us that all of the
     supporting material presented was not taken into
     consideration, and we cannot get the Internal Revenue
     Service to provide us with the final report explaining
     why such a substantial assessment remains. We would
     like an opportunity to discuss what portions of the
                               - 7 -

     supporting materials have been disallowed. We cannot
     help but believe that this is caused, at least in part,
     by a reaction to Mr. Kailing’s conduct, which does not
     reflect either the position or [sic] Janell Israel &
     Associates or Mr. Marsh.

          In addition, Mr. Marsh has failed to file his 1986
     and 1987 returns, but the necessary information has
     been assembled, and we should have the returns prepared
     in the very near future.

          It must be categorically stated that Mr. Marsh is
     not a “tax protester”, and is not willfully failing to
     file any return or to provide appropriate information
     to support returns filed. It should not be held
     against him that he was badly represented by someone
     else. In fact, he should probably be given the benefit
     of the doubt as someone who as [sic] badly represented
     in the past, but is trying to correct the situation.
     Hopefully we can cooperate on a more positive basis in
     order to get this situation properly resolved.

                             Very truly yours,

                              Carol Baptista

          I have read and approved the above letter, and
     wish to affirm that I am not trying to willfully avoid
     any lawfull [sic] Internal Revenue requirements.

                              John Marsh
     CC:   Russell Bain

Petitioner never provided Ms. Baptista with records from which

Ms. Baptista could prepare petitioner’s 1986 and 1987 returns.

During the course of the audit reconsideration, it was also

discovered that petitioner had not withheld any employment taxes,

not filed any employment tax returns, and not issued any Forms W-

2 or 1099 with respect to amounts paid to workers for S&H

Masonry.   Petitioner’s Enrolled Agent advised petitioner that he

was required to report to respondent on either Form 1099 or W-2
                                - 8 -

the amounts of compensation he paid to his masonry workers.       One

such worker was subsequently convicted for subscribing false

income tax returns under section 7206(1) for 1985, 1986, and 1987

for failing to report income earned as a mason, including more

than $62,000 paid by petitioner.

     Petitioner was indicted under section 7201, Attempt to Evade

or Defeat Tax, for the years 1987 through 1989.      After a jury

trial in 1995, petitioner was acquitted on all three counts.

     Sometime between 1975-77, petitioner purchased a male

Arabian horse named Sunset Wailea.      Petitioner's 1981 Federal

income tax return included a Schedule C that listed petitioner's

business activities as “contracting, farrier, horse breeding”

under the business names of “S&H Masonry” and “Keone's Horse

shoeing and Breeding”.    Petitioner's 1985 Federal income tax

return claimed expenses from “Keone's Ranch Supplies.”

     On April 9, 1988, petitioner broke his left ankle as the

result of an accident.    He was initially treated on that same day

at Wahiawa General Hospital.    The following day he underwent

surgery at Straub Clinic.    The medical records from Wahiawa

General Hospital indicate that petitioner stated the cause of the

injury was a “horse fell down on him”.      Petitioner told the

doctors at Wahiawa General Hospital that his injury resulted from

a horse falling on him.    The medical records from Straub Clinic

also state the cause of the injury to be “struck accidentally by
                                 - 9 -

falling object (horse)”, and describe petitioner as “police

officer who injured his left ankle when a horse fell on him”.

     Petitioner consulted an attorney sometime after the April 9,

1988 injury.   Petitioner then submitted a motor vehicle accident

report to the police on April 24, 1988.      That report stated

petitioner “was involved in a M/C [motorcycle] accident in Kahuku

4-9-88 * * * trying to avoid potential collision [with oncoming

unidentified truck] he then lost control of motorcycle flipping

off of m/c injuring left ankle.”    Under Hawaii law, the driver of

a motor vehicle which is in any manner involved in an accident in

which a person is injured is required to make a report of an

accident not more than 24 hours after the accident.     Petitioner,

a police officer, did not file a timely accident report as

required by law.   Petitioner’s accident report was filed more

than 2 weeks after his injury.

     Petitioner thereafter, through his attorney, submitted an

uninsured motorist claim to his automobile insurance company.

