civil fraud - many misdeeds but not criminal fraud

ANDY GOOD, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:



Sandy Good, pro se.
Horace Crump, for respondent.

David Marvin Swanson d.b.a. Dynamic Monetary Strategies, created the Treasures in a Field Investments

trust organization for petitioner. On November 15,

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Respondent determined deficiencies in petitioner's Federal income tax and additions to

tax under sections 6651(a)(2) and (f) and 6654(a) 1 as follows: [*2] Additions to tax Sec. 6651(f) 1

Sec. 6654(a) Year Deficiency  Sec. 6651(a)(2) 2002 $15,889 $3,972 $11,520 $531 2003 16,403 4,101 11,892

423 2004 64,969 16,242 47,103 1,862 2005 44,044 To be determined 31,932 1,767 2006 12,705 To be

determined 9,211 601 1 Alternatively, respondent determined that petitioner is liable for additions to

tax under sec. 6651(a)(1) if we conclude that he is not liable for the additions to tax under sec.

6651(f). 2 The sec. 6651(a)(2) addition to tax is 0.5% of the amount of tax shown on the return, with

an additional 0.5% per month during which the failure to pay continues, up to a maximum of 25%. In the

notice of deficiency respondent did not calculate the amounts of the sec. 6651(a)(2) additions to tax

for 2005-06 because the period necessary to support the assertion of the maximum penalty amount under

sec. 6651(a)(2) had not yet been attained. The issues for decision are: (1) whether and if so to what

extent petitioner had unreported income for the years in issue; (2) whether petitioner is liable for

self-employment tax under section 1401 for the years in issue; (3) whether petitioner was required to

file Federal income tax returns for the years in issue; (4) whether petitioner is liable for additions

to tax under section 6651(f) for fraudulent failure to file Federal income tax returns for the years in

issue; (5) whether petitioner is liable for additions to tax under sections 6651(a)(2) and 6654(a) for

the years in [*3] issue; and (6) whether we should impose a penalty undersection 6673(a)(1). Because

petitioner maintains that as a minister of God he had no income, we will first address whether

petitioner operated a church and whether he was a minister.

FINDINGS OF FACT

Some of the facts have been deemed established for purposes of this case in accordance with Rule 91(f).

2 The deemed facts are incorporated herein by this reference. Petitioner resided in Alabama when he

filed his petition. [*4] I. Background After serving in the U.S. Air Force in Germany and receiving an

honorable discharge in 1976, petitioner attended school and worked at various jobs until 1993, when he

and his wife, Kathi Good, moved to Florida.

Sometime after moving to Florida, petitioner and Mrs. Good built a house at 32210 Bartel Street for

their family. Because of the influx of people moving into the Pensacola area, petitioner and Mrs. Good

decided to build a second house at 32188 Bartel Street. Petitioner and Mrs. Good subsequently moved

into the house at 32188 Bartel Street. On a date not apparent from the record, petitioner and Mrs. Good

also acquired property at 13450 County Road 91. Petitioner initially titled all three properties in his

name.

II. Prepare the Way Ministries

A. Background

In 1999 petitioner founded Prepare the Way Ministries. He did not consult with a certified public

accountant about the tax aspects of operating through Prepare the Way Ministries. Petitioner, however,

performed some research [*5] regarding Federal taxation and also read a book by Joseph N. Sweet 3

regarding ministries and taxation.

In 1999 petitioner also established Treasures in a Field Investments, 4 an unincorporated business

trust organization (UBTO). He used Treasures in a Field Investments to conduct transactions and to make

conveyances. Petitioner, acting through Treasures in a Field Investments, received and deposited funds

into various trust accounts and used funds from trust accounts to pay his business and personal living

expenses. [*6] B. Property Transactions In 1999 petitioner and Mrs. Good transferred the properties at

32210 Bartel Street, 32188 Bartel Street, and 13450 County Road 91 to Treasures in a Field Investments.

5 In 2002 Treasures in a Field Investments granted to petitioner and his family an unrecorded life

estate with respect to the property at 13450 County Road 91. In 2003 Treasures in a Field Investments

sold the property at 32210 Bartel Street. 6 In 2004 Treasures in a Field Investments sold the property

at 32188 Bartel Street to Samuel J. Fitts and Iris K. Fitts for $120,000.

