T.C. Mem o. 2 01 6- 20 5

UNITED STAT ES TAX COURT

BRADLEY A. BALLA RD, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 13 29 3- 14
. Fi le d No ve m be r 9, 2 01 6.

Brad le y A. Ball ard , pro se. Bl ai ne Ch arl es Hol id ay , forres po nd en t.

MEMORANDUM OPINION PUGH, Ju dg e: In ano ti ce o f de fic ie nc y date d M arch 6, 2 01 4, re sp on de nt de te rm in edth e fo ll owi ng de fic ie nc ie s, ad di ti on s t o t ax , andpe na lt ie s:- 2 -

[* 2] Add it io n t o t ax Penal ty Year Defic ie nc y sec. 6 65 1( a)(1 ) sec . 66 63 20 05 $3 14 ,13 4 $7 8,5 34 $2 35 ,60 1 20 06 18 5,3 49 46,2 17 13 8,6 52 20 07 22 7,7 85 56,4 61 16 9,3 84 Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al Rev enue Co de of 1 98 6, as am en de d a ndineffe ctfor th e y ears inis su e. Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e. Am ou nt s ar e ro un de d t o the ne ares t d ol lar. Whe n thi s ca se was c al le d fr om th e tr ia l ca le nd ar i n S t. Paul , Min ne so ta , pe ti ti on er fa il edto ap pe ar. Co un se l fo r res po nd en t ap pe aredan d d es cri be d h is
co nv ers at io n wi th pe ti ti on er ea rli er tha t m orni ng as f ol lo ws: “ [Pet it io ne r] in di cat edhe ha d n o i nt en ti on of c om in g t hi s m orni ng * * *. An d h e in di cat edth at itwas h is in te nt io n t o try to res ol ve th is or wo rkwith t hi s o n t he co ll ect io n s id e th ro ug h e ithe r anin st al lm en t ag reem en t o r anoff er-i n- co m pr om is e.” Co un se l fo r res po nd en t furth er s ta te d tha t h e h adadvi se d p et it io ne r of hi s i nt en ti on to fil e a m ot io n fo r de fau ltan d e nt ry of d eci si on pu rs ua ntto Ru le 12 3( a). Res po nd en t fil edth e m ot io n fo r de fau ltan d e nt ry of d eci si on onFeb ru ary 24 , 20 16 . This cas e no w is be fo re the Co urt o n re sp on de nt ’s m ot io n.- 3 -

[* 3] Bac kg ro un d Pet it io ne r fai le d t o app ear wh enth e cas e was cal le d fo r tr ia l, as no te d abo ve . Pet it io ne r al so fai le d t o re sp on d t o o urord er t o s ho w cau se why fact s s etforth ina pr op os edst ip ul at io n b y

res po nd en t s ho ul d n otbe de em edadm it te d u nd er Ru le 91 (f). We the refo re m ad e o urord er t o s ho w cau se ab so lu te , andth os e fac ts are de em edadmit te d fo r pu rp os es of o urde ci si on on res po nd en t’s m ot io n. We in co rp or at e th os e fac ts by thi s re fere nc e. Pet it io ne r was a res id en t o f Mi nn es ot a atth e ti m e h is pe ti ti onwas fi le d. Pet it io ne r fi le d h is 20 05 , 20 06 , and20 07 Fo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, o n S ep te m

be r 8, 2 00 9, cl ai m in g afil in g s ta tu s o f si ng le an d n o de pe nd en ts . Atta ch edto hi s 2 00 5, 2 00 6, an d 2 00 7 F orm s 1 04 0 wer e Sch edul es C, Pro fitor Lo ss Fro m

Bu si ne ss , refl ect in g t he bu si ne ss na m e “ Qui k C op y ” an d rep orti ng gro ss rece ip ts of $ 10 1,4 00 , $1 28 ,60 0, an d $ 13 4,6 00 for20 05 , 20 06 , and 20 07 , res pe ct iv el y . Peti ti on er re po rte d n o t ax ab le in co m e fo r al l thr ee years. The ad dr es s re po rte d fo r Qui k C op y was o n Un iv ers ity