The claim asserted that the cause of petitioner's injuries was

the motorcycle accident described in the police report.     The

insurer initially denied the claim.      In response to petitioner’s

claim, the insurer wrote:

     Please be advised that under Mr. Marsh’s personal
     automobile policy with The Travelers, your claim for
     uninsured motorist coverage is not applicable in this
     situation. Mr. Marsh’s personal automobile policy does
     not afford coverage for bodily injury suffered by an
     insured while occupying a highway vehicle, which is
                                 - 10 -

     owned by the insured but is not insured for uninsured
     motorist coverage.

     Based on the above information, Mr. Marsh’s claim for
     uninsured motorist coverage under his personal
     automobile policy is not applicable * * *

The Hawaii Supreme Court had held in 1977 that the exclusion

relied on by the insurer was invalid in the case of Kau v. State

Farm Mut. Auto Ins., 564 P.2d 433 (Haw. 1977).

     On March 29, 1989, petitioner commenced a lawsuit against

the insurance company for its failure to pay the above-mentioned

claim.   The Civil Information Sheet attached to the Complaint,

signed by the attorney of record, lists the nature of the suit as

“contract” (not motor vehicle tort or other nonvehicle tort).

The Complaint also alleges that:

                                COUNT I

                  *    *    *      *       *   *   *

          8. Defendant TRAVELERS has breached the Implied
     Covenant of Good Faith and Fair Dealing under the
     policy by refusing or denying or failing to process or
     failing to pay Plaintiff’s claim without a reasonable
     basis for such conduct and with knowledge and reckless
     disregard or the lack of a reasonable basis for such
     conduct in that Plaintiff has submitted claims under
     the provisions of the policy, and Defendant TRAVELERS
     refused to process or pay with knowledge that the
     exclusion in Defendant’s policy of insurance is
     prohibited under the laws of Hawaii and that Defendant
     TRAVELERS has no colorable defense to payment of
     uninsured motorist benefits.

                                COUNT II

                  *    *    *      *       *   *   *
                             - 11 -

     13. The aforesaid outrageous conduct by Defendant
TRAVELERS was done intentionally for the purpose of
depriving Plaintiff of money due him and to inflict
upon him severe emotional distress.

           *    *       *       *       *   *   *

                            COUNT III

           *        *   *       *       *   *   *

     16. In its refusal to pay uninsured motorist
benefits to Plaintiff, Defendant TRAVELERS has violated
public policy as well as Hawaii Revised Statutes
Chapter 431-13 which states that no insurer doing
business in this State shall engage in unfair claim
settlement practices.

                            COUNT IV

            *    *      *      *       *    *   *

     18. Hawaii Revised Statutes Section 480-2
provides that unfair methods of competition, and unfair
and deceptive acts or practices in the conduct of any
trade or commerce are unlawful.

     19. Defendant’s failure to pay Plaintiff the
uninsured motorist benefits to which he was entitled,
or to provide legally sufficient reasons for denying
payment, was an unfair practice as set forth in Hawaii
Revised Statutes Section 431:13-103(a)(1)(A) and
Section 480-2, entitling Plaintiff to an award of
general and special damages.

            *    *      *      *       *    *   *

                             COUNT V

            *    *      *      *       *    *   *

     25. At the time of issuance of the policy
described above, the promises to pay such benefits to
Plaintiff were made by Defendant TRAVELERS INSURANCE, *
* *, with no intention of performing them or
interpreting in good faith such terms and provisions.
Defendant and each of them knew such promises and
representations were false and were made with the
                                 - 12 -

     intent and purpose to deceive Plaintiff and to induce
     Plaintiff to purchase and accept the insurance policy.
     Defendant and each * * * knew that Plaintiff believed
     such provisions to be true and the Plaintiff would and
     did justifiably rely on such promises and buying the
     insurance policy and paying the premiums thereon.
     Nevertheless, Defendant and its agents, employees,
     authorized representatives or assigns and each of them
     concealed such true intent from Plaintiff.

                  *     *    *     *      *   *   *

          27. In acting fraudulently and deceitfully as set
     forth herein, Defendants and each of them intended to
     and did vex, annoy, and injure Plaintiff.