On a date not apparent from the record, petitioner and Mrs. Good began building a house at the 13450

County Road 91 property. After the sale of the property at 32188 Bartel Street in 2004, they lived in

the partially constructed [*7] house at 13450 County Road 91 while they continued its construction. 7

Petitioner and Mrs. Good used the proceeds from the sale of the property at 32188 Bartel Street to fund

construction of the house at 13450 County Road 91.

C. Development of the Ministerial Trust

Until 2004 petitioner operated Prepare the Way Ministries through the Treasures in a Field Investments

UBTO. In 2004 using a plan promoted by Glen Stoll, petitioner reorganized his alleged ministry into a

ministerial trust. 8 Mr. Stoll has since been enjoined from engaging in such promotions. 9 To

accomplish the reorganization, a resolution was prepared purportedly to show that the board of [*8]

trustees of Treasures in a Field Investments took action to terminate the operation of Treasures in a

Field Investments as a UBTO, reorganize the entity as a “Church Ministry Trust”, and change the entity

name to Treasures in a Field. The resolution, which the board allegedly adopted, provided that the

reorganized Treasures in a Field would be consistent with section 508(c)(1)(A) and section 501(c)(3).

During the years in issue petitioner held out Prepare the Way Ministries as a section 501(c)(3)

organization. In 2004 Mrs. Good executed a document allegedly certifying that Prepare the Way

Ministries had a “non-taxable status”. However, Treasures in a Field failed to submit a Form 1023,

Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Instead,

petitioner, on behalf of Prepare the Way Ministries, prepared a Form W-8BEN, Certificate of Foreign

Status of Beneficial Owner for United States Tax Withholding. 10 Petitioner materially altered the Form

W-8BEN by adding an additional box labeled “church” under the portion of the form requesting

identification of the type of beneficial owner. Petitioner used this Form W-8BEN [*9] to hold Prepare

the Way Ministries out as a tax-exempt entity for transactions requiring tShird-party reporting.

D. Bank Accounts

From December 31, 2001, through December 29, 2006, petitioner maintained an account ending in 9269

(account 9269) in the name of Prepare the Way Ministries at Regions Bank. The signature card for

account 9269 showed petitioner, Mrs. Good, Shane M. Good, Julie A. Good, Mr. Dornstadter, and Summer C.

Dornstadter, petitioner's daughter, as authorized signatories. 11 The employer identification number

(EIN) petitioner gave to Regions Bank was 929099107 and was false. Petitioner used this false EIN to

satisfy Region's Bank requirement for establishing an account.

From April 29, 2003, through December 29, 2006, petitioner maintained an account ending in 2952

(account 2952) in the name of Treasures in a Field Investments at AmSouth Bank. 12 Only petitioner and

Mrs. Good were authorized [*10] signatories for account 2952. No EIN was provided to AmSouth Bank. We

refer to account 9269 and account 2952 collectively as the ministry bank accounts. 13

III. Petitioner's Activities and Finances During the Years in Issue During the years in issue

petitioner went on numerous trips, including trips to Europe, which he testified at trial were

missionary trips. 14 Petitioner admitted during his testimony that he also performed carpentry and

landscaping work and trained horses and that he rented space in the 32210 and 32188 Bartel Street

properties to families involved in his purported ministry.

Petitioner did not maintain a personal bank account separate from the ministry bank accounts, and he

made no distinction between his personal finances and the finances of his alleged ministry. Petitioner

deposited funds from his activities, including income he received for performing various services, into

the ministry bank accounts, over which he had total dominion and control. The alleged ministry paid

petitioner's living expenses, including room and board, as [*11] well as petitioner's tax bills on the

property at 13450 County Road 91. Petitioner and Mrs. Good used a check card tied to account 2952 at

restaurants, grocery stores, a veterinarian's office, home improvement stores, gas stations, clothing

stores, Wal-Mart, and Amazon.com. During 2002-04 petitioner and Mrs. Good used funds in account 9269 to

pay their mortgage and their cellular telephone bills. Petitioner and Mrs. Good also used funds in the

ministry bank accounts to pay their American Express credit card bills.

