Court Opinion

ID: 8207101
Source: CourtListenerOpinion
Date Created: 2022-09-19 00:03:21.388327+00
Date Added: 2024-06-11T16:41:22.116197
License: Public Domain

United States Tax Court

                              T.C. Memo. 2022-95

  ESTATE OF BRETT L. CLEMONS, SR., DECEASED, BRETT LEE
       CLEMONS, JR., PERSONAL REPRESENTATIVE,
                        Petitioner

                                        v.

              COMMISSIONER OF INTERNAL REVENUE,
                          Respondent

                                   —————

Docket No. 25029-16.                                 Filed September 14, 2022.

                                   —————

Eric W. Smith and Judith S. Schutzbach-Lambert, for petitioner.

Sean P. Deneault, Jeremy D. Cameron, and Mark J. Tober, for
respondent.

        MEMORANDUM FINDINGS OF FACT AND OPINION

      BUCH, Judge: Brett Clemons, Sr., 1 opened his first numbered
Swiss bank account in 2001, and he used that account to hide money
from his then wife and the Internal Revenue Service. In 2003 through
2009, the years at issue, he funneled into numbered foreign accounts
income that he did not report on his Forms 1040, U.S. Individual Income
Tax Return. Neither did he report investment income earned in those
accounts. And on various tax forms that required the disclosure of those
accounts, he expressly denied holding any foreign accounts. Despite Mr.
Clemons’s efforts to conceal his numbered accounts, the Commissioner
discovered them and determined deficiencies, accuracy-related

        1 Brett Clemons, Sr., passed away on March 27, 2021, after the trial in this

case. Although Brett Clemons, Jr., is the personal representative of the resulting
estate, he was not involved in the underlying facts or the trial of this case. All
references in this Opinion to Mr. Clemons are references to Brett Clemons, Sr.

                                Served 09/14/22
                                   2

[*2] penalties, civil fraud penalties, and additions to tax. Mr. Clemons
challenged the Commissioner’s income determinations and
affirmatively asserted he is entitled to various deductions. The
Commissioner established by clear and convincing evidence that Mr.
Clemons fraudulently underreported his income. And because he
destroyed or caused the destruction of his records, Mr. Clemons failed to
establish his affirmative claims.

                         FINDINGS OF FACT

        Brett Clemons was born in Florida and resided there for most of
his life. He graduated from the University of South Florida in 1980 with
a bachelor’s degree in microbiology. His coursework included computer
science and math.

       Mr. Clemons took what he learned in his computer science
coursework and turned it into a career. In the mid-1980s, after working
as a programmer for various companies, he started Softwarewizardry,
Inc. (SWI), through which he continued providing programming
services. He personally handled SWI’s finances and taxes. By 2000, he
was working as an independent contractor for Hewlett-Packard U.S.
(HP USA).

I.    Mr. Clemons’s UBS Account

       In 2001, Mr. Clemons decided to open a Swiss bank account. At
the time, he was married with children and worked for HP USA in
Tampa, Florida. He hid his plans about opening a foreign bank account
from his wife because he intended to get a divorce, to exclude his wife
from the contents of that account, and “to move to Europe without [his]
wife.”

      Mr. Clemons put his plan into action. He found a Swiss financial
consultant on the internet and requested his services. He then travelled
to Lausanne, Switzerland, where the consultant introduced him to a
representative of Union Bank of Switzerland (UBS).

       On April 10, 2001, Mr. Clemons opened a UBS investment
account. He signed multiple account opening documents. The documents
were in English and included an acknowledgement of U.S. tax liability,
an investment management authorization, a hold-mail agreement, and
a U.S. securities waiver. Mr. Clemons was the account’s sole owner and
signatory.
                                   3

[*3] The UBS account had several features that helped Mr. Clemons
shield it from detection. The account was numbered, meaning UBS
replaced Mr. Clemons’s name as the accountholder with a number. By
entering into a U.S. securities waiver, Mr. Clemons expressly waived his
right to invest in U.S. securities, thereby avoiding U.S. tax reporting
requirements for income attributable to U.S. securities. Through a hold-
mail agreement, Mr. Clemons paid UBS a fee to hold his account
correspondence and to destroy any unclaimed mail after holding it for
three years. As a result, UBS never mailed account statements to Mr.
Clemons in the United States.

       Mr. Clemons invested through his UBS account. During his first
two years as an accountholder, he deposited over $400,000 and
authorized UBS to invest those funds. Focusing on an investment
horizon in excess of 20 years, he selected a balanced investment strategy
that offered long-term “growth of assets, interest and dividend income
[and] capital gains.” He distributed his funds across multiple categories
of investment products, including market funds, bonds, and private
equity funds. Many of those products are considered “passive foreign
investment company” (PFIC) assets.

       Over the years, Mr. Clemons followed careful steps to access his
UBS funds. He periodically traveled to Switzerland and met with a UBS
representative. On these visits, he withdrew funds and requested and
received checks from UBS. He never wired money directly from UBS to
his own domestic accounts.

II.   Mr. Clemons’s Employment and Tax Reporting

       Beginning in 2003, Mr. Clemons experienced a series of life and
career changes. In January 2003, Mr. Clemons divorced his wife. He did
not disclose his UBS account to his wife or to the Florida court that
oversaw the divorce. Mr. Clemons also began working for various
companies, some of which were outside the United States. He often
caused his compensation to be directed into his UBS account. At times
he provided services to foreign employers while residing in Florida, and
at other times he resided abroad, but he always maintained a residence
in Florida.

      A.     2003

        Mr. Clemons experienced a shift in his employment in 2003, but
little changed. He had been working as an independent contractor for
HP USA. When that contract ended, he continued working for HP, but
                                            4

[*4] the contracting party changed to Hewlett-Packard Australia (HP
Australia). Although the contracting party changed, Mr. Clemons still
worked on the same project he had worked on at HP USA and continued
to live in Florida.

      There is no documentary evidence that Mr. Clemons paid
Australian taxes on the income he earned from HP Australia. In 2003,
HP Australia paid him $151,481, which was deposited directly into his
UBS account. HP Australia paid him through an Australian payroll
company, Entity Solutions Services Pty Ltd (Entity Solutions). He
provided no documents showing that Entity Solutions withheld
Australian taxes from his paycheck or paid tax to Australia on his
behalf. He did not file Australian tax returns.

       Mr. Clemons timely filed his 2003 tax return. He personally
prepared the return using Turbo Tax return preparation software. He
did not report the income from HP Australia that was deposited into his
UBS account. Neither did he report the investment income he earned on
that account or make any elections with respect to that income. See
I.R.C. §§ 1295 and 1296. 2 Mr. Clemons reported adjusted gross income
(AGI) of $52,000, which consisted entirely of wages he paid himself from
SWI reported on Form W–2, Wage and Tax Statement. He reported
taxable income of $38,900.

       In addition to failing to report income paid into or earned by his
UBS account, Mr. Clemons also failed to disclose the account’s existence.
Because he did not include a Schedule B, Interest and Ordinary
Dividends, with his return, he did not disclose the UBS account on that
form. Neither did he file a Treasury Form TD F 90-22.1, Report of
Foreign Bank and Financial Accounts (FBAR), reporting his financial
interest in his UBS account.

        B.      2004

       Mr. Clemons continued working for HP Australia in 2004 while
residing in Florida, earning $252,858. Like his 2003 earnings, those
funds were deposited directly into his UBS account. In June, Mr.
Clemons’s teenage daughter was murdered. He was grief stricken, and

        2 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. All monetary amounts are rounded to the nearest dollar.
                                   5

[*5] her death ushered in a difficult period in his personal life.
Throughout, he continued to manage his professional and financial
affairs. In October, he visited UBS in Switzerland to review his account.
While there, he requested and received a check for $75,000, and his
account representative recorded in his notes that Mr. Clemons
expressed satisfaction with his investment portfolio’s performance.