Petitioner’s attorney made the insurer’s attorney aware of the

Kau v. State Farm Mut. Ins. Co., supra, and served an extensive

discovery request seeking the identities of all persons in Hawaii

to whom Travelers had denied claims based on the exclusion and

raised the prospect of expanding petitioner’s lawsuit into a

class action suit.    Compliance with the discovery request would

have required the insurer to expend thousands of hours of manual

labor.   The insurance company eventually agreed to settle the

lawsuit for the maximum amount payable under the policy,

$105,000.   The Release and Indemnity Agreement stated in

pertinent part:

                  RELEASE AND INDEMNITY AGREEMENT

     [B]y these presents does release, acquit and forever
     discharge, the said RELEASEE * * * from and on account
     of any and all claims, actions, causes of action,
     liability or liabilities, demands or damages of
     whatever name or nature, including any and all claims
     for general, special, punitive or treble damages, for
     insurance benefits of whatever name or nature, for past
     and future earnings loss, for past and future medical
                             - 13 -

     expenses, for attorneys fees, costs, or interest, for
     loss of services, for loss of support, for loss of
     association, companionship, love and affection, and for
     any and all other additional losses incident to the
     relationships of husband and wife or parent and child,
     whether at law or in equity, in any manner arisen,
     arising or to grow out of the following:

          1) an automobile accident * * * more specifically
          described in that certain Honolulu Police
          Department Motor Vehicle Accident Report No. C-
          30064;
          2) the conduct, acts, or failures to act, or refusals
          to act on the part of RELEASEE, * * * in connection
          with the investigation, claim handling, or settlement
          of any claim arising out of or in connection with said
          Accident;
          3) any alleged neglect or refusal by RELEASEE to pay
          any benefit or recognize any obligation under any
          policy of insurance issued to any party and arising out
          of said Accident;
          4) the conduct, acts, or failures to act, neglect, or
          refusals to act on the part of RELEASEE, or any of its
          employees, agents, officers, directors, predecessor or
          successor entities, or their respective attorneys, in
          connection with the writing, amendment, revision,
          issuance, promulgation, sale, and/or marketing of any
          policy of insurance;

     any of which said Accident, conduct, acts, failures or
     refusals to act, or neglect may have resulted in injuries or
     damages to RELEASOR, as more specifically set forth in that
     certain lawsuit in the United States District Court for the
     District of Hawaii, and entitled John Marsh v. Travelers
     Insurance Company, et al., Civil No. 89-00262-HMF.

After payment of attorney's fees and costs, petitioner's share of

the settlement proceeds amounted to $68,102.70.   Petitioner

negotiated the settlement check for cash on December 15, 1989.

No portion of the settlement proceeds was deposited into any bank

account maintained by petitioner.   Respondent's notice of
                               - 14 -

deficiency for 1989 included as an item of income $105,000, which

represented the settlement amount.

                               OPINION

1. Liability for Federal Income Tax

     Petitioner argues that he has nationality in the “Nation of

Hawai‘i” by virtue of his Hawaiian ancestors who were nationals

of Hawai‘i.    Petitioner further argues:

     the United States’ annexation of the Nation of Hawaii
     was based upon illegal acts. * * * was legally invalid
     under the Constitution of the United States.
     Therefore, the United States of America and its agency,
     the Internal Revenue Service, lack jurisdiction over
     the petitioner and lack legal standing to assess U.S.
     Taxes against the petitioner.

     Petitioner places particular reliance on a 1993 Joint

Resolution of Congress, Pub. L. 103-150, 107 Stat. 1510, titled

“Overthrow of Hawaii”.    That resolution provides, inter alia,

that [Congress] “acknowledges the historical significance of

* * * [the illegal overthrow of the Kingdom of Hawaii in 1893]

which resulted in the suppression of the inherent sovereignty of

the Native Hawaiian people”.    Pub. L. 103-150, sec. 1, 107 Stat.

1513 (1993).    Petitioner urges us to find that the United States

lacks legal standing to assess taxes on his income because he is

a descendant from native Hawaiians.

     Petitioner resided in the United States and by virtue of his

birth in the United States Territory of Hawaii in 1944,

“petitioner is a United States Citizen”.    See 8 U.S.C. sec. 1405
                              - 15 -

(1994).   The Internal Revenue Code taxes the income of all

individuals; only nonresident aliens are excluded.2    See sec. 1.