IV. Petitioner's Tax Reporting and the Notices of Deficiency Petitioner failed to file Federal income

tax returns for 2002-06. Accordingly, respondent prepared substitutes for returns (SFRs) for petitioner

for 2002-06 pursuant to section 6020(b). Respondent subsequently mailed to petitioner Letters 950 (so-

called 30-day letters) with attached documents, including the SFRs, relating to 2002-06.

During respondent's examination for petitioner, respondent's revenue agent reconstructed petitioner's

income by analyzing deposits into the ministry bank accounts. The revenue agent determined that

petitioner made total deposits as follows: [*12] Year Account 9269 Account 2952 Total 2002 $37,939 -0-

$37,939 2003 17,256 $37,913 55,169 2004 62,971 59,477 122,448 2005 61,631 87,356 148,987 2006 21,091

30,824 51,915 The revenue agent determined that petitioner made taxable deposits as follows: 15

Year Account 9269 Account 2952 Total 2002 $37,643 -0- $37,643 2003 16,428 $36,113 52,541 2004 58,183

59,013 117,196 2005 61,631 65,058 126,689 2006 21,091 27,767 48,858 [*13] The revenue agent treated the

taxable deposits as income and allocated the income between petitioner's Schedules C and Schedules E as

follows: 16

Schedule C:

         Year        Account 9269             Account 2952          Total
         2002          $24,659                        -0-          $24,659
         2003           12,803                     $34,898          47,701
         2004           57,880                      58,513         116,393
         2005           61,631                      65,058         126,689
         2006           21,091                      27,767          48,858
 Schedule E:
        Year        Account 9269              Account 2952          Total
         2002          $12,984                        -0-          $12,984
         2003            3,625                      $1,215           4,840
         2004              303                         500             803
On March 18, 2010, respondent mailed to petitioner notices of deficiency for the years in issue.

Respondent determined that petitioner had unreported income as follows: 17 [*14] Year Schedule E

Schedule C Total 2002 $12,984 $44,260 $57,244 2003 4,840 54,405 59,245 2004 803 83,440 84,243 2005 -0-

132,990 132,990 2006 -0- 48,859 48,859 Respondent also determined that petitioner had self-employment

income of $44,260, $54,405, $83,440, $132,990, and $48,859, for 2002, 2003, 2004, 2005, and 2006,

respectively, and that petitioner had a short-term capital gain of $114,667 for 2004. 18

V. Petitioner's Tax Court Proceedings After receiving the notices of deficiency, petitioner filed a

petition with this Court contesting respondent's determinations. The Court set this case for trial at

the Mobile, Alabama, trial session.

Following trial we held the record open to allow petitioner the opportunity to produce to respondent

additional evidence, which, if appropriate, could then be [*15] stipulated and submitted as part of the

trial record. The parties did not submit a supplemental stipulation. 19 Consequently, we decide this

case on the trial record.

OPINION

I. Presumption of Correctness and Burden of Proof With Respect to Tax Deficiencies

A. Presumption of Correctness

The Commissioner's deficiency determination ordinarily is entitled to a presumption of correctness. See

Bone v. Commissioner, 324 F.3d 1289, 1293 [91 AFTR 2d 2003-1364] (11th Cir. 2003), aff'g T.C. Memo.

2001-43 [TC Memo 2001-43]. However, when a case involves unreported income, the U.S. Court of Appeals

for the Eleventh Circuit, to which an appeal in this case would lie absent a stipulation to the

contrary,see,sec. 7482(b)(1)(A), (2), has held that the Commissioner's determination of unreported

income is entitled to a presumption of correctness only if the determination is supported by an

evidentiary foundation linking the taxpayer to an income-producing activity, see Blohm v. Commissioner

994 F.2d 1542, 1549 [72 AFTR 2d 93-5347] (11th Cir. 1993), , aff'g T.C. Memo. 1991-636 [1991 TC Memo

¶91,636]. A determination that is unsupported by any evidence is arbitrary and erroneous, see

Weimerskirch v. Commissioner 596 F.2d , [*16] 358, 362 (9th Cir. 1979), rev'g 67 T.C.e required showing is minimal, see Blohm v. Commissioner 994 F.2d at 1549 (citing Carson v. United ,

States, 560 F.2d 693, 697 (5th Cir. 1977)). Once the Commissioner produces evidence linking the

taxpayer to an income-producing activity, the presumption of correctness applies and the burden of

production shifts to the taxpayer to rebut that presumption by establishing that the Commissioner's

determination is arbitrary or erroneous. Id.

