1These cases were consolidated by order of the Court and are

hereafter referred to as the instant case.

T.C. Memo. 2006-250

UNITED STATES TAX COURT

WILLIAM R. TINNERMAN, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 18725-04, 4975-05.1 Filed November 14, 2006.

William R. Tinnerman, pro se.

Lauren B. Epstein, for respondent.

MEMORANDUM OPINION

WELLS, Judge: Respondent determined the following

deficiencies in income tax, additions to tax, and penalties for

petitioner’s taxable years 1999, 2000, 2001, and 2002:
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2To be calculated.

3To be calculated.

4Unless otherwise indicated, all Rule references are to the

Tax Court Rules of Practice and Procedure, and all section

references are to the Internal Revenue Code in effect for the

years in issue.

 Year Deficiency 6651(a)(1) 6651(a)(2) 6651(f) 6654(a)

 1999 $75,888 - $18,972 $55,018.80 $3,672.67

 2000 69,302 - 

2 51,976.50 3,701.75

 2001 52,823 - 

3 39,617.25 2,111

 2002 44,220 $11,055 - - 1,477.71

The issues we must decide are: (1) Whether the record in the

instant case should be reopened to receive new evidence; (2)

whether petitioner has a zero basis in his S corporation stock;

(3) whether petitioner is liable for deficiencies in income tax

for taxable years 1999 through 2002; (4) whether petitioner is

liable for the fraud penalty pursuant to section 6651(f)4 for

taxable years 1999, 2000, and 2001; (5) whether petitioner is

liable for an addition to tax pursuant to section 6651(a)(1) for

failure to file his 2002 tax return; (6) whether petitioner is

liable for an addition to tax pursuant to section 6654(a) for

failure to make estimated payments for tax years 1999 through

2002; and (7) whether petitioner is liable for a penalty pursuant

to section 6673.
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Background

Some of the facts and certain exhibits have been stipulated.

The parties’ stipulations of fact are incorporated herein by

reference and are found as facts in the instant case.

Petitioner resided in St. Augustine, Florida, at the time the

petitions were filed in the instant cases. 

Petitioner graduated from the University of Colorado in 1972

with a business degree, majoring in finance and minoring in

economics. Petitioner is a licensed commercial real estate

broker and has commercial real estate management experience.

Petitioner failed to file federal income tax returns, make

estimated payments, or pay the tax due for his 1999 through 2002

taxable years. During that time, petitioner was the sole

shareholder and president of St. Augustine Self Storage, Inc.

(company), an S corporation incorporated in 1986. When

incorporated, the company had three shareholders, including

petitioner. 

The company owns property located at 5 Willard Drive, St.

Augustine, Florida (property). On August 6, 1986, the company

executed a note in the amount of $1,225,000 (note) and, to secure

the note, a mortgage encumbering the property. Petitioner did

not provide any evidence that he is or has ever been personally

liable to pay the note.
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Petitioner has been the sole shareholder of the company

since 1991, and president and treasurer since approximately 1988. 

Petitioner had significant pass-through income from the company

and received distributions from the company for all taxable years

in issue in the instant case.

Petitioner’s certified public accountant, Jon Mazer (Mr.

Mazer), has prepared all the corporate income tax returns for the

company, including those for 1999 through 2002. Prior to 1999,

Mr. Mazer also prepared individual income tax returns for

petitioner. Petitioner reviewed, signed, and filed all the Forms

1120S, U.S. Income Tax Return for a Subchapter S Corporation, for

the company for all taxable years in issue.

When petitioner filed the Forms 1120S for the company for

taxable years 1999 through 2002 he was aware of the net income

reported on those returns. Petitioner understood the tax effects

of having an S corporation and specifically was aware during the

taxable years in issue that the net profits from an S corporation

are passed through and taxable to its shareholders. Prior to the

1999 taxable year, petitioner reported the net income of the

company on his individual income tax returns.

