Court Opinion

ID: 9401949
Source: CourtListenerOpinion
Date Created: 2023-06-14 19:02:46.683094+00
Date Added: 2024-06-11T17:19:56.424149
License: Public Domain

United States Tax Court

                               T.C. Memo. 2023-71

                      CLAUDE FRANKLIN SANDERS,
                              Petitioner

                                          v.

              COMMISSIONER OF INTERNAL REVENUE,
                          Respondent

                                     —————

Docket No. 14986-19.                                          Filed June 14, 2023.

                                     —————

Claude Franklin Sanders, pro se.

Amber B. Martin and Rebecca R. Loveday, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

        GREAVES, Judge: With respect to petitioner’s Federal income
tax for 2009 through 2016 (years at issue), the Internal Revenue Service
(IRS or respondent) determined tax deficiencies totaling $1,566,802,
additions to tax under section 6651(f), additions to tax under section
6651(a)(2), and additions to tax under section 6654. 1 Petitioner
contends that he did not receive taxable income because he is not an
“individual” subject to tax. Petitioner further contends that he should
not be liable for the additions to tax because he did not know with whom
to file his tax returns. We reject these arguments and decide the case in
respondent’s favor.

        1Unless otherwise indicated, all statutory references are to the Internal

Revenue Code, Title 26 U.S.C. (I.R.C. or Code), 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 references to the Code of Federal Regulations are to the
regulations in effect at all relevant times.

                                 Served 06/14/23
                                            2

[*2]                           FINDINGS OF FACT

       Petitioner was self-employed as a gold and silver broker and a
writer from 1980 through at least 2016. He published monthly
newsletters about the gold and silver market and provided brokerage
services for clients. Petitioner has a bachelor’s degree but is self-taught
in the brokerage industry. He conducted his business through two sole
proprietorships, Moneychanger and Franklin Sanders, SP. He began
conducting these businesses in Arkansas but fled the state after an
adverse state sales tax decision for failure to withhold sales tax on his
brokerage transactions. Petitioner moved his business to Tennessee,
where he again faced state sales tax litigation.

       In 1998 both entities were sold to Little Mountain Corp. (LMC).
Petitioner provided consulting services to LMC after the sale through
another sole proprietorship, Always Frank Consulting (AFC). 2 In this
role petitioner managed LMC’s website, drafted the monthly newsletter
for Moneychanger, and provided office management services between
2009 and 2016. During these years petitioner submitted invoices to
LMC for his consulting services. Most of the invoices were for services
valued in excess of $10,000, and he instructed LMC to split the
payments into installments of less than $10,000. 3 LMC paid the
invoices in checks made out to “cash”. In addition to these payments for
services, LMC would pay petitioner bonuses based on business
performance.

       Despite receiving this income, petitioner did not file income tax
returns for tax years 2008 through 2018. Likewise, petitioner did not
make estimated tax payments. Respondent conducted an examination
for petitioner’s tax years at issue. Throughout the examination,
petitioner failed to communicate with the revenue agent and did not
attend the initial meeting. Petitioner also failed to comply with
document requests for his business records, allegedly because he had no
records. Respondent prepared substitutes for returns (SFRs) for the
years at issue, showing no estimated taxes paid.

       On May 14, 2019, respondent issued petitioner a notice of
deficiency for the years at issue, determining the following deficiencies
and additions to tax:

       2   Petitioner and AFC are used interchangeably throughout the Opinion.
       3   All dollar amounts are rounded to the nearest dollar.
                                            3

[*3] Year            Deficiency         § 6651(f)        § 6651(a)(2)         § 6654

      2010           $249,935           $181,203           $62,484            $5,360
      2011             354,288           256,859            88,572             7,014
      2012             321,820           233,320            80,455             5,770
      2013             140,088           101,564            35,022             2,516
      2014             101,914            73,888              —4               1,830
      2015             179,737           130,309              —                3,237
      2016             176,954           128,292              —                4,230

       Petitioner lived in Tennessee when he timely filed the petition
with this Court seeking redetermination of the deficiencies and
additions to tax.