However wrongful the 1893 overthrow of the Kingdom of Hawaii may

have been, we can provide no relief to petitioner from the lawful

application of the general law of the United States, including

the Internal Revenue Code.   Similarly based arguments with

respect to native American Indians have been rejected by the

Supreme Court.   Johnson v. M'Intosh, 21 U.S. 543, 588 (1823).    We

see no reason for elevating petitioner's claim above that of

native American Indians.   The Supreme Court has more recently

stated:   “Indians are citizens and that in ordinary affairs of

life, not governed by treaties or remedial legislation, they are

subject to the payment of T income taxes as are other citizens.”

Squire v. Capoeman, 351 U.S. 1, 6 (1956). The Joint Resolution

relied on by petitioner specifically provides:    “Nothing in this

Joint Resolution is intended to serve as a settlement of any

claims against the United States.”     Pub. L. 103-150, sec. 3, 107

Stat. 1514 (1993).   The Joint Resolution is neither a treaty nor

remedial legislation.   Congress has not seen fit to exempt

citizens or residents of the United States from the imposition of

income tax on the basis of unlawful acquisition of the native

land of their ancestors by the United States.    If such relief is


     2
      Sec. 2(d) provides in the case of a nonresident alien
individual the taxes imposed by secs. 1 and 55 shall apply only
as provided by sec. 871 or 877.
                                - 16 -

to be given, it must come from Congress.     We therefore hold that

petitioner was subject to tax under the Internal Revenue Code for

the years in issue.

2.   Accident:   Section 104(a)

     In the notice of deficiency for 1989, respondent determined

that petitioner received unreported income of $105,000.     The

explanation of the adjustment states:

     It is determined that you received insurance proceeds in the
     amount of $105,000 from * * * Insurance Company for tax year
     1989. This amount is determined to be taxable to you
     because you have failed to establish that this amount is
     excludable from gross income under the provisions of the
     Internal Revenue Code.

      It is undisputed that petitioner suffered a broken ankle,

made an uninsured motorist claim on his insurance carrier, the

claim was not paid on demand, a lawsuit followed, and the

insurance company chose to settle and pay the full amount payable

under the policy.     Respondent argues that petitioner's uninsured

motorist claim was based on a false motor vehicle report.

Respondent contends “insurance proceeds obtained under false

pretenses constitute ordinary income to the recipient”.

     It is not clear from petitioner’s pleadings whether he seeks

to exclude the insurance settlement under sec. 104(a)(2) or (3).

The original petition does not raise the matter and paragraph 5

of the amended petition states only:     “This money was a tax

exempt personal injury settlement received by petitioner from an

insurance company.”    Petitioner's brief fails to identify the
                              - 17 -

basis on which petitioner claims the insurance proceeds should be

excluded from petitioner's income.3

     Section 104(a)(2) excludes from gross income the amount of

damages received on account of personal injuries or sickness.

The term “damages received (whether by suit or agreement)” means

an amount received (other than workmen's compensation) through

prosecution of a legal suit or action based upon tort type

rights, or through a settlement agreement entered into in lieu of

such prosecution.   See sec. 1.104-1(c), Income Tax Regs.   To

exclude damages from gross income pursuant to section 104(a)(2),


     3
       Respondent’s brief assumes that petitioner seeks to
exclude the insurance settlement under sec. 104(a)(3). Sec.
104(a)(2) and (3) provides:

     SEC. 104. COMPENSATION FOR INJURIES OR SICKNESS.

          (a) In General.--Except in the case of amounts
     attributable to (and not in excess of) deductions
     allowed under section 213 (relating to medical, etc.,
     expenses) for any prior taxable year, gross income does
     not include–-

               *     *    *    *      *   *   *

              (2) the amount of any damages received
          (whether by suit or agreement and whether as lump
          sums or as periodic payments) on account of
          personal injuries or sickness;

              (3) amounts received through accident or
          health insurance for personal injuries or sickness
          (other than amounts received by an employee, to
          the extent such amounts (A) are attributable to
          contributions by the employer which were not
          includible in the gross income of the employee, or
          (B) are paid by the employer);
                                 - 18 -

the taxpayer must prove:   (1) The underlying cause of action is

based upon tort or tort type rights, and (2) the damages were

received on account of personal injuries.     See Commissioner v.

Schleier, 515 U.S. 323, 336 (1995).