       Mr. Clemons timely filed his 2004 return, which he personally
prepared using Turbo Tax. He reported AGI of $54,000, consisting
entirely of wages from SWI. He did not report the income paid directly
into or earned by his UBS account. He did not include a Schedule B with
his return and accordingly did not report his UBS account on that form.
Neither did he report that account’s existence on an FBAR.

      C.     2005

       In 2005, Mr. Clemons continued working for HP Australia while
residing in Florida, earning $253,383, which was deposited directly into
his UBS account. Again, he visited UBS in Switzerland to review his
account. He requested and received a check for $65,000 and, according
to his account representative, expressed satisfaction with his
investment portfolio’s performance and UBS’s service.

       Mr. Clemons untimely filed his 2005 return, which he personally
prepared using Turbo Tax. He reported AGI of $57,160, which consisted
primarily of wages from SWI. He did not report the income paid directly
into or earned by his UBS account. He did not include a Schedule B with
his return and accordingly did not report his UBS account on that form.
Neither did he report that account’s existence on an FBAR at that time.

      D.     2006

       In the first half of 2006, Mr. Clemons continued working for HP
Australia while residing in Florida, earning $117,670. He also continued
his pattern of traveling to Switzerland to visit UBS. In February he
traveled to UBS, where he requested and received a check for $167,000
and, according to his account representative, expressed satisfaction with
his investment portfolio’s performance and asset allocation. He also
signed a “Confirmation of Receipt UBS Retained Mail.” His signature on
that form confirmed that UBS presented his account correspondence to
him in a sealed envelope and that he authorized UBS to destroy any
mail he left behind.
                                     6

[*6] After Mr. Clemons’s HP Australia contract ended, he decided to
try his hand as a cattle rancher. Operating as Alafia Cattle Co. (Alafia),
he purchased farm and veterinary supplies, a Cub Cadet mower, and a
Honda four-wheeler to get around his Florida property.

      Later that year, he visited UBS in Switzerland again to review
his account. He withdrew $350,000 and, according to his account
representative, expressed satisfaction with his investment portfolio’s
performance. He signed more documents, including a “Confirmation of
Receipt UBS Retained Mail” and a “Master agreement for derivatives
trading and forward transactions.”

       Mr. Clemons timely filed his 2006 return, which he personally
prepared using Turbo Tax. He reported AGI of $79,666, which consisted
of $16,000 of wages from SWI, $1,510 of taxable interest from a domestic
bank account, $90,878 of qualified dividends, and a loss of $28,722 from
Schedule C, Profit or Loss From Business. That loss stemmed from
Alafia, for which Mr. Clemons reported no income, only expenses.

       Mr. Clemons did not report the income deposited into or earned
by his UBS account, and he did not report the account’s existence.
However, for the first time during the years at issue, he included a
Schedule B with his return. On that form, he reported his domestic
interest income. Part III, line 7a, of Schedule B asks whether the
taxpayer had “an interest in . . . a financial account in a foreign country,
such as a bank account, securities account, or other financial account”
at any time during 2006 and references the instructions for filing an
FBAR. In response to that question, Mr. Clemons answered “No.” He did
not disclose his UBS account on Schedule B, and he did not timely file
an FBAR for 2006. Neither did he make any election under section 1295
or 1296.

      E.     2007

       In 2007, Mr. Clemons continued cattle ranching with little
success. Using funds he had withdrawn from UBS in 2006, he purchased
land adjacent to his Florida home and kept a few horses and cattle there.
He looked after the animals and quickly discovered that cattle ranching
is tough work. According to Mr. Clemons, the business lasted for “about
a year” from its inception.

      After the failed cattle business, Mr. Clemons got back into
computer programming and continued his pattern of traveling to
Switzerland. He had a short-term job, earning wages of $47,095 from
                                   7

[*7] Volt Technical Resources, LLC (Volt), in California. He deposited
his compensation from Volt directly into his domestic account. He also
conducted an IT consulting business through a new company, Applied
Software Concepts, Inc. (ASCI), earning $8,000. In December, he visited
UBS to review his account. He withdrew 7,500 euro and, according to
his account representative, expressed satisfaction with his investment
portfolio’s performance.

      Mr. Clemons untimely filed his 2007 return, which he personally
prepared using Turbo Tax. He reported AGI of $2,249. He included
$47,095 of wages from Volt and income from two Schedule C
businesses—Alafia and his work as an IT consultant. For Alafia, he
reported a loss of $26,125. For his work as an IT consultant, he reported
a net profit of $8,000, corresponding to a Form 1099–MISC,
Miscellaneous Income, issued by ASCI for that amount. He reported
$2,001 of taxable interest from a domestic bank account. Finally, Mr.
Clemons reported a net operating loss (NOL) carryover from 2006 of
$28,722; that amount represented the NOL from Alafia that he fully
used in 2006.

      Again, Mr. Clemons did not report the income earned by his UBS
account, or that account’s existence, despite having included a
Schedule B with his return. On the Schedule B, he reported only
domestic interest income and indicated he had no foreign financial
accounts during 2007. He did not timely file an FBAR. And he did not
include an election under section 1295 or 1296.

      F.     2008

       In January 2008, Mr. Clemons started working for Axantis, a
software company in Pirmasens, Germany, earning $139,794. He
worked as a subcontractor for Axantis, which contracted directly with
other companies, including the U.S. Army. On the basis of timesheets
Mr. Clemons submitted, Axantis billed the appropriate company for his
services and then paid him. Axantis also reimbursed certain expenses if
he reported those expenses with his timesheets. Axantis reimbursed Mr.
Clemons for $12,642 of the total expenses of $19,400 he submitted. He
incurred unreimbursed expenses of $6,758.

      Axantis directly deposited Mr. Clemons’s compensation at a new
bank account he opened in Germany at Volks Reich-Bank Pirmasens
(VR-Bank). It was a savings account for which he received account
statements, and he typically accessed it by making ATM withdrawals.
                                         8

[*8] Using the cash he withdrew, he would buy groceries, send money to
the United States, and pay rent for an apartment in Pirmasens (1,500
euro/month). In a series of wire transfers that began in January and
ended in August, he also wired $86,727 to an acquaintance in Florida.
Meanwhile, he charged thousands of dollars to ASCI’s American
Express, including amounts paid to hotels and restaurants in
Amsterdam, Paris, and Frankfurt. 3

       In October 2008, Mr. Clemons stopped working for Axantis and
visited UBS in Switzerland. Around that time, UBS had begun advising
U.S. persons of new reporting requirements. At UBS, he requested a
$20,000 check and signed a “Confirmation of Receipt UBS Retained
Mail.” While he was there, an account representative explained the “new
business model” UBS was using for accounts held by U.S. persons. After
that discussion, Mr. Clemons directed UBS to liquidate his investment
portfolio, hold the funds, and await further instructions.

       Mr. Clemons left UBS and opened a second Swiss bank account
the same day. He walked to nearby Dresdner Bank (Switzerland), Ltd.
(Dresdner), and opened a numbered investment account. Like UBS,
Dresdner agreed to hold account correspondence. Mr. Clemons directed
UBS to transfer his funds to Dresdner. UBS completed his request
through two transfers (one in November and another in December)
totaling $550,063, which Mr. Clemons mostly invested in mutual funds.

      After his trip to Switzerland, Mr. Clemons returned to the United
States briefly at the end of 2008. The UBS representative mailed the
$20,000 check Mr. Clemons had requested to his home in Florida on
December 4, 2008.

       Mr. Clemons untimely filed his 2008 return, which he personally
prepared using Turbo Tax. He included income from two Schedule C
businesses, Alafia and his work in Germany as a “project engineer.” For
Alafia, he reported a loss of $9,997, and for his work as a project
engineer, he reported net profit of $24,069. He also reported $37 of
taxable interest from domestic accounts. Lastly, as he had in 2007, Mr.
Clemons claimed a $28,722 NOL carryover that originated with Alafia
in 2006 and that he had used twice before, first as a loss in 2006 and
again as an NOL carryover in 2007.