Avenue inSai ntPau l. On Oct ob er 1 4, 2 01 1, af

te r pe ti ti on er was sen t a l et te r in fo rm in g h im th at hi s 2 00 7 F orm

10 40 was b ei ng ex am in ed , pet it io ne r subm it te d F orm s 1 04 0X, Am en de d U.S. In di vi du al Inc om e Tax Return, fo r ta x years 2 00 5, 2 00 6, an d 2 00 7,
as joi ntreturns . Atta ch edto pe ti ti on er’s 2 00 5, 2 00 6, an d 2 00 7 F orm s 1 04 0X wer e- 4 -

[* 4] Sch edul es C refl ect in g g ro ss rece ip ts fro m “ Qui k C op y ” o f $1 ,16 5,8 09 , $9 55 ,13 3, an d $ 1,0 91 ,37 9 fo r 20 05 , 20 06 , and20 07 , res pe ct iv el y , andcla im in g subs tant ia l d educ ti on s fo r eac h year. Res po nd en t d idno t fi le th e Fo rm s 1 04 0X as th ey were s ub m itte d, b utth e g ro ss rece ip ts th atpe ti ti on er re po rte d o n h is am en de d Sch edul es C fo r ta x years 2 00 5 a nd20 07 m at chth e g ro ss rece ip ts th atres po nd en t us edinde te rm in in g p et it io ne r’s ta xabl e in co m e. On p et it io ne r’s am en de d re tu rn s th e st reetad dr es s re po rte d fo r Qui k C op y was o n R ai ni er Al co ve inW oo db ury , Mi nn es ot a. Pet it io ne r’s Qui k C op y

bu si ne ss was e ng ag edinco un te rfei ti ng in te ll ectua l pr op erty th ro ug h the il le ga l dup li cat io n a ndsal e o f DVDs an d C Ds. Pet it io ne r’s Qui k C op y

bu si ne ss de al s o nl y

incas h andm ai nt ai ns no bu si ne ss reco rd s. Res po nd en t d et erm in edpe ti ti on er’s i nc om e fo r 20 06 un de r th e b an k de po si ts m etho d. In20 06 pe ti ti on er h adto ta l d ep os it s i nt o fo urba nkacco un ts of $1 ,38 8,4 18 , whi chin cl ud edtax ab le de po si ts of $ 1,0 04 ,35 7. Pet it io ne r ti m el y

pe ti ti on edth is Co urt fo r red et erm in at io n.

Dis cu ss io n I. Burd enof P ro of Ord in ari ly, th e b ur de n o f pr oo f incas es be fo re the Co urt i s o n t he tax pa y er. Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). In u nr ep orte d i nc om e- 5 -

[* 5] cas es , th e Co m

m is si on er g en eral ly m

us t m ak e so m e m in im al ev id en ti ary sh owi ng to li nkth e ta xp ay er t o the di sp ut edin co m e. See Weim ers ki rchv. Co m m is si on er, 5 96 F.2d35 8, 3 60 (9t h C ir. 1 97 9) , rev ’g 67 T.C. 67 2 (1 97 7) ; s ee al so Dod ge v. Co m

m is si on er, 9 81 F.2d35 0, 3 53 -3 54 (8t h C ir. 1 99 2) , aff’g i n p art , rev ’g inpa rt 9 6 T.C. 1 72 (19 91 ). The C omm is si on er al so be ars th e in it ia l b ur de n of pro du ct io n wi th res pe ctto ad di ti on s t o t ax . See s ec. 7 49 1( c). The Co m m is si on er b ears th e b ur de n o f pr oo f as to pe na lt ie s fo r frau d. Se c. 74 54 (a); Ru le 14 2( b)
. II. Pet it io ne r’s Defi ci en ci es Sect io n 6 1( a) p ro vi de s tha t g ro ss in co m e in cl ud es “ al l i nc om e fro m wha te ve r so ur ce d eri ve d” . See al so Co m m is si on er v . Glen sh aw Glas s C o., 3 48 U.S. 42 6, 4 30 (19 55 ). A tax pa y er i s re qu ire d t o m ai nt ai n a de qu at e b oo ks an d re co rd s s uf fic ie ntto es tabl is h h is or h er i nc om e. See s ec. 6 00 1; DiLeo v. Co m m is si on er, 9 6 T.C. 8 58 , 86 7 (1 99 1) , aff’d, 9 59 F.2d16 (2dCir . 19 92 ). If a t ax pa y er fa il s t o m ai nt ai n t he se reco rd s, the Co m