     Subject to an exception not relevant here, section 104(a)(3)

provides an exclusion from gross income of “amounts received

through accident or health insurance for personal injuries or

sickness”.   (Emphasis added.)    The mere fact that amounts in

question are paid by an insurance company under an insurance

policy does not establish that such amounts were actually paid

for injuries and sickness.   The taxpayer has the burden of

proving this.

     Petitioner’s auto insurance, regarding uninsured drivers,

apparently does not cover a nonvehicular accident that occurred

while the insured was riding his horse.     Petitioner sought

medical help immediately after breaking his ankle.     At that time

he informed hospital personnel that a horse had fallen on him.

When he was treated the next day he conveyed the same account to

the medical service providers.     Petitioner was also a career

policeman who would understand the need to file a police report

immediately if he had been injured as a result of actions by an

uninsured motorist who had fled the scene of the accident.

Nevertheless, no such report was immediately filed.     Indeed, it

was not until several weeks had lapsed, after petitioner had a
                              - 19 -

conversation with his attorney, that he filed a belated police

report claiming that an unidentified motorist had caused his

injury while petitioner was riding a motorcycle.   After filing

the police report petitioner filed a claim with his insurance

company.

     We do not find petitioner’s testimony at trial concerning

the cause of the accident to be credible.   While petitioner

admitted telling hospital personnel on the day of the accident

that a horse had fallen on him, he failed to give any explanation

for the inconsistency between that and his subsequent police

report and insurance claim.   The police report was not filed

until after he consulted with his attorney.   In contrast, his

statements to attending physicians immediately after the accident

that the injury was caused by a horse accident, in circumstances

that inherently call for truthfulness, are credible.

     The Release and Indemnity executed by the insurer and

petitioner does not apportion the settlement amount among the

various claims made by petitioner in his complaint.    The attorney

who acted for the insurance company testified the settlement was

in response to “a demand for policy limits and we paid it.”     He

further testified:

          Q: * * * after this entire case was settled, you
     had satisfied yourself on behalf of the [insurance]
     company that Mr. Marsh was not committing any type of
     insurance fraud against [the insurance company],
     correct?
                               - 20 -

          A: No, we had not - it was not quite that
     simple. It was basically that the fact that the issue
     of whether or not it was a motorcycle versus a horse
     accident was not conclusively established. We had not
     had the opportunity to fully develop those issues. But
     looming on the horizon was [Mr. Marsh’s attorney’s]
     threat of expanding the lawsuit, plus this very onerous
     discovery request [“that would require hundreds of
     thousands of hours of manual labor” to comply with]
     that had been served on us. And you know, we felt that
     we were kind of pushed against the wall basically.

          Q: * * * if Mr. Marsh was lying about the cause
     of the accident and it was a non-vehicular accident,
     the insurance company would have had a defense to
     paying out any claims under the policy, correct?

          A: Yes it would have had a defense to the claim
     under the policy, but not to the other claims.

     The insurance settlement in this case was paid by the

insurer to avoid the costs of litigating what it considered to be

a doubtful personal injury claim after the insurance company had

initially and improperly relied on an invalid exclusionary

provision.    Petitioner’s claim was actually based on a false

accident report, and this false statement was the basis for his

recovery.    Without petitioner’s false statement regarding the

circumstances of the accident there would have been no insurance

recovery.    Statutory exclusions from income such as those

contained in section 104(a) are to be narrowly construed.     See

Commissioner v. Jacobson, 336 U.S. 28 (1949).    We hold that the

$105,000 settlement was not on account of or for personal

injuries within the meaning of section 104(a).    We, therefore,
                               - 21 -

uphold respondent’s determination that the amount of $105,000 be

included in petitioner's 1989 gross income.4

3.   Fraud

      Respondent determined that petitioner is liable for an

addition to tax for fraud for each of the years 1986, 1987, 1988,

and 1989.    Respondent bears the burden of proof on this issue.

See sec. 7454(a); Rule 142(b).    In order to discharge the burden,

respondent must prove by clear and convincing evidence:    (1) An

underpayment exists for each year in issue, and (2) some portion

of the underpayment for that year is due to fraud.    See sec.

7454(a); Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989).

      In order to show fraud respondent must show that petitioner

intended to evade taxes known to be owing by conduct designed to

conceal, mislead, or otherwise prevent the collection of taxes.

See Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir.

1968); Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).      Fraud

is intentional wrongdoing on the part of the taxpayer with the

specific intent to evade a tax known to be owing.    See Bradford

v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C.