                                       OPINION

I.      Burden of Proof

       The Commissioner’s determinations set forth in a notice of
deficiency are generally presumed correct, and the taxpayer bears the
burden of proving the determinations are in error. See Rule 142(a)(1);
Welch v. Helvering, 290 U.S. 111, 115 (1933). For the presumption of
correctness to attach in an unreported income case, we rely on the test
developed by the U.S. Court of Appeals for the Sixth Circuit, the
appellate venue for this case absent other stipulation by the parties. See
I.R.C. § 7482(b); Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d,
445 F.2d 985 (10th Cir. 1971). The Sixth Circuit requires that the
Commissioner establish a “minimal evidentiary foundation” regarding
the income for the presumption of correctness to attach. See United
States v. Walton, 909 F.2d 915, 919 (6th Cir. 1990). If the Commissioner
introduces some evidence that the taxpayer received unreported income,
the burden shifts to the taxpayer, who must establish by a
preponderance of the evidence that the deficiency was arbitrary or
erroneous. See id.

      Respondent has established through invoices, checks, and LMC’s
general ledger that petitioner received $3,492,526 in the years at issue.

         4 According to the notice of deficiency, additions to tax under section 6651(a)(2)

for tax years 2014, 2015, and 2016 will be computed at a later date.
                                    4

[*4] These documents, coupled with petitioner’s own admissions that he
received these payments, are sufficient to establish a minimal
evidentiary foundation to shift the burden of proof to petitioner on this
issue. Petitioner does not contend, and the evidence does not establish,
that the burden of proof shifts to respondent under section 7491(a) as to
any issue of fact.

II.   Unreported Income

       Section 1 imposes an income tax on the taxable income of an
“individual.” See I.R.C. § 1(c). Taxable income is an individual’s gross
income minus allowable deductions. See I.R.C. §§ 62 and 63. Gross
income is broadly defined as “all income from whatever source derived.”
See I.R.C. § 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426,
431 (1955). Gross income includes compensation for services. See
I.R.C. § 61(a)(1). Petitioner received gross income in the form of
compensation from LMC for consulting services.

       Petitioner argues that the payments he received from LMC are
not taxable because he is not an “individual” subject to tax. Specifically,
petitioner contends that he is a “citizen,” not an “individual.” Petitioner
relies on section 7701(a)(1), defining “person” as an “individual.”
Petitioner then argues that because “citizen” and “person” are listed
together in various Code sections, the two are mutually exclusive and
thus so are “citizen” and “individual.” Petitioner’s theory that citizens
do not need to pay federal income tax has been consistently rejected as
frivolous by this Court. See Wnuck v. Commissioner, 136 T.C. 498, 503–
04 (2011) (rejecting arguments that wages are not subject to tax and
that income tax laws do not apply to wages earned in the U.S.); Hill v.
Commissioner, T.C. Memo. 2013-265, at *7 & n.9 (rejecting an argument
that only withholding agents are liable for tax); Martin v. Commissioner,
T.C. Memo. 1990-560, 1990 Tax Ct. Memo LEXIS 632, at *5 (rejecting
an argument that only foreign citizens and U.S. citizens that earned
foreign source income are subject to tax). The regulations under section
1 define an individual subject to tax as any “individual who is a citizen
or resident of the United States.” See Treas. Reg. § 1.1-1(a). A citizen
is defined as “[e]very person born or naturalized in the United States
and subject to its jurisdiction.” See id. para. (c).

       Petitioner was born in the United States and is subject to its
jurisdiction, which makes him a citizen under the regulations. As a
citizen, he is an individual as defined by section 1. Therefore, section 1
imposes a tax on his income, including the compensation he received
                                     5

[*5] from LMC. Consequently, we uphold respondent’s determination
that petitioner received unreported income of $3,492,526 in the years at
issue.

III.   Additions to Tax

       Respondent determined additions to tax under section 6651(f) for
fraudulent failure to file, additions to tax under section 6651(a)(2) for
failure to timely pay, and additions to tax under section 6654 for failure
to pay estimated tax for the years at issue. In the alternative to the
fraudulent failure to file additions to tax, respondent asserts additions
to tax under section 6651(a)(1) for failure to timely file.