m is si on er m ay

de te rm in e in co m e und er the ba nkde po si ts
m etho d. Di Leo v. Co m

mis si on er, 9 6 T.C. at86 7. A b an k d ep os itis pri m a fac ie
ev id en ce o f in co m e. Id . at 8 68 . The Co m m is si on er i s n otrequi redto fol lo w any

“ le ad s” su gg es ti ng th ata ta xp ay er m ig htha ve de du ct ib le ex pe ns es . Id. at87 2.- 6 -

[* 6] Ru le 12 3( a) p ro vi de s as fol lo ws:

(a) Def au lt : If a ny party

ha s fa il edto pl eador o th erwi se pr oc eedas p ro vi de d b y

th es e Ru le s o r as requi redby the Co urt, the n su chpa rty m ay

be he ldinde fau ltby the Co urt ei th er o n m ot io n o f an ot he r pa rty or o n the in it ia ti ve of t he Co urt. The reaf te r, th e Co urt m ay en te r a d eci si on ag ai ns t the de fau lt in g p arty , up onsu chterm s an d c on di ti on s as th e Co urt m ay de em pro pe r, orm ay

im po se su ch sa nc ti on s (s ee, e.g ., Rul e 1 04 ) as th e Co urt m ay de em ap pr op ria te . * * * Ru le 14 9( a) p ro vi de s as fol lo ws: (a) At te nd an ce atTrial s: The u ne xc us edab se nc e o f a p arty or a p arty ’s cou ns el when a cas e is cal le d fo r tr ia l wi ll no t b e g ro un d fo r de lay . The ca se m ay

be di sm is se d fo r fai lu re p ro pe rly to p ro se cu te , or th e tr ia l m ay

pro ceedan d t he cas e b e reg ard edas s ub m it te d o n t he pa rt o f th e ab se ntpa rty or p art ie s. Pet it io ne r is de em edto ha ve adm it te d t ha t h e und erre po rte d h is in co m e b y om itti ng gro ss rece ip ts an d o th er i nc om e an d fa il in g t o s ub st an ti at e expe ns es un de rlyin g d educ ti on s b ey on d tho se th atres po nd en t al lo wedfortax y ears 20 05 , 20 06 , and20 07 , res ul ti ng inde fic ie nc ie s o f $3 14 ,13 4, $ 18 5,3 49 , and$2 27 ,78 5 fo r 20 05 , 20 06 , and20 07 , res pe ct iv el y . Thes e d efi ci en ci es wil l b e su st ai ne d b ecau se of pe ti ti on er’s fai lu re t o app ear f ortri al , fai lu re t o c om

pl y with t he Co urt’s o rd ers an d R ul es , andfai lu re o th erwi se pro pe rly to p ro se cu te th e cas e.- 7 -

[* 7] III. Ad di ti on s t o Tax Und er Se ct io n 6 65 1( a)(1 ) Res po nd en t d et erm in edth atpe ti ti on er i s l iabl e fo r ad di ti on s t o t ax for20 05 , 20 06 , and20 07 un de r se ct io n 6 65 1( a)(1 ) fo r fai lu re t im el y to fil e a v al idreturn. The Co m m is si on er b ears th e b ur de n o f pr oduc ti on with re sp ectto a ta xp ay er’s li ab il ity for ad di ti on s t o t ax . See s ec. 7 49 1( c); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Once th e Co m m is si on er ca rri es th e b ur de n o f pr oduc ti on , th e ta xp ay er m