Memo. 1984-601; Conforte v. Commissioner, 692 F.2d 587, 592 (9th




      4
      Petitioner has made no claim for   deductions of legal fees
and costs in the event we were to find   the $105,000 includable in
gross income; therefore, we express no   opinion on the
deductibility of these items under the   particular facts of this
case.
                               - 22 -

Cir. 1982)(citing Powell v. Granquist, 252 F.2d 56, 60 (9th Cir.

1958)), affg. in part and revg. in part 74 T.C. 1160 (1980).

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

upon consideration of the entire record.    See Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978).    Fraud is never imputed or

presumed; it must be affirmatively established by the

Commissioner.    See Beaver v. Commissioner, 55 T.C. 85, 92 (1970).

      Fraudulent intent is rarely established by direct evidence.

As a consequence courts have inferred fraudulent intent from

various kinds of circumstantial evidence.      See Spies v. United

States, 317 U.S. 492, 499 (1943); Powell v. Granquist, supra at

61.    Some of the indicia of fraud include:   (1) Understatement of

income, (2) inadequate records, (3) failure to file tax returns,

(4) implausible or inconsistent explanations of behavior, (5)

concealing assets, (6) failure to cooperate with tax authorities,

(7) engaging in illegal activities, (8) attempting to conceal

illegal activities, (9) dealing in cash, and (10) failing to make

estimated tax payments.    See Bradford v. Commissioner, supra at

307-308.    Willful failure to file does not in itself establish

liability for additions to tax on account of fraud.     However,

such a failure may be properly considered in connection with

other facts in determining whether any deficiency or underpayment

of tax is due to fraud.    See Stoltzfus v. United States, supra.
                                 - 23 -

     Respondent's fraud determinations were made in relation to

three separate statutory regimes.     For the taxable years 1986 and

1987, the addition to tax for fraud is equal to 75 percent of the

portion of any underpayment attributable to fraud, plus 50

percent of the interest due on that portion.    See sec.

6653(b)(1)(A) and (B).    If respondent establishes that any

portion of the underpayment for 1986 or 1987 is attributable to

fraud, then the entire underpayment is to be treated as

attributable to fraud, except with respect to any portion of the

underpayment that petitioner establishes is not attributable to

fraud.    See sec. 6653(b)(2).

     For 1988 the fraud addition to tax was changed by the

enactment of the Technical and Miscellaneous Revenue Act of 1988,

Pub. L. 100-647, section 1015(b)(2)(B), 102 Stat. 3369.5    The


     5
         The relevant provision provided:

     SEC. 6653(b) Fraud.--

                 (1) In General.--If any part of any
            underpayment (as defined in subsection (c))
            of the tax required to be shown on a return
            is due to fraud, there shall be added to the
            tax an amount equal to 75 percent of the
            portion of the underpayment which is
            attributable to fraud.

                 (2) * * * If the Secretary establishes
            that any portion of an underpayment is
            attributable to fraud, the entire
            underpayment shall be treated as attributable
            to fraud, except with respect to any portion
            of the underpayment which the taxpayer
                                                     (continued...)
                              - 24 -

statutory regime was again changed in relation to 1989.6

Respondent determined that petitioner is liable under the

provision of section 6651(f) in relation to his failure to file

for 1989.   That section, so far as is relevant, provided that if

any failure to file any return is fraudulent the additions to tax

for failure to file provided in section 6651(a) are increased

from 5 percent to 15 percent and from 25 percent to 75 percent

respectively.7

     There is an underpayment of tax for each of the years in

issue.   Petitioner was aware of his legal obligation to file for

the years preceding the years in issue and did in fact file

returns for years prior to 1986.   Petitioner did not file returns

for 1986, 1987, 1988, and 1989, or any years thereafter.


     5
      (...continued)
          establishes is not attributable to fraud.