       A.    Additions to Tax Under Section 6651(f)

       Section 6651(a)(1) provides for an addition to tax of 5% of the tax
required to be shown on a return for each month for which there is a
failure to timely file a tax return, up to 25% in the aggregate. Section
6651(f) increases the addition to tax for fraudulent failure to file to 15%
of the tax required to be shown on the return for each month, up to 75%
in the aggregate. An SFR prepared by the Commissioner under section
6020(b) is not a return for purposes of section 6651(f). See I.R.C.
§ 6651(g)(1).

       Respondent bears the burden of proving fraud by clear and
convincing evidence and must show “the taxpayer intended to evade
taxes known to be owing by conduct intended to conceal, mislead or
otherwise prevent the collection of taxes.” DiLeo v. Commissioner, 96
T.C. 858, 874 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992); see I.R.C.
§ 7454(a); Rule 142(b). Fraud is established by showing that a “taxpayer
intended to evade tax believed to be owing by conduct intended to
conceal, mislead, or otherwise prevent the collection of such tax.” See
Clayton v. Commissioner, 102 T.C. 632, 647 (1994). Fraud may be
established by circumstantial evidence. See id. The same factors
relevant to determining fraudulent intent under section 6663 are
relevant to determining fraudulent intent for failure to file. See Clayton,
102 T.C. at 653.

       The Court looks to the following nonexclusive badges of fraud to
determine fraudulent intent: (1) failure to file tax returns; (2) failure to
report income over an extended period; (3) failure to furnish the
Commissioner with access to records or to cooperate with taxing
authorities; (4) failure to keep adequate books and records;
(5) experience and knowledge, especially knowledge of tax laws;
                                     6

[*6] (6) concealment of bank accounts or assets from IRS agents;
(7) willingness to defraud another in a business transaction;
(8) implausible or inconsistent explanations of behavior; (9) failure to
make estimated tax payments; and (10) a pattern of behavior that
indicates an intent to mislead. See Solomon v. Commissioner, 732 F.2d
1459, 1461–62 (6th Cir. 1984), aff’g T.C. Memo. 1982-603; Gross v.
Commissioner, T.C. Memo. 2008-218, slip op. at 13–14.

       Respondent produced certified SFRs for the years at issue. Given
petitioner’s admission that he earned compensation but did not file tax
returns for the years at issue, respondent has carried his burden of
showing that petitioner failed to file tax returns for the years at issue
and that he was required to file a return each year. As for fraudulent
intent, after thorough review of the record, we conclude that at least
eight badges of fraud demonstrate that petitioner acted with fraudulent
intent.

       Petitioner’s failure to file tax returns for the years at issue
supports an inference of fraud. See Solomon v. Commissioner, 732 F.2d
at 1461; Beaver v. Commissioner, 55 T.C. 85, 93 (1970). By not filing his
tax returns for the years at issue, petitioner failed to report income of at
least $3,492,526. This pattern of substantially underreporting income
is strong evidence of fraud. See Holland v. United States, 348 U.S. 121,
139 (1954); Solomon v. Commissioner, 732 F.2d at 1461; Vanover v.
Commissioner, T.C. Memo. 2012-79, slip op. at 12.

       Petitioner also failed to cooperate with the Commissioner during
the examination process.         The revenue agent repeatedly asked
petitioner to provide records of his business activities. Petitioner
refused these requests, ignoring both informal document requests and
subpoenas. Petitioner alleges that he did not comply with the requests
because he did not have the requested records. However, petitioner
failed to credibly state why he could not produce these records. The
failure to maintain adequate books and records and the failure to permit
the Commissioner to inspect such records support an inference of fraud.
See Solomon v. Commissioner, 732 F.2d at 1461; Bradford v.
Commissioner, 796 F.2d 303, 307–08 (9th Cir. 1986), aff’g T.C. Memo.
1984-601.

       Petitioner’s education and knowledge further support fraudulent
intent. Petitioner is a college-educated businessman who has worked in
the brokerage industry since at least 1980. Although petitioner did not
have formal education in finance or tax, he claimed that he spent a
                                     7

[*7] considerable amount of time studying tax laws. Petitioner’s self-
acquired tax knowledge and his general business experience support an
inference that he knew of the filing obligation and that his failure to file
was fraudulent. See Niedringhaus v. Commissioner, 99 T.C. 202, 211
(1992); Tooke v. Commissioner, T.C. Memo. 1977-91, aff’d, 595 F.2d 1229
(9th Cir. 1979).