       3 He testified that he incurred those expenses in connection with his work for

Axantis in Germany.
                                    9

[*9] Mr. Clemons’s reporting of his income as a project engineer in
Germany is notable. On Schedule C, he reported gross receipts of
$139,794. He reduced that income by expenses totaling $115,725,
consisting of $12,000 for rent or lease of “other business property” and
$103,725 for travel, meals, and entertainment. These items netted to the
$24,069 net profit he reported on Schedule C. On a separate Form 2555,
Foreign Earned Income, he reported gross receipts of $139,794 as
foreign earned income and claimed an exclusion of $74,635. Mr.
Clemons’s reporting had the effect of both reducing his gross receipts of
$139,974 by $115,725 of expenses and excluding $74,635 of those gross
receipts from income, therefore excluding from income most of the gross
receipts for which he reported Schedule C expenses.

      Mr. Clemons’s reporting of his interest income for 2008 is also
notable. He included a Schedule B with his return on which he reported
domestic interest. But unlike prior years’ returns, his 2008 return
reported that he held foreign financial accounts. However, on the line
used to identify the foreign country or countries where he held any
accounts, Mr. Clemons disclosed Germany but not Switzerland.
Although his printed Turbo Tax instructions showed that he prepared
an FBAR and those instructions directed him to “file it on or before June
30, 2009,” he did not timely file an FBAR. He did not include an election
under section 1295 or 1296.

      G.     2009

       Mr. Clemons’s travel and work activity in 2009 is unclear. At trial,
he gave conflicting testimony, which was also inconsistent with the
documentary record. However, he lived in Amsterdam from January
through June 2009. In Amsterdam he held a savings account at ABN
AMRO, which he used to pay personal expenses and for which he did not
receive account statements. In August 2009, he visited Germany for 40
days, and while there, he earned $9,600 working on a short-term project.
In September 2009 he returned to Florida permanently.

       Mr. Clemons continued to hold an account at Dresdner
throughout 2009. He frequently shifted his assets within the account by
selling interests in the money market funds, converting U.S. dollars to
euro, and purchasing financial products. He kept the account open until
December 30, 2010, when Dresdner issued him a check for the balance
of $543,766.
                                   10

[*10] Mr. Clemons untimely filed his 2009 return, which he personally
prepared using Turbo Tax. He reported negative AGI. He included
$9,600 of wages and attached a Form W–2 issued by Application
Development Resources in Alpharetta, Georgia, to his return. He also
included income from two Schedule C businesses, Alafia and
“softwarewizardry.nl.” For Alafia, he reported a net loss of $11,339. For
softwarewizardy.nl, he reported a net loss of $63,775, which consisted
entirely of expenses—including, among others, $44,975 for rent or lease
and $15,813 for travel, meals, and entertainment. He also reported
taxable interest from a domestic account. Lastly, for the fourth time, Mr.
Clemons claimed a $28,722 loss that originated with Alafia in 2006 and
that he had previously used in 2006, 2007, and 2008.

      Like Mr. Clemons’s testimony regarding his 2009 activities, his
income reporting was inconsistent. Although he reported $9,600 of
wages from a company in the U.S. state of Georgia on his return, he
reported the same amount as foreign income from self-employment in
Germany (as a “program engineer”) on Form 2555. He claimed an
exclusion for $9,600, thus excluding an amount equal to his wages from
income.

       Mr. Clemons’s reporting of his interest income is also notable. He
included a Schedule B with his return on which he reported domestic
interest. He reported that he held a foreign financial account in the
Netherlands but not Switzerland. He did not include any income from
the Dresdner account anywhere on his return. Although his printed
Turbo Tax instructions showed that the software had prepared an FBAR
and instructed him to “file it on or before June 30, 2010,” he did not
timely file an FBAR. He did not include an election under section 1295
or 1296.

III.   IRS Examination

       A.    Discovery of the UBS Account

       In 2011, Mr. Clemons’s returns became the subject of an IRS
examination. Before getting into the details of that examination, context
is helpful to understand how this came about.

       In 1996, the United States and Switzerland entered into      a tax
treaty whereby they agreed to exchange taxpayer information to      avoid
double taxation and prevent fraud. Pursuant to that treaty,          UBS
entered into an agreement with the IRS in January 2001.             That
                                   11

[*11] agreement established reporting procedures to help the IRS
identify UBS’s unnamed U.S. clients.

       Records and testimony provided in connection with a
congressional investigation show that in 2001 or 2002, UBS took steps
to limit the agreement’s effect. UBS began dividing U.S. clients into two
groups: those who were willing to report their accounts to the IRS and
those unwilling to do so. UBS representatives helped the unwilling
group maintain “anonymity” and “fraudulently evade large amounts of
tax.” UBS’s practices garnered scrutiny from the U.S. Department of
Justice, which launched an investigation that was publicized in a July
2008 congressional hearing held on the matter. In the wake of these
events, UBS stopped providing “offshore banking or securities services
to U.S. residents.” It was also in 2008 that Mr. Clemons closed his UBS
account and moved his assets to Dresdner.

       The IRS also tried to protect its interests as events unfolded. In
summer 2008, the IRS issued UBS a summons that requested
information about UBS’s U.S. accountholders in 2002 through 2007.
UBS responded with certified records, including account opening
documents, account statements, and correspondence. Through those
records, the IRS discovered Mr. Clemons’s UBS account. The records
were assigned to revenue agents for examination and form a significant
part of the record before us. The examination began in May 2011.

      B.     Filing of Delinquent FBARs

      In July 2011, after the examination began, Mr. Clemons filed
delinquent FBARs for 2005 through 2009. Those FBARs were false,
incomplete, and misleading. The 2005 through 2007 FBARs called the
UBS account a Swiss bank account instead of a securities account. The
2008 FBAR called the Dresdner account a German bank account—
without an account number—instead of a Swiss securities account.
However, it properly identified the VR-Bank account. The 2009 FBAR
again misidentified the Dresdner account but properly identified the
ABN AMRO account, including its account number.

      C.     Examination Interview

       In August 2011, revenue agents conducted an in-person interview
with Mr. Clemons and his attorney. At that interview, he provided some
receipts for his expenditures in 2007 through 2009 and account
statements from VR Bank. He informed revenue agents that he
otherwise lacked account statements but instead maintained an Excel
                                   12

[*12] spreadsheet, which he referred to as a ledger, to keep track of his
foreign account balances.

       During the interview, Mr. Clemons misled revenue agents about
the UBS account. He falsely informed them that he had opened the
account for privacy reasons, more than 20 years earlier; the account-
opening records were in German; the account was an unnumbered, non-
interest-bearing, savings account; he made only one withdrawal; and the
last deposit was in 2005. He failed to mention his HP Australia
compensation deposited in 2003 through 2006. When asked why he had
failed to report the account on Schedule B or an FBAR, he claimed
ignorance of having earned income to report.

      D.     Information Document Requests and Summons

      After the interview, a revenue agent issued information document
requests (IDRs) to Mr. Clemons and his attorney. The IDRs requested
bank account information (including bank statements and identification
of deposits, transfers, and credits) and income information (such as
Forms 1099, copies of client contracts, or other statements showing how
much income he received).

      Mr. Clemons gave an incomplete response. He failed to provide
UBS account statements, information regarding his income, or his
personal account ledger. A revenue agent eventually issued a third-
party summons to Mr. Clemons’s attorney, who provided the records in
her possession.