     6
      See Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-
239, sec. 7721(c)(1) (deleting Code sec. 6653(b)), and sec.
7741(a) (inserting the new Code sec. 6651(f)).
     7
      SEC. 6651(a).   Addition to the Tax.--In case of failure--

          (1) to file any return required under authority of
     subchapter A of chapter 61 * * * there shall be added to the
     amount required to be shown as tax on such return * * * [15]
     percent of the amount of such tax if the failure is for not
     more than 1 month, with an additional * * * [15] percent for
     each additional month or fraction thereof during which such
     failure continues, not exceeding * * * [75] percent in the
     aggregate; [Sec. 6651(a), (f). The bracketed percentages
     are substituted into sec. 6651(a) pursuant to sec. 6651(f)
     in cases where the failure to file is fraudulent.]
                              - 25 -

Petitioner’s failure to file income tax returns for years

subsequent to 1985 eventually became the subject of a criminal

investigation.

     Petitioner has adopted various theories over the years in an

attempt to explain his failure to file returns or pay Federal

income tax on his substantial income.     Petitioner testified:

“From 1986, I just said, I’m not part of your system, and I just

did nothing.   I had state taxes taken from my pay, I had federal

taxes taken from my pay.   I made no effort to disrupt that.      I

just said, ‘Hey, I’m not bothering with you guys’.”     Petitioner

further testified, “Well, I also knew that the law required me,

supposedly, to pay taxes, and I took a stand against it back in

‘86.”

     Petitioner’s testimony is in marked contrast to the

representation that he and his Enrolled Agent, Ms. Baptista, made

to respondent in the letter, dated March 24, 1989, requesting

additional audit reconsideration.     In that letter it was stated:

          Mr. Marsh has failed to file his 1986 and 1987
     returns, but the necessary information has been
     assembled, and we should have the returns prepared in
     the very near future.

           It must be categorically   stated that Mr. Marsh is
     not a “tax protester”, and is    not willfully failing to
     file any return or to provide    appropriate information
     to support returns filed. It     should not be held
     against him that he was badly    represented by someone
     else.
                             - 26 -

In response to the criminal investigation, petitioner wrote to

respondent on May 29, 1992, stating:

     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)* * *”

The remainder of the letter contains the pseudolegal argument

that this Court has had occasion to refer to as tax protester

rhetoric and legalistic gibberish.    See, e.g., Kearney v.

Commissioner, T.C. Memo. 1999-12.    In September 1992, petitioner

was represented by an attorney who wrote respondent, in an effort

to avoid the criminal prosecution of his client, and described

petitioner as a “naive citizen exposed to ‘tax protestor’

rhetoric” and further stating:

     When I [petitioner’s attorney] took the time to explain
     in detail the process by which federal appeals courts
     had rejected each of the positions on which he
     [petitioner] had relied, Mr. Marsh was shocked,
     incredulous and mortified.

Neither petitioner’s nor his attorney’s letters in 1992 attribute

petitioner’s failure to pay tax or file tax returns to a belief

in “Hawaiian Sovereignty”.

     At a conference in January 1993 with respondent at Honolulu

District Council’s office, neither petitioner nor his attorney

mentioned “Hawaiian Sovereignty” as an explanation for

petitioner’s noncompliance with the tax laws.
                               - 27 -

     At trial petitioner, a police officer, testified that he did

not believe he was required to file in 1986 or subsequent years

because filing was “voluntary” and because of his growing belief

in “Hawaiian Sovereignty”.    Petitioner testified his post-1985

beliefs were based on the advice of a “tax accountant”, a Mr.

Kailing.   The record is devoid of corroboration for petitioner’s

testimony as to his growing belief in “Hawaiian Sovereignty” as a

reason for his failure to file tax returns or pay taxes prior to

his criminal trial in 1995.    Indeed, the representations made by

petitioner and his attorney in the record indicate petitioner

held no such belief prior to his criminal trial.

     We do not find to be credible petitioner’s testimony that he

failed to file tax returns or pay taxes because he believed the

tax system to be voluntary or because of his growing belief in

“Hawaiian Sovereignty”.   Rather, the record clearly and

convincingly demonstrates that after petitioner filed his 1985

return in 1986, the alleged reasons that petitioner used to

justify his failure to file returns simply shifted from one

rationale to another.   When it served petitioner’s purposes he

and his agents made representations to the Internal Revenue

Service that he had been misled or misguided.    However, after

every such instance petitioner reverted to another justification

for his continued noncompliance.    The only thing that remained
                                - 28 -

constant was petitioner’s objective to dodge his responsibility

to pay taxes.   Based on the foregoing we believe that petitioner

did not have a sincere belief in the reasons he now relies on for

not complying with the law.

