T.C. Memo. 2009-83

UNITED STATES TAX COURT

THOMAS E. & IRIS M. TILLEY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4097-08. Filed April 27, 2009.

Thomas E. Tilley and Iris M. Tilley, pro sese.

J. Craig Young, for respondent.

MEMORANDUM OPINION

COHEN, Judge: In separate notices, respondent determined

deficiencies, penalties, and additions to tax as follows:

Thomas E. Tilley

 Additions to Tax/Penalties 

Year Deficiency Sec. 6651(f) Sec. 6651(a)(2) Sec. 6654

2000 $338,491 $245,406 $84,623 $18,080

2001 1,608,566 1,165,198 401,792 64,222
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Iris M. Tilley

 Additions to Tax/Penalties 

Year Deficiency Sec. 6651(f) Sec. 6651(a)(2) Sec. 6654

2000 $327,015 $237,066 $81,747 $17,466

2001 1,596,563 1,157,508 399,141 63,805

Unless otherwise indicated, all section references are to the

Internal Revenue Code for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

Petitioners sent to the Court various frivolous documents

and willfully failed and refused to appear for trial. The issues

for decision are whether the deficiencies should be sustained by

reason of petitioners’ default and whether respondent has

established the prerequisites for the penalties and additions to

tax.

Background

Petitioners resided in North Carolina at the time that they

filed their petition. Because they refused to participate in

preparation of this case for trial, there is no stipulation. The

background stated here is based on the pleadings, on respondent’s

records, and on the testimony of the examiner who reconstructed

petitioners’ income for purposes of the statutory notices of

deficiency. 

Petitioners failed to file Federal income tax returns for

2000 or 2001 or for many years before and after those years. 

Because petitioners failed to produce books and records or to
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cooperate in the determination of their taxable income, the

examiner caused summonses to be served on banks with which

petitioners did business. Petitioners filed frivolous challenges

to the summonses, which caused delays in obtaining the records. 

The summonses were ultimately enforced by the District Court. 

After reviewing the bank records and third party reports of

specific items of income, the examiner reconstructed petitioners’

income using the source and application of funds method. 

The specific items of income identified by the examiner with

respect to Thomas E. Tilley (Mr. Tilley) included a retirement

account distribution, nonemployee compensation, Social Security

benefits, and patronage dividends. The known sources of funds

received by Mr. Tilley totaled $12,457 during 2000 and $14,117

during 2001. Additional unreported income was determined from

loan payments totaling $820,505.30 in 2000 and $3,906,732.31 in

2001 applied to loans showing Mr. Tilley as a joint borrower. 

Additional applications of funds were determined on the basis of

personal living expenses shown in the bank records secured

pursuant to the summonses.

The specific items of income identified by the examiner with

respect to Iris M. Tilley (Mrs. Tilley) included wage income,

Social Security benefits, and interest income. The known sources

of funds received by Mrs. Tilley totaled $6,033 during 2000 and

$6,491 during 2001. Additional unreported income was determined
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from loan payments totaling $797,389.88 in 2000 and $3,884,518.31

in 2001 applied to loans showing Mrs. Tilley as a joint borrower. 

Additional applications of funds were determined on the basis of

personal living expenses shown in the bank records secured

pursuant to the summonses.

Among the records received as a result of the summonses to

banks were financial statements signed by petitioners 

representing that they owned a mobile home park and other real

estate and that they received substantial income from their

properties. In a 1994 loan application, Mr. Tilley was described

as “self-employed - mobile home rentals”. In a financial

statement dated August 8, 1995, petitioners represented that they

owned real estate valued at $9,433,000 with mortgages payable

totaling $3,787,867. The statement represented that petitioners

had a net worth of $7,772,683. A warranty deed, which showed

“The Tilley Trust” as the grantor, and a Wake County real estate

record reflected sale of a mobile home park in October 2001 for

$3,000,000. 

Petitioners never produced trust documents or other evidence

of the separate existence of a Tilley Trust during the

examination of their liabilities for 2000 and 2001 or during the

course of this case in Court. They did not mention a trust in

their petition. The petition claimed, but did not identify,

various exemptions, deductions, and credits. Many of the
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allegations are similar or identical to allegations in petitions

filed by tax protesters. Also among the allegations is the

following:

Due to lack of records, Petitioners need to

reconstitute records and provide reasonable estimations

of business expenses as provided for in the Cohen [sic]

case, below. This case shows that the tax court can

use reasonable figures when records do not exist. The

taxpayer can also reconstruct lost paperwork to

substantiate deductions and business expenses.