      E.     Bank Deposits Analysis and Penalty Approval

      In July 2012, a revenue agent analyzed deposits into Mr.
Clemons’s bank accounts. The analysis included foreign and domestic
accounts. The revenue agent discovered unreported income, including
HP Australia compensation, gains from trading PFIC assets, and
unidentified deposits in domestic accounts. The revenue agent
categorized domestic deposits as gross receipts from Schedule C unless
substantiated with a nontaxable source. The revenue agent calculated
PFIC gain and tax according to section 1291.

     The revenue agent decided to assert penalties under sections
6662 and 6663. He prepared Forms 4549, Income Tax Examination
Changes, commonly known as a revenue agent report (RAR), asserting
those penalties. The revenue agent’s immediate supervisor
communicated those penalties to Mr. Clemons on November 12, 2014,
                                               13

[*13] when he mailed him a Letter 5153 and enclosed the RAR with that
letter. The supervisor signed the Letter 5153.

IV.     Notice of Deficiency

       The Commissioner mailed Mr. Clemons a notice of deficiency on
August 25, 2016. The Commissioner determined tax deficiencies,
additions to tax, and penalties as follows:

                                               Addition to Tax/Penalties
      Year   Deficiency
                              I.R.C. § 6651(a)(1)        I.R.C. § 6662         I.R.C. § 6663

   2003         $53,081                —                          —                    $39,811

   2004         112,892                —                          —                     84,669

   2005            91,650                  $18,330                —                     68,738

   2006          69,150                —                              $515              48,794

   2007            51,838                      9,942              —                     35,035

   2008            68,428                   17,107                     325              39,058

   2009             7,851                      1,963              —                      5,888

     The deficiency determinations are largely based on unreported
income from the bank deposits analysis. As relevant to this Opinion, the
Commissioner determined taxable income as follows:

      Year    2003           2004       2005            2006          2007      2008       2009

 Gross       $151,481       $252,858   $253,383        $117,670       $5,076   $66,328    $43,544
 Receipts

 Ordinary        555           1,611       3,082          3,802        2,712     2,767      —
 Dividends

 I.R.C.         6,172         30,636       7,343         22,616       18,176    13,838      —
 § 1291
 PFIC
 Gain

 Taxable       —              —            —             —             —         —          2,226
 Interest
                                     14

[*14] The Commissioner also disallowed various deductions that Mr.
Clemons claimed on Schedule C for Alafia (C1) and for his IT activities
(C2). As relevant to this Opinion, the Commissioner disallowed the
following amounts:

  Year       2003    2004    2005     2006      2007      2008      2009

Sched. C1     —       —       —       $17,158    —        $11,497   $13,074

Sched. C2     —       —       —           —      —        115,725    60,788

NOL           —       —       —           -—    $28,722    28,722    28,722
Carryover

      The Commissioner reduced Mr. Clemons’s 2008 foreign earned
income exclusion but allowed a foreign housing deduction and
determined additional self-employment tax for each year except 2007
and 2009.

       The Commissioner determined section 6651(a)(1) additions to tax
for untimely filing returns for 2005 and 2007 through 2009.

      The Commissioner determined that section 6662 accuracy-related
penalties applied to portions of the underpayments for 2006 and 2008.
Those portions were attributable to expense deductions Mr. Clemons
claimed on Schedules C for Alafia that the Commissioner disallowed and
determined to be negligent. Although the Commissioner disallowed all
expense deductions for Alafia for 2008, he determined the penalty with
respect to the disallowance of only some of those deductions.

       The Commissioner determined section 6663 civil fraud penalties
for all the years at issue. For 2006 through 2009, the Commissioner
determined section 6662 penalties as alternatives to the fraud penalties.

       While residing in Florida, Mr. Clemons timely filed a petition for
redetermination of the deficiencies. He disputes the entire amount of the
deficiencies, penalties, and additions to tax for each year.

V.       Mr. Clemons’s Credibility

      We tried this case in February 2021. Mr. Clemons’s trial
testimony was self-contradictory, inconsistent with the documentary
record, and not credible. For example, he offered shifting explanations
                                   15

[*15] for opening a UBS account. During the examination, he said he
had opened the account for privacy reasons. At trial, he testified that he
had opened the account to hide money from his then wife. He also
testified that he had long considered moving to Europe and opened the
Swiss account to facilitate eventually moving there. Yet when he moved
to Europe, he opened accounts in the local jurisdictions where he
resided.

       He claimed ignorance of his reporting requirements, but his
claimed ignorance was inconsistent with his actions. He testified that
he was unaware of Schedule B and FBAR requirements, but he disclosed
his Netherlands and German bank accounts on his returns and reported
income from those accounts. And the Turbo Tax records show that the
software prepared FBAR forms and instructed Mr. Clemons how and
when to file them. Through his testimony, Mr. Clemons implied that
UBS invested his money without his knowledge or consent, but he
signed various investment-related forms, including an investment
management authorization. Those forms were in English (not German,
as he told revenue agents and the Court).

                               OPINION

      The principal issues in this case are (1) the determination of Mr.
Clemons’s income tax liabilities for 2003 through 2009 and (2) whether
those liabilities are subject to section 6663 civil fraud penalties.
Redetermining Mr. Clemons’s income tax liabilities requires us to
consider various issues, including: whether he may retroactively elect to
tax his PFIC income under section 1296; whether the Commissioner’s
determination of unreported gross receipts included nontaxable sources;
whether he may deduct previously unreported expenses from his HP
Australia income; whether he may deduct various disallowed Schedule
C expenses; whether he may offset investment income with expenses
and capital losses; whether he may deduct his foreign housing expenses
for 2008; and whether he is entitled to a foreign tax credit for 2003
through 2006.

       The section 6663 fraud issue is more straightforward, but it bears
on a related issue: the period of limitations for assessment under section
6501. Mr. Clemons argues that the section 6501(a) three-year period of
limitations bars assessment. The Commissioner argues that the
deficiencies may be assessed at any time under section 6501(c)(1)
because they were due to fraud. Mr. Clemons disagrees.
                                         16

[*16] I.      Deficiencies

       A.      Income; Burden of Proof and Production

       Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of
proving error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
However, a special rule applies to determinations of unreported income.
The Commissioner’s determinations of unreported income are
presumptively correct if supported by a minimal evidentiary foundation
linking the taxpayer to an income-producing activity. Blohm v.
Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993), aff’g T.C. Memo.
1991-636. After the Commissioner produces evidence linking the
taxpayer to an income-producing activity, the burden shifts to the
taxpayer to prove the determinations are arbitrary or erroneous. Id.

       Here, the Commissioner’s determinations are presumptively
correct. Because Mr. Clemons lacked records substantiating his income,
the Commissioner reasonably reconstructed unreported income using a
bank deposits analysis. See DiLeo v. Commissioner, 96 T.C. 858, 867
(1991), aff’d, 959 F.2d 16 (2d Cir. 1992); see also I.R.C. § 6001; Treas.
Reg. § 1.6001-1(a). After showing that Mr. Clemons received bank
deposits, the Commissioner needed only to produce evidence linking him
to an income-producing activity to shift the burden. To that end, the
record is replete with evidence that Mr. Clemons operated various
Schedule C businesses during the years at issue and invested through
his Swiss accounts. Thus, the Commissioner’s determinations are
presumptively correct.

      The burden has shifted to Mr. Clemons to prove the
Commissioner’s determinations are arbitrary or erroneous. 4 To meet his
burden, he must show that the deposit is derived from a nontaxable
source or otherwise excludable from income. See DiLeo, 96 T.C. at 868–
69, 871.

               1.      Gross Receipts

      The Commissioner determined additional gross receipts for Mr.
Clemons for each year before us on the basis of deposits into his various
accounts. Entity Solutions deposited $151,481, $252,858, $253,383, and
$117,670 in Mr. Clemons’s UBS account as compensation for services in

       4 Mr. Clemons does not ague for, and the record does not support, shifting the

burden back to the Commissioner. See I.R.C. § 7491(a).
                                   17

[*17] 2003, 2004, 2005, and 2006, respectively, which he does not
dispute. Mr. Clemons also received bank deposits in excess of his
reported income in 2007 through 2009. The Commissioner characterized
the deposits as gross receipts from Mr. Clemons’s Schedule C
businesses: $5,076, $66,328, and $43,544 for 2007, 2008, and 2009,
respectively.