Petitioner told Mr. Mazer not to prepare petitioner’s

individual income tax returns starting with the 1999 taxable

year. Petitioner, however, still had Mr. Mazer prepare the Forms
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1120S for the company for years 1999 and thereafter. Beginning

with petitioner’s 1999 taxable year, petitioner stopped filing

returns or making estimated tax payments.

Mr. Mazer did not advise petitioner that he was not required

to file individual income tax returns for taxable years 1999

through 2002. Mr. Mazer did not advise petitioner that his

income from the company for taxable years 1999 through 2002 was

not taxable.

On the Schedule K-1 attached to the Form 1120S for the

company for year 1999, petitioner inserted the following

statement (statement): 

“The corporation has determined the net income shown on

the Schedule K-1 (Form 1120S) does NOT constitute

‘gross income’ as determined by rules set forth in the

Treasury Regulations at 26 CFR (4-1-99) Parts 1.61-1(a)

and (b) and 1.931-1(b)(1)-(4). Therefore, since there

is NO gross income, the net income shown on the K-1 is

NOT reportable on your 1040 as taxable income.” 

Petitioner placed the statement on the Schedule K-1 after Mr.

Mazer had prepared the Form 1120S. Petitioner added other

statements similar to the statement to the Forms 1120S for the

company’s years 2000, 2001, and 2002.

Mr. Mazer did not advise petitioner that placing the

statement on the Schedules K-1 relieved him of the requirement to

file an individual income tax return. Petitioner did not consult

an attorney, accountant, or other tax professional about whether
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his income was taxable or whether he was required to file an

individual income tax return.

On May 4, 2000, petitioner personally prepared and filed

Forms 1040X, Amended U.S. Individual Income Tax Return, for the

1996, 1997, and 1998 taxable years reporting zero income and

claiming refunds. In addition to the amended individual income

tax returns that petitioner filed, petitioner also sent letters

to his payors on April 14, 2000, stating that they had

erroneously reported income to the Internal Revenue Service (IRS)

and directing that they file corrected information returns with

the IRS reflecting that he had no gross income.

Petitioner also filed Forms 4852, Substitute for Form W-2,

Wage and Tax Statement, or Form 1099R, Distributions from

Pensions, Annuities, Retirement or Profit-Sharing Plans, IRA’s,

Insurance Contracts, Etc., with the amended individual income tax

returns he filed on May 4, 2000. On those Forms 4852 petitioner

reported that he had zero income from each payor for the 1996,

1997, and 1998 taxable years.

On May 19, 2000, the IRS sent petitioner a letter informing

him that the amended individual income tax returns he filed for

the 1996, 1997, and 1998 taxable years were determined to be

frivolous documents, that the positions taken on the amended

income tax returns were frivolous, and that his refund claims
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were denied. On June 22, 2000, petitioner responded by sending

the IRS a letter making frivolous arguments. Petitioner’s

frivolous arguments included, among others, that he derived none

of his income from sources outside the United States and

therefore his income was not taxable under section 861 and

various associated regulations. On August 11, 2000, the IRS sent

petitioner notice that his refund claims for the 1996, 1997, and

1998 taxable years were disallowed, informed him that the Tax

Court and other Federal courts have repeatedly rejected his

position, and again informed him that a penalty of $500 may be

assessed under section 6702. On September 4, 2000, the IRS

assessed the Frivolous Return Penalty under section 6702 against

petitioner for his 1996, 1997, and 1998 taxable years.

During 1999, petitioner purchased a package of documents for

$9,000 from John P. Ellis (Mr. Ellis) and Jeff Pollard (Mr.

Pollard). Petitioner used the package of documents to establish

a sham trust under the name of Bay Point Enterprises (Bay Point). 

When petitioner purchased the package, petitioner knew that

Messrs. Ellis and Pollard were being investigated by a grand jury

for promoting the sham trusts.

Petitioner transferred to Bay Point his limited partnership

interest in Winthrop Venture Capital that he had acquired in 1997

for $100,000. Petitioner directed Winthrop Venture Capital to
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pay significant dividends to Bay Point, which petitioner used to

open a bank account in Bay Point’s name.