Further the taxpayer can claim a percentage of

business expenses and profit for a business enterprise,

even if he has no records to substantiate his business

expenses.

This allegation is relevant in view of petitioners’ later claim,

described below, that they had no income-producing activities

during 2000 and 2001. 

This case was set for trial in Winston-Salem, North

Carolina, on January 26, 2009. The Notice Setting Case For Trial

included a warning as follows: YOUR FAILURE TO APPEAR MAY RESULT

IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU. 

Attached to the Notice Setting Case For Trial was the Court’s

Standing Pretrial Order. Both the notice and the pretrial order

advised petitioners of the obligation to cooperate and to

stipulate to facts and documents about which there should be no

disagreement.

Respondent served requests for admission on petitioners,

attaching documents, setting out the specific items of income

received by petitioners, and setting out the conclusions that had
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been reached by the examiner on the basis of the bank records

obtained as a result of the summonses. Petitioners responded to

the requests for admission with a document that they titled

“Affidavit of Truth”. They did not deny receipt of the specific

items of income but instead claimed that they believed them to be

“an un-taxable event”. Among other things, petitioners alleged

that they were not required to file a tax return because they had

no taxable income and that “wages are not income as defined in

the IRS law”.

Shortly before trial, petitioners sent to the Court a

package of documents including a copy of the Handbook for Special

Agents portion of the Internal Revenue Manual. The documents

contained various spurious accusations against respondent, long

refuted tax-protester theories, and other unintelligible and

irrelevant arguments. In one signed document, Mrs. Tilley denied

that she was a “person” or a “taxpayer” under the Internal

Revenue Code. The package of documents was filed as petitioners’

pretrial memorandum. Before the trial date, petitioners mailed

to the Court a document entitled “Notice of Fraud and R.I.C.O.

Violations”, which was received after the trial date and was

filed as a supplement to pretrial memorandum. Petitioners’

documents made clear that their actions were willful in that

their failure to appear for trial was consistent with their prior

course of refusing to cooperate in the determination of their
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correct tax liabilities. None of petitioners’ documents alleged

that the unexplained sources of loan payments used in

respondent’s determination of unreported income were attributable

to a trust. 

Petitioners failed to appear at the calendar call on January

26, 2009. The case was set for trial on January 27, 2009. 

Respondent presented evidence that petitioners had failed to file

returns for 2000 and 2001 and that substitutes for returns had

been filed pursuant to section 6020(b) for 2000, 2001, and

subsequent years. 

Respondent also presented evidence with respect to the

penalty for fraudulent failure to file returns. This evidence

included the pattern of nonfiling for multiple years before and

after 2000 and 2001, implausible explanations, concealment of

income and assets, failure to cooperate, and conduct actively

obstructing the determination of petitioners’ correct tax

liability. Respondent’s witness, the revenue agent who had

conducted the examination, and respondent’s counsel both

acknowledged the duplication of income items without a known

source in the separate notices of deficiency but explained that

the available records, without any input from petitioners, did

not support allocation and that the separate determinations were

necessary to prevent whipsaw in case either petitioner later

claimed that the income belonged to the other.
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After trial, the Court issued an Order to Show Cause that

included the following:

Petitioners have refused to participate in

determination of their actual taxable income, and they

have actively obstructed lawful processes by which

information necessary to that determination could be

obtained. As a result, neither respondent nor the

Court can effect a reliable reduction of any of the

liabilities in dispute. Reduction of the deficiencies

would, of course, result in proportionate reduction of

the penalties and additions to tax.