       For 2008, Mr. Clemons argues that deposits into his domestic
accounts totaling $66,328 were previously taxed. He claims that the
deposits came from compensation that had previously been deposited
into his VR-Bank account and had already been taxed. He further claims
that he deposited that money in Florida while residing abroad by using
his acquaintance (to whom he had wired money from VR-Bank in 2008)
as an intermediary. There is no evidence of this arrangement other than
Mr. Clemons’s testimony, which we do not find credible. At trial, he tried
to demonstrate that each deposit to his domestic account corresponded
to a wire transfer to his acquaintance. However, the wire transfers
exceeded the deposits in both number and amount, and the dates of each
do not correspond. For example, the last wire transfer of 4,500 euro was
in August 2008, whereas the last (and largest) deposit of over $20,000
was in December 2008. In sum, Mr. Clemons failed to provide sufficient
evidence showing that the excess deposits were from nontaxable
sources.

       During 2003 through 2006, Mr. Clemons received income from
Entity Solutions as compensation for the services rendered to HP
Australia. During 2007 through 2009, Mr. Clemons operated as an IT
consultant and received deposits into his bank accounts for his efforts.
The income derived from these activities constitutes “self-employment
income” under section 1402 and is subject to the self-employment taxes
of section 1401.

             2.     UBS Investment Income

       Through his UBS account, Mr. Clemons received dividend income
and income from trading PFIC assets in 2003 through 2008. See I.R.C.
§ 1297. The Commissioner determined PFIC income and tax according
to section 1291. Mr. Clemons does not dispute the Commissioner’s
calculation of ordinary dividends. He argues that he may retroactively
elect to have his PFIC income and tax determined according to section
1296.
                                    18

[*18] By default, PFIC income is taxed according to section 1291, unless
a taxpayer elects otherwise. See I.R.C. §§ 1291(a)–(c), 1295, 1296. In
1996, Congress enacted section 1296, allowing taxpayers to elect mark-
to-market treatment. In 2002, the Secretary promulgated proposed
regulations setting forth the rules for making such an election. Prop.
Treas. Reg. § 1.1296-1, 67 Fed. Reg. 49,634 (July 31, 2002). Those
regulations became final in 2004. T.D. 9123, 2004-1 C.B. 907 (May 3,
2004); see Treas. Reg. § 1.1296-1(h)(1). Under either the proposed or the
final regulations, for a taxpayer’s PFIC income to be taxed according to
section 1296, he generally must make an election by the due date for
filing his income tax return for the first year to which the election will
apply. Treas. Reg. § 1.1296-1(h)(1); Prop. Treas. Reg. § 1.1296-1(h)(1),
67 Fed. Reg. at 49,642. Whether a taxpayer is eligible to make a
retroactive election under section 1296 turns on general rules regarding
extensions for regulatory elections. Treas. Reg. § 1.1296-1(h)(1)(iii); see
Treas. Reg. § 301.9100-1. Automatic extensions of six months may be
available to taxpayers who take certain corrective action during that
period (which Mr. Clemons did not). See Treas. Reg. § 301.9100-2(b). If
a taxpayer does not meet the requirements for an automatic extension,
his request for retroactive relief will be granted if he shows that he
“acted reasonably and in good faith” and that “the grant of relief will not
prejudice the interests of the Government.” Treas. Reg. § 301.9100-3(a).
A taxpayer is deemed to not have acted reasonably or in good faith when
he “[u]ses hindsight in requesting relief.” Treas. Reg. § 301.9100-
3(b)(3)(iii). If a change in circumstances after the original due date for
an election makes the election more advantageous, “the IRS will not
ordinarily grant relief.” Id.

       Mr. Clemons is not entitled to make a retroactive election because
his claim is based on hindsight. Mr. Clemons did not make an election
under section 1296 when filing his original returns. He first raised the
possibility of making a retroactive election only after the Commissioner
began his examination, discovered the UBS investments, and
determined PFIC income. The election became advantageous to Mr.
Clemons only when the Commissioner discovered the unreported PFIC
income, and Mr. Clemons seeks to take advantage of hindsight in
making an election long after it was due.

             3.     Interest Income

       For 2009, the Commissioner determined taxable interest income
of $2,226. Although Mr. Clemons placed the entire deficiency at issue,
he did not offer any argument or evidence to dispute the Commissioner’s
                                   19

[*19] interest income determination. Accordingly, the Commissioner’s
interest income determination is sustained.

      B.     Deductions, Credits, etc.; Burden of Proof

        Taxpayers bear the burden of proving their entitlement to
deductions and credits. Rule 142(a); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992). Taxpayers must maintain records sufficient to
establish the amount of each deduction, and failure to produce such
records counts heavily against a taxpayer’s attempted proof. Rogers v.
Commissioner, T.C. Memo. 2014-141, at *17; see Treas. Reg. § 1.6001-
1(a), (e).

             1.    Business Expenses

       Section 162(a) generally allows a deduction for ordinary and
necessary expenses paid or incurred during the taxable year in carrying
on a trade or business. The taxpayer bears the burden of proving that
business expenses were actually incurred and were “ordinary and
necessary.” I.R.C. § 162(a); see Rule 142(a). If the taxpayer establishes
that an expense is deductible but cannot substantiate the precise
amount, the Court may estimate the amount. See Cohan v.
Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). However, the
taxpayer must provide some basis for an estimate. See Vanicek v.
Commissioner, 85 T.C. 731, 742–43 (1985).

                   a.     HP Australia

       Mr. Clemons argues that he is entitled to deduct expenses that he
did not report on Schedule C that he incurred while working for HP
Australia in 2003 through 2006. At trial, he estimated those expenses
as a percentage of his income (15% to 30%) and argued that he is entitled
to deduct a similar amount (at least 20% to 30%). However, he provided
no record of those expenses or information upon which the Court could
reasonably base an estimate. Mr. Clemons failed to meet his burden of
proof.

                   b.     Alafia

       Mr. Clemons argues that he may deduct Schedule C expenses for
Alafia for 2006 through 2009.

      For 2006 and 2007, Mr. Clemons failed to meet his burden. For
2006, the Commissioner disallowed deductions for (1) car and truck
                                     20

[*20] expenses, (2) travel expenses, and (3) repairs. Mr. Clemons did not
provide records for those expenses. For 2007, the Commissioner allowed
deductions for all expenses Mr. Clemons reported on Schedule C, and
Mr. Clemons provided no records of additional expenses.

       For 2008 and 2009, Mr. Clemons may not deduct his expenses
under section 162. Section 162 allows a deduction only for expenses
incurred in carrying on a trade or business. The test for whether a
taxpayer is engaged in a trade or business is whether his primary
purpose and intention in engaging in the activity is to make a profit. Zell
v. Commissioner, 763 F.2d 1139, 1142 (10th Cir. 1985), aff’g T.C. Memo.
1984-152. During 2008 and 2009, Mr. Clemons’s primary purpose in
keeping cattle and horses was not to make a profit. By his own account,
he started Alafia in 2006, and it lasted only for about a year. In 2008, he
resided in Europe for most of the year, and in 2009, he also spent
substantial time there. By his own testimony, Alafia was not operating
as a business in 2008 and 2009; thus no deduction is allowed for those
years.

                    c.     Axantis

       Mr. Clemons argues that he may deduct Schedule C expenses for
Axantis for 2008. He produced reports he submitted to Axantis, showing
unreimbursed expenses of $6,758. The Commissioner concedes that Mr.
Clemons is entitled to deduct those unreimbursed expenses, subject to
the limitation of section 911(d)(6). Section 911(d)(6) disallows a
deduction to the extent expenses are allocable to amounts excluded from
income pursuant to section 911(a) (foreign earned income exclusion). If
a taxpayer excludes part of his foreign income, he may deduct an amount
of expenses proportional to the percentage of foreign income not
excluded. Treas. Reg. § 1.911-6. For 2008, Mr. Clemons excluded $74,635
of the $139,794 total foreign income he reported, or 53.4%. He did not
exclude 46.6%, so he may deduct 46.6% of $6,758.

                    d.     Other Activities

      Mr. Clemons argues that he may deduct Schedule C expenses for
softwarewizardry.nl, a business in the Netherlands, for 2009. He
reported no income on Schedule C for softwarewizardry.nl. He reported
substantial expenses for meals, travel, and rent, which the
Commissioner disallowed.