us t co m e fo rwardwith p ers ua si ve ev id en ce tha t the Co m m is si on er’s de te rm in at io n i s i nc orrector t ha t the tax pa y er h as anaffi rm at iv e d efen se . See Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 47
. Sect io n 6 65 1( a)(1 ) au th or iz es th e im po si ti on of a n a dd it io n t o t ax for fai lu re ti m el y to fil e a return u nl es s i t i s s ho wn tha t s uc h fa il ur e is du e to reas on ab le cau se an d n otdu e to wil lfu l n eg le ct . See Un it edSta te s v . Boyle, 4 69 U.S. 24 1, 2 45 (1 98 5) . A fail ur e to fil e a Fed eral in co m e ta x re turnti m el y is du e to reas on ab le
cau se if the tax pa y er ex erci se d o rd in ary bu si ne ss care an d p ru de nc e b ut ne ve rth el es s was un ab le to fil e th e return wi th in th e p res cri be d t im e, typic al ly for
reas on s o ut si de th e ta xp ay er’s co nt ro l. See McM ah anv. Co m m is si on er, 1 14 F.3d 36 6, 3 68 -3 69 (2dCir . 19 97 ), aff’g T.C. Me m o. 1 99 5- 54 7; sec . 30 1.6 65 1- 1( c)(1 ), Pro ced . & Adm in . Reg s.- 8 -

[* 8] Pet it io ne r was requi redto fil e Fo rm s 1 04 0 fo r 20 05 , 20 06 , and20 07 an d fai le d t o d o s o u nt il Sep te m be r 20 09 . See s ec. 6 01 2( a)(1 )(A). Acco rd in gl y , res po nd en t h as carr ie d h is bu rd enof p ro du ci ng ev id en ce s ho win g t ha t the ad di ti on s t o t ax un de r se ct io n 6 65 1( a)(1 ) are ap pr op ria te . Peti ti on er fa il edto in tro du ce an y

cred ib le ev id en ce s ho win g t ha t h e h adreas on ab le cau se for fai li ng to fil e h is Fo rm s 1 04 0 t im el y . Accor di ng ly, pe ti ti on er i s l iabl e fo r th e ad di ti on s t o ta x u nd er s ect io n 6 65 1( a)(1 ). IV. Frau d P en al ty Und er Se ct io n 6 66 3( a) Frau d i s an in te nt io na l wro ng do in g o n t he pa rt o f a t ax pa y er wi th th e sp eci fic purp os e to ev ad e a t ax be li ev edto be owed . Sad le r v. C omm is si on er, 1 13 T.C. 99 , 10 2 (1 99 9) . The fraudpe na lty is a ci vi l s an ct io n p ro vi de d p rimaril y as a sa feg ua rdforpro te ct io n o f rev enue an d t o re im bu rs e th e Gov ern m en t fo r th e he av y ex pe ns e o f in ve st ig at io n a ndth e lo ss res ul ti ng fro m th e ta xp ay er’s fraud
. Helv eri ng v. Mi tc he ll , 30 3 U.S. 3 91 , 40 1 (1 93 8) ; Sa dl er v . Comm is si on er, 1 13 T.C. at 1 02 . The Co m

mis si on er h as th e b ur de n o f pr ov in g fr au d b y cle ar an d
co nv in ci ng ev id en ce. Sec . 74 54 (a); Ru le 14 2( b) . The Co m m is si on er s at is fie s thi s bu rd enby sho win g tha t an un de rp aym en t ex is ts an d t ha t the tax pa y er i nt en de d t o co nc eal , m is le ad , or o th erwi se pre ve ntth e co ll ect io n o f ta xe s kno wn o r be li ev edto be owi ng . Katz v . Commis si on er, 9 0 T.C. 1 13 0, 1 14 3 (1 98 8) . If th e- 9 -