       LMC’s method of paying petitioner indicates his intent to conceal
income. Petitioner specifically instructed LMC to pay invoices in
installments of less than $10,000. Additionally, all checks were made
out to “cash”. Requesting payments of less than $10,000 to avoid
potential reporting obligations is an indicium of fraud. See Spies v.
United States, 317 U.S. 492, 499 (1943); Roudakov v. Commissioner, T.C.
Memo. 2014-193, at *18; McClellan v. Commissioner, T.C. Memo. 2013-
251, at *27. Petitioner argues that this payment scheme was the result
of his difficulty in obtaining a bank account because he lacked a Social
Security number. This excuse is not credible because petitioner failed
to provide any evidence of such difficulties. Additionally, petitioner’s
failure to make estimated tax payments for the years at issue indicates
fraudulent intent. See Miller v. Commissioner, 94 T.C. 316, 336 (1990);
Putnam v. Commissioner, T.C. Memo. 2015-160, at *23.

       Finally, petitioner has a pattern of tax avoidance. He has been
the subject of two state tax enforcement actions and fled one state to
prevent collection. This pattern of state sales tax violation does not
establish fraudulent intent but is evidence of a propensity to defraud.
See Petzoldt v. Commissioner, 92 T.C. 661, 701–02 (1989); McGirl v.
Commissioner, T.C. Memo. 1996-313, slip op. at 36–37, aff’d, 131 F.3d
143 (8th Cir. 1997).

       Two badges of fraud weigh against finding fraudulent intent.
Respondent did not offer evidence that petitioner has defrauded another
in business. See Solomon v. Commissioner, 732 F.2d at 1462; Afshar v.
Commissioner, T.C. Memo. 1981-241, 1981 Tax Ct. Memo LEXIS 503, at
*71–72, aff’d, 692 F.2d 751 (4th Cir. 1982). Petitioner has also
consistently asserted that his failure to file was due to his belief that he
was not subject to income tax. This consistency weighs against finding
fraudulent intent. Cf. Grosshandler v. Commissioner, 75 T.C. 1, 20
(1980). However, this claim is implausible given his familiarity with tax
laws and pattern of tax avoidance.
                                            8

[*8] Weighing the badges of fraud, we conclude that respondent has
established by clear and convincing evidence that petitioner failed to file
for the years at issue and his failure was due to fraud.

       Additions to tax for failure to timely file are not imposed if the
failure is due to reasonable cause and not willful neglect. See I.R.C.
§ 6651(a)(1). To establish reasonable cause, petitioner must show that
he exercised “ordinary business care and prudence” but nonetheless was
unable to meet his filing obligations. See United States v. Boyle, 469
U.S. 241, 245–46 (1985); Treas. Reg. § 301.6651-1(c)(1). Willful neglect
is a “conscious, intentional failure or reckless indifference.” See Boyle,
469 U.S. at 245.

       Petitioner argues that he had reasonable cause for failing to
timely file his tax returns for the years at issue because he did not know
with whom to file the returns on account of the Department of the
Treasury’s alleged failure to comply with the Administrative Procedure
Act (APA). The APA requires agencies to publish in the Federal Register
(1) “descriptions of [their] central and field organization” and (2) “the
established places at which . . . the public may obtain information, make
submittals or requests, or obtain decisions.” See 5 U.S.C. § 552(a)(1)(A).
Petitioner argues that the Department of the Treasury has failed to
meet both obligations and therefore he cannot be “adversely affected by,
a matter required to be published in the Federal Register and not so
published.” See 5 U.S.C. § 552(a)(1) (flush language).