      Whether softwarewizardry.nl was an active business is unclear
from the record. According to Mr. Clemons, his only work activity during
                                   21

[*21] 2009 was a short-term project he undertook while residing in
Germany for 40 days, for which he earned $9,600 (according to Form
2555). He did not report $9,600 as income from softwarewizardry.nl.
Nevertheless, he testified that the expenses he reported were “typical
business-related expenses for travel, meals, parking, hotel stays, and
any type of expenses related to [his] travel and [his] stay in Germany.”

      If we were to accept Mr. Clemons’s testimony, he would still fail
to meet his burden. Mr. Clemons did not provide any evidence of those
expenses other than his testimony. And his testimony failed to credibly
explain how he incurred over $60,000 of legitimate business expenses in
connection with $9,600 of income while residing in Germany for 40 days.
Mr. Clemons failed to meet his burden.

             2.     Investment Expenses

       Mr. Clemons argues that he is entitled to deduct under section
212 the amounts he paid UBS as fees for maintaining his investment
account. The Commissioner concedes Mr. Clemons is entitled to deduct
such expenses to the extent he demonstrates that he paid the fees and
that they exceed 2% of his AGI. See I.R.C. § 67; Temp. Treas. Reg. § 1.67-
1T. Also, because Mr. Clemons elected the standard deduction for 2003
through 2005, the amount by which they exceed the 2% floor must also
exceed the standard deduction for those years.

       For 2003 and 2004, Mr. Clemons did not establish the amounts of
his investment expenses. He claimed that he incurred amounts “[a]s set
forth in the UBS statements” without any further information or
reference. He failed to meet his burden for 2003 and 2004. For 2005
through 2009, Mr. Clemons established the following amounts: $9,091,
$10,911, $8,570, $8,661, and $1,910, respectively. The extent to which
he may deduct those amounts will be determined when the parties
complete their Rule 155 computations.

             3.     Foreign Tax Credit

       Mr. Clemons argues that he is entitled to a foreign tax credit for
each of 2003 through 2006. Generally, a U.S. citizen can claim a credit
in the amount of any income taxes paid or accrued during the taxable
year to any foreign country. I.R.C. § 901(a) and (b). When a taxpayer
claims a credit for foreign income taxes withheld at the source, he must
establish that the tax was withheld and that it was paid over to the
foreign taxing authority. Norwest Corp. & Subs. v. Commissioner, T.C.
                                     22

[*22] Memo. 1995-453, 70 T.C.M. (CCH) 779, 781; see I.R.C. § 905;
Treas. Reg. § 1.905-2.

      Mr. Clemons failed to meet his burden. He testified that Entity
Solutions withheld taxes from his HP Australia compensation and paid
them over to the Australian government but provided no documentary
evidence. Because he failed to provide sufficient evidence showing that
tax was withheld by Entity Solutions or paid over to the Australian
government, Mr. Clemons did not meet his burden.

             4.     Foreign Income Exclusion and Housing Deduction

       For 2008, the Commissioner concedes that Mr. Clemons may
exclude foreign income of $74,635 pursuant to section 911(a). However,
Mr. Clemons argues he may also deduct rent expenses for an apartment
he claims to have resided at in Germany. Section 911 permits a qualified
individual to exclude a percentage of his foreign earned income and
housing cost amount from gross income. I.R.C. § 911(a), (c)(1), (3). When
the housing cost amount is not employer provided, it is generally treated
as deductible, subject to a limitation. I.R.C. § 911(c); Treas. Reg. § 1.911-
4(e).

       Axantis did not reimburse Mr. Clemons’s housing costs. To the
extent he had any housing costs, he failed to provide credible evidence
of those costs, and he may not deduct them.

II.   Penalties and Additions to Tax

      A.     Burden of Proof and Production

       Section 7491(c) provides that the Commissioner bears the burden
of production “with respect to the liability of any individual for any
penalty, addition to tax, or additional amount imposed by this title.” To
meet his burden, the Commissioner must produce evidence regarding
the appropriateness of imposing the penalty or addition to tax. Higbee
v. Commissioner, 116 T.C. 438, 446–47 (2001). Where applicable, that
includes evidence of compliance with section 6751(b). See Carter v.
Commissioner, T.C. Memo. 2020-21, at *26–27. Once the Commissioner
carries his burden of production, the taxpayer must come forward with
persuasive evidence that the Commissioner’s determination is incorrect
or that the taxpayer had reasonable cause. See Higbee, 116 T.C. at 447.

       One notable exception to the general rule applies in cases
involving fraud. The Commissioner must prove fraud by “clear and
                                          23

[*23] convincing evidence.” Rule 142(b); see I.R.C. § 7454(a); Castillo v.
Commissioner, 84 T.C. 405, 408 (1985).

       The Commissioner determined penalties under section 6662 and
section 6663 and additions to tax under section 6651(a). The
Commissioner must produce evidence that those penalties are
appropriate. Such a showing would shift the burden to Mr. Clemons.
However, with respect to section 6663, the Commissioner must prove
fraud by clear and convincing evidence.

        B.      Managerial Penalty Approval

       Section 6751(b) requires managerial approval of certain
penalties, including penalties under sections 6662 and 6663. Section
6751(b)(1) provides that the initial determination to assert penalties
must be approved (in writing) by the immediate supervisor of the person
who made that determination. An “initial determination” occurs the
earlier of when the Commissioner issues a notice of deficiency or
formally communicates a decision to determine penalties. Belair Woods,
LLC v. Commissioner, 154 T.C. 1, 14–15 (2020); Clay v. Commissioner,
152 T.C. 223, 248–49 (2019), aff’d, 990 F.3d 1296 (11th Cir. 2021). 5 A
Letter 5153 accompanied by an RAR can be an initial determination.
Oropeza v. Commissioner, 155 T.C. 132, 140–41 (2020); Patel v.
Commissioner, T.C. Memo. 2020-133, at *18–19.

       The Commissioner has met his burden with respect to the section
6751(b) penalty approval. The initial determination was the Letter 5153
accompanied by the RAR, because it was the first formal communication
of the penalties and the Commissioner mailed it before the notice of
deficiency. The Commissioner produced evidence that the supervisor of
the revenue agent who prepared the RAR signed the Letter 5153 before
mailing it to Mr. Clemons. Thus the penalty was approved before
assessment, which has yet to occur in this case. See Kroner v.

         5 In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th

Cir. 2022), rev’g and remanding 154 T.C. 68 (2020), the Court of Appeals for the Ninth
Circuit recently held that written supervisory approval can occur after the initial
determination to impose a penalty has been formally communicated to the taxpayer,
so long as it occurs before assessment. Id. at 1067–68, 1071–72, 1074. In this case, the
initial determination to impose a penalty was approved before it was communicated to
Mr. Clemons, and thus the Commissioner satisfied section 6751(b) both as interpreted
by this Court and under the looser standard established by the Ninth Circuit.
                                    24

[*24] Commissioner, No. 20-13902 (11th Cir. Sept. 13, 2022), rev’g in
part T.C. Memo. 2020-73.