[* 9] Co m m is si on er es tabl is he s tha t an y po rti onof t he un de rp aym en t i s at tri bu tabl e to frau d, the en ti re u nd erp aym en t s ha ll be tre at edas a ttrib ut ab le to frau d and
subjec t t o a75 % pe na lty , exc ep t wi th res pe ctto an y po rti onth atth e ta xp ay er es tabl is he s (b y

a pr ep on de ran ce o f th e ev id en ce) i s n otatt rib ut ab le to frau d. Se c. 66 63 (a) and(b)
. The ex is te nc e o f frau d i s a que st io n o f fac t t o b e res ol ve d upo n c on si de rati onof t he en ti re re co rd . Kin g’s Co urt M ob il e Hom e Park, In c. v. Co m m is si on er, 98 T.C. 51 1, 5 16 (19 92 ). Frau d m ay be pro ve d b y

cir cu m st an ti al ev id en ce an d in fere nc es dra wn fr om

th e fac ts be cau se di rectpro of of atax pa y er’s i nt en t rarel y is
av ai labl e. Niedrin gh au s v . Comm is si on er, 9 9 T.C. 2 02 , 21 0 (1 99 2) . The ta xp ay er’s en ti re co ur se of c on du ctm ay est ab li sh th e requi si te frau du le ntin te nt . DiLeo v. Co m

mis si on er, 9 6 T.C. at87 4; Sto ne v. Co m m is si on er, 5 6 T.C. 2 13 , 22 4 (1 97 1) . Frau du le ntin te ntm ay be in ferr edfro m

va rio us ki nd s o f ci rcu m st an ti al
ev id en ce, o r “ba dg es of f rau d” . Brad fo rdv. Co m

m is si on er, 7 96 F.2d30 3, 3 07 (9 th Cir . 19 86 ), aff’g T.C. Me m o. 1 98 4- 60 1. Ov er the y ears , cou rts ha ve de ve lo pe d ano ne xc lu si ve li stof f act or s tha t d em on st rat e fraudul en t i nt en t. The se ba dg es of f

rau d i nc lu de : (1 ) un de rs ta ti ng in co m e, (2 ) m ai nt ai ni ng in ad equa te reco rd s, (3 ) fai li ng to fil e ta x re tu rn s, (4 ) gi vi ng im pl au si bl e o r in co ns is te nt ex pl an at io ns of b eh av io r, (5 ) co nc eal in g a ss et s, (6 ) fai li ng to co op erat e wit h t ax- 10 -

[* 10 ] au th or it ie s, (7 ) en ga gi ng inil le ga l ac ti vi ti es , (8) att em pt in g t o c on ceal il le ga l act iv it ie s, (9 ) de al in g i n c as h, an d (1 0) fai li ng to m ak e es ti m at edtax pa y m en ts . See, e.g ., Spi es v. Un it edSta te s, 3 17 U.S. 49 2, 4 99 (19 43 ); R eck li ti s v . Co m m is si on er, 9 1 T.C. 8 74 , 91 0 (1 98 8) ; s ee al so McGra w v. Co m m is si on er, 3 84 F.3 d 9 65 , 97 1 (8 th Cir . 20 04 ) (ci ti ng Sp ie s an d B rad fo rd ), aff’g Bu tl er v . Co m m is si on er, T.C. Mem o. 2 00 2- 31 4. W e h av e h el d tha t the Co m m is si on er m ay

sat is fy hi s b ur de n o f pr ov in g li ab il ity for th e fraudpe na lty

with d eem edadm is si on s. See Sm ith v
. Co m m is si on er, 9 1 T.C. 1 04 9, 1 05 2- 10 53 (19 88 ), aff’d, 9 26 F.2d14 70 (6t h C ir. 19 91 ); M ars ha ll v. Co m

m is si on er, 8 5 T.C. 2 67 (19 85 ). In num ero us cas es we ha ve rel ie ve d the Co m

mis si on er o f th e b ur de n o f pu tt in g o n h is cas e fo r th e pe na lty for frau d wh ere d eem edadm is si on s h av e res ul te d fr om a ta xp ay er’s fai lu re to res po ndto cert ai n p ro cedur al de vi ces co nt ai ne d i n o urrul es . See Sm ith v
. Co m m is si on er, 9 1 T.C. at10 55 . W e rev ie w th e fac ts est ab li sh edth ro ug h d eem ed adm is si on s o r st ip ul at io n t o d et erm in e whe th er the y are s uf fic ie ntto su st ai n a fin di ng of f