Petitioner appointed Mr. Ellis as the sole “trustee” of Bay

Point. Mr. Ellis was incarcerated for contempt approximately 1

month after petitioner purchased the Bay Point “trust” and Mr.

Ellis was indicted shortly afterwards. Petitioner was the only

person with control over the assets of Bay Point. Petitioner was

the only person with signature authority over Bay Point’s bank

account, and petitioner managed all of Bay Point’s property.

In 2002, Mr. Ellis was sentenced to serve 10 and a half

years in prison for marketing sham trusts. Petitioner

nonetheless continued to use Bay Point. Bay Point has never

filed an income tax return and has never paid any taxes.

Petitioner repeatedly told IRS agents that he had no taxable

income or gross income and was not required to file income tax

returns for his 1999 through 2002 taxable years. Throughout the

examination of petitioner’s 1999 through 2002 taxable years,

petitioner sent multiple documents to the IRS containing

frivolous arguments.

On August 14, 2003, the IRS’s revenue agent informed

petitioner of the IRS’s authority to enforce income tax laws and

examine books and records, provided petitioner with a document

titled “The Truth about Frivolous Tax Arguments,” and provided
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petitioner with another opportunity to provide requested books

and records. The document titled “The Truth about Frivolous Tax

Arguments” provided petitioner with specific legal citations

showing why such frivolous tax arguments have been rejected.

Petitioner failed to comply with reasonable requests of the

IRS to provide books and records. Petitioner continued taking a

frivolous position throughout his IRS appeals proceedings.

Discussion

Before we address the substantive issues in the instant

case, we must decide whether the record should be reopened to

receive new evidence. After briefs were due in the instant case,

petitioner filed a motion requesting a reopening of the record

for the introduction of new evidence to support his indebtedness

and subsequent contribution of the note proceeds to the capital

of the company.

Reopening the record for the submission of additional

evidence lies within the discretion of the Court. Zenith Radio

Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331 (1971). A

court will not grant a motion to reopen the record unless, among

other requirements, the evidence is material to the issues

involved and probably would change the outcome of the case. See

Coleman v. Commissioner, T.C. Memo. 1989-248, affd. without
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5Petitioner claims he has basis in his stock of the company

sufficient to offset capital gains distributions he received from

the company. 

published opinion 991 F.2d 795 (6th Cir. 1993)(citing Edgar v.

Finley, 312 F.2d 533 (8th Cir. 1963)).

Despite repeated requests for documents by respondent before

and at the trial of the instant case, petitioner failed to

substantiate his contention that he had basis in the company’s

stock through the contribution of cash he obtained from a

refinancing of the note.5 Indeed, petitioner refused to address

that issue, preferring to rely on frivolous arguments. 

We deny petitioner’s motion to reopen the record because,

among other reasons, it is prejudicial to respondent, but note

that, even if we were to admit the documents petitioner wishes to

submit, the documents fail to support petitioner’s contention

that he is personally liable on a refinancing of the note, that

the company was relieved of its debt pursuant to the note, and

that he actually contributed the proceeds of the refinancing of

the note to the capital of the company. 

We do not address with somber reasoning and copious

citations of precedent petitioner’s arguments that he is not

required to file tax returns or pay income tax, as to do so might

suggest that petitioner’s arguments possess some degree of

colorable merit. See Crain v. Commissioner, 737 F.2d 1417, 1417
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(5th Cir. 1984). Accordingly, we hold that petitioner is liable

for the amounts of the deficiencies in his income tax set forth

in the notices of deficiency for the 1999 through 2002 taxable

years.

We address next whether petitioner is liable for the fraud

penalty pursuant to section 6651(f). In deciding whether a

failure to file is fraudulent under section 6651(f), we consider

the same elements that are considered in imposing the addition to

tax for fraud under former section 6653(b) and present section

6663. Clayton v. Commissioner, 102 T.C. 632, 653 (1994). Fraud

is defined as an intentional wrongdoing designed to evade tax

believed to be owing. Powell v. Granquist, 252 F.2d 56 (9th Cir.