     Other facts support this conclusion.   For example,

petitioner collected a 4-percent general excise tax from his

customers but did not remit the funds so collected to the State

of Hawaii.   The fact that petitioner collected taxes and did not

pay them to the State of Hawaii leads us to believe that his

purpose in collecting and retaining these State taxes was to

enhance his financial status.    There was no high-minded or

misguided purpose; petitioner just did not want to pay tax.

Petitioner’s conduct regarding his State tax obligations supports

our conclusion that petitioner's failure to file or pay Federal

tax was not motivated by a sincere belief that he was under no

legal obligation to do so.    In McGee v. Commissioner, 61 T.C.

249, 260 (1973), affd. 519 F.2d 1121 (5th Cir. 1975), we

observed:

     While evidence that a taxpayer was attempting to
     defraud another in a business transaction may not be
     direct evidence of fraud with intent to evade tax, see
     Toledano v. Commissioner, 362 F.2d 243, 247 (C.A. 5,
     1966), the Court is entitled to consider such evidence
     along with other evidence in determining the intent of
     the taxpayer in doing certain acts, because it is a
     fair inference that a man who will misappropriate
     another's funds to his own use through
     misrepresentation and concealment will not hesitate to
                              - 29 -

     misrepresent and conceal his receipt of those same
     funds from the Government with intent to evade tax.
     Rogers v. Commissioner, 111 F.2d 987 (C.A. 6, 1940).
     The legal relevancy of such evidence is based upon
     logical principles which go to negate innocent intent.
     United States v. Bridell, 180 F.Supp. 268 (N.D. Ill.
     1960); Pappas v. United States, 216 F.2d 515 (C.A. 10,
     1954).

     On July 12, 1988, petitioner requested that the State of

Hawaii place his specialty masonry contractor’s license on

“inactive status”.   Afterward, petitioner continued to operate

that business on an unlicenced basis.   Petitioner had gross

receipts from his masonry business of $318,315 in 1989.     Around

August of 1989, petitioner stopped using his business checking

account in favor of conducting the masonry business using cash.

Petitioner started paying his employees in cash as of July 21,

1989, rather than by check.   Petitioner received a large

insurance settlement and converted the check into cash rather

than depositing that amount into a bank account.   Petitioner's

conduct in operating an unlicenced business and switching to cash

transactions is further evidence of petitioner’s fraudulent

intent.

     Petitioner suggests that his failure to file and pay tax for

the years 1986 through 1989 was not fraudulent because the

Internal Revenue Service was aware of his noncompliance.    The

fact that petitioner’s failure to file returns was known to the

IRS does not preclude a finding of fraud.   Disclosed defiance,
                               - 30 -

standing alone, does not bar a finding of fraud.    See Edelson v.

Commissioner, 829 F.2d 828 (9th Cir. 1987), affg. T.C. Memo.

1986-223.    We find that petitioner knew of his obligation to pay

tax and intentionally evaded the tax known to be owing by failing

to report his income.    Consequently, we sustain respondent's

determination of the applicability of the fraud additions to tax

for each of the years 1986, 1987, 1988, and 1989.    For 1986,

1987, and 1988, petitioner has not established any portion of the

underpayment is not attributable to fraud.

4.   Addition to Tax for Failure To Pay Estimated Tax Under

Section 6654 for the Years 1987-95

      Respondent determined that petitioner is liable for an

addition to tax for failure to pay estimated income tax under

section 6654(a) for the years 1987-1995.    Unless the taxpayer

demonstrates that one of the statutory exceptions applies,

imposition of this addition to tax is mandatory where prepayments

of tax, either through withholding or by making estimated

quarterly tax payments during the course of the taxable year, do

not equal the percentage of total liability required under the

statute.    See sec. 6654(a); Niedringhaus v. Commissioner, 99 T.C.

202, 222 (1992); Grosshandler v. Commissioner, 75 T.C. 1, 20-21

(1980).    Petitioner bears the burden of proving his entitlement
                              - 31 -

to any exception.   See Habersham-Bey v. Commissioner, 78 T.C.

304, 319-320 (1982).

     Petitioner has not filed returns for the years in issue or

made any estimated tax payments for those years, nor has he shown

that any of the statutory exceptions are applicable in this case.

We, therefore, sustain respondent's determination.



                                          Decision will be entered

                                       under Rule 155.