       We reject petitioner’s arguments that the Department of the
Treasury has not met its publishing obligations. In accordance with its
obligation to publish the central and field organization, the Department
of the Treasury published its organization structure in the U.S.
Government Manual, a special edition of the Federal Register, for each
of the years at issue. See 44 U.S.C. § 1510(a); 1 C.F.R. § 9.1 (2023). 5

        5 For the organization structure publication for the years at issue, see Office of

the Federal Register, The United States Government Manual 2009/2010, at 327–30,
332 (2009); Office of the Federal Register, The United States Government Manual 2011,
at 289–90, 295–302 (2011); Office of the Federal Register, The United States
Government Manual 2012, at 296–97, 300–08 (2012); Office of the Federal Register,
The United States Government Manual 2013, at 299–300, 303–11 (2013); Office of the
Federal Register, The United States Government Manual 2014, at 299–300, 303–11
(2014); Office of the Federal Register, Department of the Treasury, The United States
Government Manual 2015 (July 1, 2015), https://www.govinfo.gov/content/pkg/
GOVMAN-2015-07-01/xml/GOVMAN-2015-07-01-125.xml; Office of the Federal
                                      9

[*9] Petitioner also alleges that the Department of the Treasury has
failed to provide a description of the place at which the public can “make
submittals.” Again, we reject this argument. The Department of the
Treasury published locations where returns could be filed in the
regulations under section 6091. See Treas. Reg. § 1.6091-2(a)(1) (stating
a person may file at “the local Internal Revenue Service office that
serves the legal residence or principal place of business of the person
required to make the return”); see also id. para. (c) (indicating that
returns must be filed with a service center if the instructions so specify).
In turn, the IRS issued Notices that directed taxpayers to the local IRS
office. See I.R.S. Notice 2003-19, 2003-1 C.B. 703; I.R.S. Notice 2010-53,
2010-31 I.R.B. 182. Thus, the Department of the Treasury met its
obligations under the APA. See DiCarlo v. Commissioner, T.C. Memo.
1992-280 (finding that publication of the location where a taxpayer could
obtain forms in Treasury Regulation § 1.6011-1(b) and the relevant
addresses in the U.S. Government Manual satisfied the APA publication
requirement). Notice was duly given in the Federal Register, and
petitioner is deemed to have received such notice. See 44 U.S.C. § 1507.
Regardless of the Department of the Treasury’s compliance with the
APA, the obligation to file tax returns is from the Code itself, without
reference to the regulations. See United States v. Hicks, 947 F.2d 1356,
1360 (9th Cir. 1991); United States v. Bowers, 920 F.2d 220, 222 (4th
Cir. 1990); United States v. Wunder, 919 F.2d 34, 38 (6th Cir. 1990).

       Even if petitioner did not know with whom to file his returns, his
failure to file was not reasonable. Taxpayers have a personal and
nondelegable duty to file their tax returns on time. See Boyle, 469 U.S.
at 249–50. There is one narrow exception if the taxpayer engages an
attorney or accountant (for example) to determine whether a liability
exists. See id. at 250–51. Petitioner states that he spoke with several
attorneys. Petitioner’s supposed reliance is not credible because he
failed to offer the names of the attorneys and the subject of the
conversations. Petitioner’s uninformed belief about the law is not
reasonable cause for failing to file. See Henningsen v. Commissioner, 26
T.C. 528, 536 (1956) (“Mere uninformed and unsupported belief by a
taxpayer, no matter how sincere that belief may be, that he is not
required to file a tax return, is insufficient to constitute reasonable cause
for his failure so to file.”), aff’d, 243 F.2d 954 (4th Cir. 1957); Staples v.
Commissioner, T.C. Memo. 2019-75, at *8 (holding that a frivolous

Register, Department of the Treasury, The United States Government Manual 2016
(December 6, 2016), https://www.govinfo.gov/content/pkg/GOVMAN-2016-12-16/xml/
GOVMAN-2016-12-16-125.xml.
                                   10

[*10] argument regarding exemption from tax was not reasonable cause
for failure to file); McGowan v. Commissioner, T.C. Memo. 2006-154, slip
op. at 5 (holding that tax-protester arguments are not sufficient for
reasonable cause).

       We uphold respondent’s determination that petitioner is liable for
additions to tax for the years at issue under section 6651(f).