1958); Miller v. Commissioner, 94 T.C. 316, 332 (1990). The

Commissioner bears the burden of demonstrating fraud by clear and

convincing evidence. Sec. 7454(a); Rule 142(b). The existence

of fraud is a question of fact to be resolved upon consideration

of the entire record. Korecky v. Commissioner, 781 F.2d 1566,

1568 (11th Cir. 1986), affg. per curiam T.C. Memo. 1985-63;

Estate of Pittard v. Commissioner, 69 T.C. 391 (1977). To carry

the burden of proof on the issue of fraud, the Commissioner must

show, for each year in issue, that (1) an underpayment of tax

exists and (2) some portion of the underpayment is due to fraud. 

Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989).
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With respect to the first prong of the test, the

Commissioner need not prove the precise amount of the

underpayment resulting from fraud, but only that some part of the

underpayment of tax for each year in issue is attributable to

fraud. Lee v. United States, 466 F.2d 11, 16-17 (5th Cir. 1972);

Plunkett v. Commissioner, 465 F.2d 299, 303 (7th Cir. 1972),

affg. T.C. Memo. 1970-274. The Commissioner may not, however,

simply rely upon the taxpayer’s failure to show error in the

determinations of the deficiencies. DiLeo v. Commissioner, 96

T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Petzoldt

v. Commissioner, supra at 700.

The Commissioner must show that the taxpayer intended to

evade taxes known or believed to be owing by conduct intended to

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

Korecky v. Commissioner, supra at 1568; Rowlee v. Commissioner,

80 T.C. 1111, 1123 (1983). Fraud is not to be imputed or

presumed, but rather must be established by some independent

evidence of fraudulent intent. Beaver v. Commissioner, 55 T.C.

85, 92 (1970); Otsuki v. Commissioner, 53 T.C. 96, 106 (1969). 

However, fraud need not be established by direct evidence, which

is rarely available, but may be proved by surveying the

taxpayer’s entire course of conduct and drawing reasonable

inferences therefrom. Spies v. United States, 317 U.S. 492, 499
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(1943); Korecky v. Commissioner, supra at 1568; Rowlee v.

Commissioner, supra at 1123. Although fraud may not be found

under "circumstances which at the most create only suspicion",

Petzoldt v. Commissioner, supra at 700, the intent to defraud may

be inferred from any conduct the likely effect of which would be

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

believed to be owing, Spies v. United States, supra at 499.

Courts have relied on a number of indicia or badges of fraud

in deciding whether to sustain the Commissioner’s determinations

with respect to the additions to tax for fraud. Although no

single factor may be necessarily sufficient to establish fraud,

the existence of several indicia may be persuasive circumstantial

evidence of fraud. Solomon v. Commissioner, 732 F.2d 1459, 1461

(6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603; Beaver v.

Commissioner, supra at 93.

Circumstantial evidence that may give rise to a finding of

fraudulent intent includes: Understatement of income; inadequate

records; failure to file tax returns; concealment of assets;

failure to cooperate with tax authorities; filing false Forms W4; failure to make estimated tax payments; and engaging in

illegal activity. Bradford v. Commissioner, 796 F.2d 303, 307

(9th Cir. 1986), affg. T.C. Memo. 1984-601. The "badges of

fraud" are nonexclusive. Miller v. Commissioner, supra at 334. 
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The taxpayer's background and the context of the events in

question may be considered as circumstantial evidence of fraud. 

Spies v. United States, supra at 497; Plunkett v. Commissioner,

supra at 303.

The instant case involves numerous badges of fraud. 

Petitioner is an intelligent and well-educated businessman, who

prior to 1999 complied with applicable tax laws. Petitioner

failed to file tax returns or make tax payments in taxable years

1999 through 2002. Petitioner attempted to conceal assets and

income in a sham trust. Petitioner failed to cooperate with

reasonable requests for documents. We conclude that the record

shows by clear and convincing evidence that petitioner

understated his income and that there are sufficient badges of

fraud to show that petitioner fraudulently intended to understate

his income. We therefore hold that petitioner is liable for the

fraud penalty pursuant to section 6651(f) for taxable years 1999,

2000, and 2001. 