The obfuscation and tax protestor gibberish

engaged in by petitioners in this case is inexplicable

foolishness. They are risking loss of whatever assets

they possess, because collection efforts will

undoubtedly proceed once a decision is entered in this

case. An adverse decision for the full amounts

determined against each petitioner is inevitable on the

existing record, and such decision will be entered by

the Court without undue delay. In order to provide

petitioners with one last opportunity to abandon their

tactics, to secure competent counsel, and to

participate in determination of their correct, and

presumably reduced, liabilities, it is hereby

ORDERED that on or before March 2, 2009,

petitioners shall show cause in writing served on

respondent and filed with the Court why a decision

should not be entered in this case determining that

they are liable for the full amount of deficiencies,

penalties and additions to tax set out in the statutory

notices of deficiency that are the subject of their

petition. Such showing shall:

Explain the source of funds used to pay off loans

and to engage in other transactions identified in

respondent’s reconstruction of petitioners’ income for

2000 and 2001;

Explain the business or other income producing

activities engaged in by petitioners during 2000 and

2001 in which they incurred the business expenses

referred to in their petition;
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Identify any witnesses that petitioners would call

at any further trial of this case, with a brief summary

of the expected testimony of each witness;

Include a list specifying by nature and amount

each deduction, exemption, or credit claimed by

petitioners as reducing their taxable income; and

Attach copies of any records corroborating their

positions.

The above deadline will not be extended unless,

prior to March 2, 2009, petitioners have met with

respondent’s counsel or a designated representative of

respondent’s counsel, arranged to cooperate in curing

their prior defaults, and filed with the Court a motion

with respondent’s agreement to extend the date.

Petitioners submitted a response that repeated their

spurious accusations, frivolous arguments, and denials that they

had income during 2000 and 2001. They allege that a trust is a

separate entity for tax purposes, but they have not provided any

of the information specified in the Order To Show Cause. There

are no trust agreements in the record, and there is no reason to

believe that any trust involving petitioners is not a grantor

trust or a sham trust or that petitioners did not receive taxable

distributions from any trust. There is no indication that tax

returns were filed by a Tilley Trust. During the course of the

examination and the pendency of the case, petitioners have failed

to identify any nontaxable source of the funds used to pay off

loans in 2000 and 2001.
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Discussion

At the time of trial, respondent’s counsel described

numerous efforts to reach petitioners and to secure their 

cooperation in resolving the issues. Left with no alternative,

counsel stated that “[regarding] this whipsaw issue, 

it’s unfortunate, but it’s the taxpayers own creation. I would

ask the Court to simply hold them in default as to all the issues

and all the additions to tax.” Because it appears that the

probable source of petitioners’ unreported income was sales or

rentals of real property, there is no way to allocate that income

without knowing more about the ownership of the property than

appears in the record. Petitioners have been given every

opportunity to provide that information and have been repeatedly

warned about the consequences of failure to provide it.

The record reflects petitioners’ longtime delinquencies and

frivolous positions with respect to their Federal tax

obligations. Their tax liabilities for 1991 and 1992 were the

subject of Tilley v. Commissioner, T.C. Memo. 1997-222, and

collection actions for 1991, 1992, 1994, and 1995 were the

subject of Tilley v. Commissioner, T.C. Memo. 2002-161. In

letters dated September 12, 1996, to the Secretary of the

Treasury, petitioners admitted that they had not filed Federal

tax returns for 1994 or 1995, with the following explanation:

The reason for not doing so is that I do not

believe that I have received any gross income for that
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year. This is based upon an examination of all records

which I have concerning my affairs. These records do

not show:

(a) Any evidence upon which I can make a

determination that I am a citizen or resident of the

United States, as that term is used in the 14th

Amendment to the Constitution, and at 26 CFR §1.1-1(a)-

(c).

(b) Any evidence of gross income from a source

within, or from a trade or business which is

effectively connected with the United States.

(c) Any evidence which indicates that I have made

any determination for said year that I am legally

obligated to any tax not mandated upon me by Congress.

Under these circumstances, petitioners’ denials of receipt of

taxable income have no credibility.

Rule 123 provides as follows:

(a) Default: If any party has failed to plead or

otherwise proceed as provided by these Rules or as

required by the Court, then such party may be held in

default by the Court either on motion of another party

or on the initiative of the Court. Thereafter, the

Court may enter a decision against the defaulting

party, upon such terms and conditions as the Court may

deem proper, or may impose such sanctions (see, e.g.,

Rule 104) as the Court may deem appropriate. The Court

may, in its discretion, conduct hearings to ascertain

whether a default has been committed, to determine the

decision to be entered or the sanctions to be imposed,

or to ascertain the truth of any matter.

(b) Dismissal: For failure of a petitioner

properly to prosecute or to comply with these Rules or

any order of the Court or for other cause which the

Court deems sufficient, the Court may dismiss a case at

any time and enter a decision against the petitioner. 