      B.     Additions to Tax Under Section 6651(a)(2)

       Section 6651(a)(2) provides for additions to tax when a taxpayer
fails to pay timely the tax shown on a return. To meet his burden of
production, respondent must provide evidence of a tax return showing a
tax liability. See I.R.C. §§ 7491(c), 6651(a)(2); Wheeler v. Commissioner,
127 T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008); Cabirac
v. Commissioner, 120 T.C. 163, 170 (2003), aff’d, No. 03-3157, 2004 WL
7318960 (3d Cir. Feb. 10, 2004). An SFR is treated as a return for
purposes of section 6651(a)(2). See I.R.C. § 6651(g)(2). When a taxpayer
does not file a return, the Commissioner must introduce evidence that
an SFR satisfying the requirements of section 6020(b) was prepared.
See Wheeler, 127 T.C. at 210. Respondent has met his burden of
production by producing certified copies of the SFRs for the years at
issue.

       Additions to tax under section 6651(a)(2) are not imposed if the
taxpayer can show that the failure to timely pay is due to reasonable
cause and not willful neglect. A taxpayer had reasonable cause if the
taxpayer “exercised ordinary business care and prudence in providing
for payment of his tax liability and was nevertheless either unable to
pay the tax or would suffer an undue hardship.” See Treas. Reg.
§ 301.6651-1(c)(1). Petitioner asserts the same argument as above, that
he did not know whom to pay because the Department of the Treasury
failed to comply with its publishing obligations under the APA. For the
same reasons as above, we reject this argument.             We uphold
respondent’s determination that petitioner is liable for additions to tax
under section 6651(a)(2) for the years at issue.

      C.     Failure to Make Estimated Tax Payments

        Section 6654(a) provides for additions to tax for an individual’s
underpayment of estimated tax. Estimated income tax must be paid
quarterly in an amount equal to 25% of the lesser of (1) 90% of the tax
required to be shown on the current year’s return or (2) if the taxpayer
filed for the previous tax year, 100% of the tax shown on the prior year’s
                                    11

[*11] tax return. See I.R.C. § 6654(c) and (d)(1). To meet his burden of
production, respondent must show that petitioner had an obligation to
make estimated tax payments. See Wheeler, 127 T.C. at 211–12. That
is, respondent must introduce evidence of whether petitioner filed a tax
return for the prior year and whether petitioner had a tax liability for
the year at issue. See id.

       To meet his burden of production, respondent produced certified
copies of the SFRs for the years at issue. Further, petitioner stipulated
that he did not file tax returns for tax years 2008 through 2018. This
evidence is sufficient to show that petitioner did not file tax returns for
2008 through 2016, had outstanding tax liabilities for the years at issue,
and failed to pay estimated tax for the years at issue. Respondent has
thus satisfied his burden of production. See id.

       The burden of production, then, shifts to petitioner to show one of
the statutory exceptions applies. See I.R.C. § 6654(e). Petitioner does
not contend that any exception applies. Consequently, we uphold
respondent’s determination that petitioner is liable for additions to tax
under section 6654 for the years at issue.

IV.   Frivolous Argument Penalty

       Section 6673(a)(1) authorizes this Court to impose a penalty not
in excess of $25,000 whenever it appears that (1) the taxpayer has
instituted or maintained proceedings primarily for delay; (2) the
taxpayer's position is frivolous or groundless; or (3) the taxpayer
unreasonably failed to pursue available administrative remedies. A
taxpayer’s position is frivolous or groundless “if it is contrary to
established law and unsupported by a reasoned, colorable argument for
a change in the law.” See Takaba v. Commissioner, 119 T.C. 285, 294
(2002); Williams v. Commissioner, 114 T.C. 136, 144 (2000).

       As we have found, petitioner’s arguments that citizens are not
subject to tax and that he did not have an obligation to file his tax
returns because of the Department of the Treasury’s alleged failure to
comply with the APA are frivolous.           Throughout the pretrial
proceedings, petitioner repeatedly asserted these arguments despite
warnings that he risked a section 6673 penalty. However, because
petitioner refrained from advancing frivolous arguments at trial, this
Court will not impose a section 6673 penalty.
                                    12

[*12]                           Conclusion

       We accordingly sustain respondent’s determination that
petitioner is liable for income tax and additions to tax in the amounts
set forth in the notice of deficiency.

        To reflect the foregoing,

        Decision will be entered for respondent.