      C.     Additions to Tax for Untimely Filing

      Mr. Clemons filed his 2005 and 2007 through 2009 returns late,
but he argues that was due to reasonable cause and not willful neglect.
See § 6651(a)(1); Mileham v. Commissioner, T.C. Memo. 2017-168,
at *41–42.

       Section 6651(a)(1) imposes an addition to tax for the failure to file
a return on or before the due date (including extensions) unless the
taxpayer can establish that such failure was “due to reasonable cause
and not due to willful neglect.” To demonstrate reasonable cause, a
taxpayer must show that he exercised ordinary business care and
prudence but was nevertheless unable to file on time. United States v.
Boyle, 469 U.S. 241, 246 (1985); Treas. Reg. § 301.6651-1(c)(1).

        Mr. Clemons’s failures do not fit within the exception for
reasonable cause. He argues he had reasonable cause on the basis of his
daughter’s death in June 2004. In certain circumstances, the death of a
taxpayer’s immediate family member may constitute reasonable cause.
Boyle, 469 U.S. at 243 n.1. However, a taxpayer’s selective inability to
meet his tax obligations when he can otherwise carry on normal
activities does not excuse late filing. Wilkinson v. Commissioner, T.C.
Memo. 1997-410, 74 T.C.M. (CCH) 566, 571. Mr. Clemons’s daughter
died in June 2004. Notwithstanding this tragic loss, he timely filed the
first return that was due after she died. He also continued working and
traveling and carried on with his normal business activities. Because
Mr. Clemons could tend to his financial affairs and selectively chose not
to meet his tax filing obligations, his failures to timely file do not fit
within the exception for reasonable cause.

      D.     Accuracy-Related Penalty

       Section 6662(a) and (b)(1) imposes a 20% accuracy-related
penalty on any portion of an underpayment of tax that is due to
negligence or disregard of rules. “Negligence” includes any failure to
make a reasonable attempt to comply with the provisions of the Code,
and “disregard” includes any careless, reckless, or intentional disregard.
I.R.C. § 6662(c); Treas. Reg. § 1.6662-3(b)(1) and (2). Also, a taxpayer is
negligent if he fails to maintain sufficient records to substantiate the
items in question. Treas. Reg. § 1.6662-3(b)(1); see Mileham, T.C. Memo.
2017-168, at *45.
                                       25

[*25] The Commissioner determined a section 6662 penalty for
negligence for the portions of the 2006 and 2008 underpayments that
were attributable to disallowed deductions. 6 The Commissioner met his
burden of production by showing that Mr. Clemons failed to maintain
sufficient records to substantiate the expenses underlying those
deductions.

       Mr. Clemons argues that accuracy-related penalties should not
apply because he acted reasonably and in good faith under section 6664.
Section 6664(c)(1) provides that section 6662 penalties do not apply to
any portion of an underpayment as to which the taxpayer acted with
reasonable cause and in good faith. That determination depends on all
the facts and circumstances. Higbee, 116 T.C. at 448; see Treas. Reg.
§ 1.6664-4(b)(1). “‘Reasonable cause’ requires the taxpayer to
demonstrate that he exercised ordinary business care and prudence as
to the disputed item.” Barnes v. Commissioner, T.C. Memo. 2016-79, at
*11. “Good faith” is not expressly defined; however, an honest
misunderstanding of fact or law that is reasonable considering the
taxpayer’s experience, knowledge, and education may indicate
reasonable cause and good faith. See Higbee, 116 T.C. at 449; Barnes,
T.C. Memo. 2016-79, at *11–12.

      Mr. Clemons does not fit within the exception. He was an
educated and experienced taxpayer. He did not exercise ordinary
business care or prudence in reporting expenses for which he lacked
adequate substantiation.

       E.     Civil Fraud Penalty

       Section 6663 imposes a penalty of 75% of an underpayment of tax
if any part of the underpayment is due to fraud. Once the Commissioner
establishes that part of an underpayment is due to fraud, the entire
underpayment is treated as “attributable to fraud,” except to the extent
the taxpayer establishes that some part is not. I.R.C. § 6663(b). The
existence of fraud is a factual question to be resolved by considering the
entire record. See DiLeo, 96 T.C. at 874.

       The Commissioner determined a fraud penalty for each year at
issue. For each year, the Commissioner must prove two elements of

        6 Section 6662(b) (flush language) provides that the 20% penalty shall not

apply to any portion of an underpayment to which the section 6663 penalty applies.
The Commissioner did not apply section 6663 to the portion of the underpayment to
which he applied section 6662.
                                  26

[*26] fraud by clear and convincing evidence: (1) an underpayment of
tax and (2) fraudulent intent. Castillo, 84 T.C. at 408–09. A taxpayer’s
failure to meet his burden of proof as to an issue does not satisfy the
clear and convincing evidence standard. DiLeo, 96 T.C. at 873. The
Commissioner’s burden applies separately for each of the years. I.R.C.
§ 7454(a); Rule 142(b); Castillo, 84 T.C. at 408–09.

             1.    Underpayment

       An underpayment is defined as the amount by which the tax
imposed by Title 26 exceeds the amounts shown as the tax by the
taxpayer on his return. I.R.C. § 6664(a). The Commissioner established
by clear and convincing evidence that Mr. Clemons reported less tax
than he owed for each year at issue, resulting in the underpayments
above.

             2.    Fraudulent Intent

       We infer fraudulent intent from circumstantial evidence, which
may be given more weight depending on the taxpayer’s sophistication.
See Clark v. Commissioner, T.C. Memo. 2021-114, at *36–37. Mr.
Clemons earned a bachelor’s degree, owned and operated his own
businesses for decades, and handled finances and tax reporting without
assistance. His education and work experience show that he understood
and could manage his finances. We examine his actions and
explanations considering his sophistication.

      Various “badges of fraud” may indicate fraudulent intent.
Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Clark, T.C.
Memo. 2021-114, at *37. The existence of any one badge is not
dispositive, but multiple badges together are strong circumstantial
evidence of fraudulent intent. Niedringhaus, 99 T.C. at 211. Several
badges of fraud are evident in this case, including underreporting
income, concealing income and assets, filing false documents, failing to
cooperate with tax authorities, implausible and inconsistent
explanations of behavior, and failing to maintain adequate records. See
id.

                   a.     Underreporting Income

      A pattern of substantially underreporting income over several
successive years can be strong evidence of fraudulent intent. See
Zhadanov v. Commissioner, T.C. Memo. 2002-104, 83 T.C.M. (CCH)
1553, 1560. Such a pattern evinces fraudulent intent “even where the
                                   27

[*27] record is ‘devoid of the usual indicia of fraud.’” Isaacson v.
Commissioner, T.C. Memo. 2020-17, at *48–49 (quoting Otsuki v.
Commissioner, 53 T.C. 96, 107–08 (1969)), aff’d, 2022 WL 541617 (9th
Cir. Feb. 23, 2022).

      Mr. Clemons substantially underreported his income for seven
consecutive years. Over those years, Mr. Clemons underreported his
income by over $1 million. His substantial and consistent
underreporting is persuasive evidence of fraudulent intent.

                    b.    Concealment

       A taxpayer’s concealment of income or assets may indicate
fraudulent intent. See Spies v. United States, 317 U.S. 492, 499 (1943).
Notably, opening a Swiss bank account can indicate concealment. See
Harrington v. Commissioner, T.C. Memo. 2021-95, at *35–36.
Switzerland’s bank practices and legal framework make it difficult for
other countries to obtain disclosure of Swiss bank accounts. See Ryan v.
Commissioner, 58 T.C. 107, 109–10 (1972) (“[T]he laws of that country
have long imposed a veil of secrecy over transactions between Swiss
banks and their customers.”).