The Court may, for similar reasons, decide against any

party any issue as to which such party has the burden

of proof, and such decision shall be treated as a

dismissal for purposes of paragraphs (c) and (d) of 

this Rule.
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(c) Setting Aside Default or Dismissal: For 

reasons deemed sufficient by the Court and upon motion 

expeditiously made, the Court may set aside a default 

or dismissal or the decision rendered thereon.

(d) Effect of Decision on Default or Dismissal: A

decision rendered upon a default or in consequence of a

dismissal, other than a dismissal for lack of

jurisdiction, shall operate as an adjudication on

the merits.

 Rule 149(a) provides as follows:

(a) Attendance at Trials: The unexcused absence

of a party or a party’s counsel when a case is called

for trial will not be ground for delay. The case may

be dismissed for failure properly to prosecute, or the

trial may proceed and the case be regarded as submitted

on the part of the absent party or parties.

Because the examiner could not determine whether the income

used to pay the loans showing petitioners as joint borrowers was

income of Mr. Tilley or of Mrs. Tilley, and to avoid “whipsaw”

and to protect the interest of the Government, the same loan

payments were determined to be income to each individual in the

separate notices of deficiency. If petitioners had cooperated

and explained the sources of payments of the loans, the income

would have been allocated between them and the duplication

eliminated. Without their cooperation or any other information,

however, there is no reasonable way to allocate the income. We

have considered the entire record in this case and conclude that

we have no basis for reducing the deficiencies, which were

reasonably determined by the examining agent. The deficiencies

will be sustained by reason of petitioners’ failure to appear for
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trial, failure to comply with the Court’s orders and Rules, and

failure otherwise properly to prosecute the case.

Respondent acknowledges the burden of production with

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

See sec. 7491(c). The examining agent testified that substitutes

for returns had been filed pursuant to section 6020(b) for 2000,

2001, and subsequent years for which no returns had been filed by

petitioners. Certifications under section 6020(b) were received

in evidence with respect to 2000 and 2001. Thus respondent’s

burden with respect to section 6651(a)(2) has been satisfied.

Despite the probability that petitioners had income from

their real properties during 1999 and that they failed to file a

return for that year or to pay estimated taxes for 2000, no

reliable evidence was presented with respect to petitioners’ tax

liability for 1999. We cannot, therefore, sustain the section

6654 addition to tax for 2000. See Wheeler v. Commissioner, 127

T.C. 200, 210-212 (2006), affd. 521 F.3d 1289 (10th Cir. 2008). 

The examining agent testified and presented records to

satisfy respondent’s burden of proving fraudulent failure to file

returns. Secs. 6651(f), 7454(a); Rule 142(b). Long-recognized

badges of fraud that are found in this case include the pattern

of failing to file returns, substantial unreported income,

implausible or inconsistent explanations of behavior, concealment

of assets, and failure to cooperate with tax authorities. In
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addition, petitioners admitted in their petition, as quoted

above, that they failed to maintain adequate records. See, e.g.,

Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986),

affg. T.C. Memo. 1984-601; Clayton v. Commissioner, 102 T.C. 632,

647-653 (1994); Grosshandler v. Commissioner, 75 T.C. 1, 19-20

(1980); Gajewski v. Commissioner, 67 T.C. 181, 199-200 (1976),

affd. without published opinion 578 F.2d 1383 (8th Cir. 1978). 

The evidence presented by respondent was clear and convincing. 

Because respondent has presented evidence of unreported

income, petitioners must come forward with evidence in support of

any claimed defenses; failure to do so allows the inference that

they have no defenses, such as nontaxable sources of funds or

deductible expenses. See Brooks v. Commissioner, 82 T.C. 413,

433 (1984), affd. without published opinion 772 F.2d 910 (9th

Cir. 1985). The penalty under section 6651(f) will be upheld.

Petitioners’ position in this proceeding has been frivolous

and groundless, and they have failed to exhaust administrative

remedies. A penalty under section 6673 in an amount not to

exceed $25,000 would be justified on this record. Under the

circumstances, however, the decision to be entered is a

sufficient sanction. 
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For the reasons explained above,

Decision will be entered

for respondent except for the

addition to tax under section

6654 for 2000.