Pursuant to section 7491(c), respondent bears the burden of

production with respect to the additions to tax under sections

6651(a)(1), 6651(a)(2), and 6654. Consequently, respondent must

produce sufficient evidence to demonstrate that the addition to

tax is appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446
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(2001). Once respondent meets his burden of production,

petitioner must produce sufficient evidence to persuade the Court

that respondent’s determination is incorrect. Id. at 447.

Section 6651(a)(1) imposes an addition to tax for failure to

file an income tax return. A taxpayer may be relieved of the

addition, however, if he can demonstrate that the “failure is due

to reasonable cause and not due to willful neglect”. Id.

Willful neglect means conscious intentional failure or reckless

indifference. United States v. Boyle, 469 U.S. 241, 245 (1985). 

Proced. & Admin. Reg. section 301.6651-1(c)(1) states that if a

taxpayer exercises ordinary business care and prudence and is

nevertheless unable to file on time, then the delay is due to

reasonable cause.

Respondent has carried his burden of production, showing

that petitioner failed to file a return for taxable year 2002. 

Petitioner has failed to demonstrate reasonable cause for his

failure to file a return and failure to pay the tax due, citing

only frivolous, protester arguments. See Yoder v. Commissioner,

T.C. Memo. 1990-116 (holding misguided interpretations of the

Constitution are not reasonable cause). The addition to tax

under section 6651(a)(1) for taxable year 2002 is accordingly

sustained.
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6Sec. 6654(d) requires quarterly installment payments of 25

percent of the required annual payment. Sec. 6654(d)(1)(A). The

required annual payment is the lesser of 90 percent of the tax

due for the year in issue or 100 percent of the tax shown on the

return in the preceding year. Sec. 6654(d)(1)(B). 

Section 6651(a)(2) provides for an addition to tax in

instances where there is a failure to pay the amount of tax shown

on a return, and it applies only when an amount of tax is shown

on a return. Cabirac v. Commissioner, 120 T.C. 163, 170 (2003). 

Petitioner did not file a return or pay taxes for any of the

years 1999 through 2002, and respondent prepared substitute

returns pursuant to section 6020(b). Under section 6651(g)(2), a

return prepared by the Secretary under section 6020(b) is treated

as the return filed by the taxpayer for purposes of determining

an addition to tax under section 6651(a)(2). Cabirac v.

Commissioner, supra at 170. We hold that petitioner is liable

for the additions to tax under section 6651(a)(2) for taxable

years 1999 through 2002.

Section 6654(a) imposes an addition to tax for failure to

pay estimated income tax. Section 6654 applies where prepayments

of tax, either through withholdings or by making estimated

quarterly payments, do not equal the percentage of total

liability required under the statute,6 unless one of the several

exceptions under section 6654(e) applies. Niedringhaus
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v. Commissioner, 99 T.C. 202, 222 (1992). Petitioner reported a

tax liability in 1998 of $9,258 and owed tax in each of years in

issue, yet failed to make any estimated payments. We therefore

hold that petitioner is liable for the addition to tax under

section 6654 for taxable years 1999 through 2002.

Section 6673(a)(1) provides that this Court may require the

taxpayer to pay a penalty not in excess of $25,000 whenever it

appears to this Court: (a) The proceedings were instituted or

maintained by the taxpayer primarily for delay; (b) the

taxpayer’s position is frivolous or groundless; or (c) the

taxpayer unreasonably failed to pursue available administrative

remedies. Respondent has moved that the Court impose a penalty

in the instant case. The record indicates that petitioner was

warned that this Court could impose a penalty if he persisted in

raising frivolous tax protester arguments. Despite being warned,

petitioner raised frivolous arguments throughout the Appeals

process, in his petition to this Court, and in his briefs. 

Accordingly, we shall impose a $10,000 penalty on petitioner

pursuant to section 6673. 

To reflect the foregoing,

 An appropriate order and

 decision will be entered.