       Mr. Clemons’s choice to open Swiss bank accounts with secretive
features provides ample evidence of concealment. He specifically sought
out and found a consultant to refer him to a Swiss bank and then
traveled to Switzerland to open an account. Both his UBS and Dresdner
accounts bore the secretive features for which Swiss accounts are well
known. His name was replaced with a number. He entered into a hold-
mail agreement so that no mail would be sent to his U.S. address. And
he signed a U.S. securities waiver so that the accounts’ investments
would not require U.S. tax reporting by the banks. When UBS adopted
its “new business model” in October 2008, Mr. Clemons liquidated his
account and opened a new Swiss account with similar secretive features,
rather than transferring funds to any of his other existing accounts. This
demonstrates that it was the secretive features he was specifically
seeking.

       Mr. Clemons’s actions in funneling income into his Swiss
accounts, and carefully accessing those accounts in manners to avoid
detection, make clear that their very purpose was concealment. He hid
the UBS account from his wife and did not disclose it to the state court
during his divorce proceeding in 2003. He deposited only foreign income
into his Swiss accounts. When an Australian payroll company paid him
                                    28

[*28] for services he provided to an Australian company, he deposited
the compensation in a Swiss account and failed to report it. But when a
German company paid him for services he provided to the U.S. Army,
he deposited the compensation in a German account held in his name
and reported it. He never used his Swiss accounts to transfer money
directly to or from his accounts in the United States. Instead, he traveled
to Switzerland to make withdrawals in person by requesting checks.

       Furthermore, Mr. Clemons concealed his Swiss accounts by
failing to timely disclose them. See Harrington, T.C. Memo. 2021-95,
at *36. On his income tax returns, he reported on Schedule B interest
income from his German and Netherlands accounts but not his Swiss
accounts. He also failed to file the required foreign account disclosures
for his Swiss accounts. In doing so, he disregarded the instructions on
the forms he filed as well as the instructions printed by Turbo Tax
informing him on what to file and when. Mr. Clemons filed delinquent
FBARs for 2005 through 2009 only after the Commissioner opened his
examination. He never filed FBARs for 2003 and 2004. Mr. Clemons’s
efforts to conceal his Swiss accounts provide ample evidence of
fraudulent intent.

                    c.     Filing False Documents

        The U.S. tax system relies on taxpayers to report their tax
liabilities, and the information necessary to calculate those liabilities,
via annual returns. Filing false documents indicates a taxpayer’s intent
to evade income tax. See id. at *40. That includes filing an FBAR that is
incomplete or filing a return that omits income or contains a false
response. See id. at *39–40.

       Mr. Clemons filed false documents. His delinquent FBARs
contained false information about his Swiss accounts, and his returns
omitted substantial income and contained false responses on
Schedules B. Mr. Clemons failed to attach Schedules B to his 2003
through 2005 returns, even though he had an interest in a foreign
account. For 2006 and 2007, he attached Schedules B, but he falsely
denied having any foreign bank accounts. For 2008 and 2009, he
attached Schedules B, but he disclosed only his foreign bank accounts in
Germany and the Netherlands, omitting those in Switzerland from the
disclosure. Mr. Clemons’s false statements provide evidence of
fraudulent intent.
                                  29

[*29]              d.     Failing to Cooperate with Tax Authorities

       A taxpayer’s failure to cooperate with tax authorities, including
his failure to cooperate with revenue agents during an examination, can
indicate fraudulent intent. Grosshandler v. Commissioner, 75 T.C. 1,
19–20 (1980). “[M]isleading statements during an audit, even from an
unsophisticated taxpayer, may indicate fraudulent intent.” Clark, T.C.
Memo. 2021-114, at *37.

       Mr. Clemons failed to cooperate with tax authorities. When
interviewed, he lied about the attributes of his Swiss accounts and how
he used those accounts. After the Commissioner issued IDRs, Mr.
Clemons did not readily provide documents. Notably, the Commissioner
obtained Mr. Clemons’s personal account ledger—one of few documents
he possessed—only after issuing a third-party summons to his
representative. Mr. Clemons attempted to misdirect the Commissioner,
and his failure to cooperate provides evidence of fraudulent intent.

                   e.     Implausible or Inconsistent Explanations

       Implausible or inconsistent explanations for a taxpayer’s
behavior can indicate fraudulent intent. Bradford v. Commissioner, 796
F.2d 303, 307 (9th Cir. 1986), aff’g T.C. Memo. 1984-601. The Court has
previously addressed various situations in which taxpayers made
statements about their UBS accounts that were inconsistent with
documentary evidence in the record. Harrington, T.C. Memo. 2021-95,
at *33–34; see Isaacson, T.C. Memo. 2020-17, at *52–53. One taxpayer’s
statements that UBS invested his account’s funds without his
authorization was inconsistent with evidence that UBS invested the
funds “following detailed conversations with him concerning the
investments.” Isaacson, T.C. Memo. 2020-17, at *52. And another
taxpayer’s statements that he lacked control over his account was
inconsistent with evidence that “he communicated with UBS bankers—
in person, over the phone, and by email—to discuss investment options.”
Harrington, T.C. Memo. 2021-95, at *33–34.

       Mr. Clemons’s explanations are equally implausible and
inconsistent. He claimed ignorance of investment activity and suggested
that UBS controlled his account, but he signed documents specifying
limits on the investment activity and directed how his account would be
invested. He claimed records were not in English, but the actual records
were in English. His claimed ignorance is contradicted by documents in
the record, providing strong evidence of fraudulent intent.
                                    30

[*30]                f.    Inadequate Records

       Taxpayers must maintain records sufficient to determine their
tax liability, and a failure to do so can indicate fraudulent intent. I.R.C.
§ 6001; Bradford v. Commissioner, 796 F.2d at 307–08. A taxpayer’s
choice not to receive regular UBS account statements may be seen as a
“tax-avoidance strategy that he implemented with UBS, hoping that the
absence of records, coupled with Swiss bank secrecy laws, would” shield
the account from discovery. Harrington, T.C. Memo. 2021-95, at *31.

       Mr. Clemons purposely kept inadequate records to prevent
discovery of his Swiss accounts. He waived his right to invest in U.S.
securities and directed UBS and Dresdner to hold correspondence to
ensure that records would not be sent to the United States. When UBS
presented his bank records to him, he authorized UBS to destroy any
mail he left behind. He did not merely fail to keep records, but he took
affirmative steps to see that records were destroyed. This badge provides
evidence of fraudulent intent.

              3.     Conclusion as to Fraud Penalty

      For each year at issue, the Commissioner established by clear and
convincing evidence that Mr. Clemons underpaid his tax and that those
underpayments were due to fraud. His conduct provides a veritable
checklist of badges of fraud. The section 6663 fraud penalty applies.

III.    Statute of Limitations

       Mr. Clemons questions whether the Commissioner’s notice of
deficiency was timely. In 2016, the Commissioner issued a single notice
of deficiency for 2003 through 2009, more than three years after Mr.
Clemons filed his return for any of those years. Generally, the
Commissioner must assess tax within three years from the later of when
a return is filed or when it is due. I.R.C. § 6501(a). Thus, the assessments
would be time-bared unless an exception to this general rule applies.

       A notable exception applies here. If a taxpayer files a false or
fraudulent return with the intent to evade tax, tax may be assessed at
any time. I.R.C. § 6501(c)(1). The Commissioner established fraud by
clear and convincing evidence. We determine fraud for this purpose the
same way we determine fraud under section 6663. Neely v.
Commissioner, 116 T.C. 79, 85 (2001); Harrington, T.C. Memo. 2021-95,
at *21. The Commissioner may assess the tax, penalties, and additions
to tax due from Mr. Clemons at any time.
                                  31

[*31] IV.   Conclusion

       Mr. Clemons underpaid his tax for each year at issue and his
underpayments were due to fraud. Any arguments not discussed are
irrelevant, moot, or without merit. To reflect the foregoing and the
parties’ concessions,

      Decision will be entered under Rule 155.