rau d. Id . at 1 05 8- 10 59
. Pet it io ne r si gn ifi can tl y

un de rrep orte d h is in co m e, rep orti ng a ne ga ti ve ta xabl e in co m e fo r al l thr ee years. See Ots uk i v . Comm is si on er, 5 3 T.C. 9 6, 1 07
- 10 8 (1 96 9) (ho ld in g tha t u nd erre po rti ng in co m e b y a subs tant ia l am ou ntforfiv e- 11 -

[* 11 ] co ns ecu ti ve y ears is stro ng ev id en ce o f anatt em ptto de frau d the Gov ern m en t). In ad di ti on , pet it io ne r’s in co m e was de riv edfro m th e il le ga l dupl ic at io n a ndsal e o f DVDs an d C Ds, an d h is bu si ne ss de al t ex cl us iv el y incas h. See Aro ut h v . Commis si on er, T.C. Mem o. 1 99 2- 67 9 (h ol di ng th atth e ta xp ay er’s act iv ity of i ll eg al ly obt ai ni ng an d s el li ng pre sc rip ti on dru gs , fai li ng to m ai nt ai n reco rd s, an d d eal in g o nl y incas h was su ffi ci en t ev id en ce t o h ol d t ha t the ta xp ay er’s und ers ta te m en ts were at tri bu tabl e to frau d) . Peti ti on er’s fai lu re t o k eep reco rd s fo r hi s b us in es s al so is a ba dg e o f frau d. Se e Bra df or d v . Comm is si on er, 79 6 F .2dat 3 07 -3 08
. Whe n the cas e was cal le d fr om th e cal en da r, we ex pr es se d c on cern with the
wor di ng of t he pro po se d s ti pu la ti on (ch arac te riz in g p et it io ne r’s bu si ne ss act iv it ie s as il le ga l), b utpe ti ti on er was gi ve n a n o pp ortu ni ty to co nt es t the is su e. Inou r or de r to pe ti ti on er t o s ho w cau se why th e m at te rs setforth inres po nd en t’s Ru le 91 (f) m ot io n s ho ul d n otbe de em edadm itte d fo r pu rp os es of thi s ca se , we warn ed hi m of t he co ns eque nc es of n otco nt es ti ng res po nd en t’s m ot io n. We st at ed : “ If n o res po ns e is fil edwith the Co urt wi th in th e p eri od s s pe ci fie d abo ve with re sp ectto
an y m at te r orpo rti on th ereo f, or if the res po ns e is ev as iv e o r no t fa irl y di rect edto th e p ro po se d s ti pu la ti onor p orti on th ereo f, su chm at te r orpo rti on th ereo f m ay be de em edst ip ul at ed ”. Co un se l fo r res po nd en t al so no ti fie d p et it io ne r th ata m ot io n- 12 -

[* 12 ] forde fau ltwou ldbe fil edif h e d idno t ap pe ar fo r tr ia l. Pet it io ne r can no t
es cap e fraudpe na lt ie s s im pl y by fail in g t o re sp on d t o t he Co urt’s o rd ers or t o sh ow up t o c on te sthi s ca se . The d eem edadmis si on s p res en te d b y res po nd en t an d
no t co nt es te d b y

pe ti ti on er ar e cl ear a ndco nv in ci ng ev id en ce o f frau d wi th res pe ct to each y ear i n i ss ue , sat is fy in g re sp on de nt ’s bu rd enof p ro of . W e th eref

or e h ol d th atpe ti ti on er i s l iabl e fo r th e fraudpe na lt ie s u nd er s ect io n 6 66 3. Any con te nt io ns we ha ve no t ad dr es se d we d eem irr el ev an t, m oo t, o r m eri tl es s. To re fle ctth e fo reg oi ng , An ap pr op ria te ord er an d d eci si on wil l b e en te red
.