Respondent introduced evidence that petitioner directed the operations and financial affairs of Prepare

the Way Ministries, Treasures in a Field Investments, and Treasures in a Field during the years in

issue. Respondent also introduced evidence that, in addition to his alleged ministry work, petitioner

engaged in other secular work in exchange for payment and deposited proceeds from all his activities

into ministry bank accounts. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (holding that bank

deposits evidence receipt of income). Respondent introduced evidence that petitioner, acting through

Prepare the Way Ministries and Treasures in a Field Investments, sold the 32188 Bartel Street property.

Accordingly, we conclude that respondent laid the requisite minimal evidentiary foundation for the

contested unreported income adjustments and that respondent's determinations are entitled to a

presumption of correctness. [*17] Although his argument is not entirely clear, petitioner appears to

contend that respondent's determinations are not entitled to the presumption of correctness because

respondent acted arbitrarily in issuing the notices of deficiency. Petitioner contends that

respondent's determinations constitute a “naked” assessment because respondent has failed to link

petitioner's receipt of income to an income-generating activity.

The presumption of correctness does not apply when the Commissioner fails to make a determination and

issues a “naked' assessment without any foundation whatsoever”. United States v. Janis, 428 U.S. 433,

441 [38 AFTR 2d 76-5378] (1976). As we stated above, however, respondent has introduced substantive

evidence to establish that petitioner, acting through Prepare the Way Ministries, Treasures in a Field

Investments, and Treasures in a Field, received payments, made deposits into various ministry bank

accounts, engaged in income-producing activities during the years in issue, and sold real property in

2004. That evidence is more than sufficient to support respondent's determinations in the notices of

deficiency. Accordingly, we find that the notices of deficiency are not “naked assessments”.

B. Burden of Proof

Generally, the taxpayer bears the burden of proving that the Commissioner's determinations in a notice

of deficiency are erroneous. See Rule 142(a); Welch v. [*18] Helvering, 290 U.S. 111, 115 [12 AFTR

1456] (1933). If, however, a taxpayer produces credible evidence 20 with respect to any factual issue

relevant to ascertaining the taxpayer's tax liability and satisfies the requirements of section 7491

(a)(2), the burden of proof on any such issue shifts to the Commissioner. Sec. 7491(a)(1). Section

7491(a)(2) requires a taxpayer to demonstrate that he or she complied with the substantiation

requirements, maintained all records required under the Code, and cooperated with reasonable requests

by the Secretary 21 for witnesses, information, documents, meetings, and interviews. See also Higbee v.

Commissioner, 116 T.C. 438, 440-441 (2001). The taxpayer bears the burden of proving that all of the

section 7491(a) requirements have been satisfied. Rolfs v. Commissioner, 135 T.C. 471, 483 (2010),

aff'd, 668 F.3d 888 [109 AFTR 2d 2012-828] (7th Cir. 2012).

Petitioner does not contend that section 7491(a)(1) applies, and the record establishes that he did not

satisfy the section 7491(a)(2) requirements. [*19] Consequently, petitioner bears the burden of proof

as to any disputed factual issue. See Rule 142(a).

II. Parties' Arguments Respondent contends that petitioner, a “carpenter”, received taxable income and

deposited that income into the ministry bank accounts. Respondent contends that petitioner is liable

for all taxable income deposited into the ministry bank accounts because petitioner exercised dominion

and control over those accounts. Respondent also contends that petitioner is liable for self-employment

tax with respect to his unreported income. Relying on the determination of unreported income,

respondent further contends that petitioner had sufficient gross income to require him to file Federal

tax returns for the years in issue and that he failed to file such returns. Respondent also contends

that petitioner is liable for a civil penalty for fraudulently failing to file his tax returns and

additions to tax for failing to pay his Federal income tax and estimated tax for the years in issue.

Petitioner contends that he did not receive any taxable income during the years in issue. Petitioner

contends that he was a man of God engaged in the work of God during the years in issue and that

everything he received or acquired belonged to God. He further contends that he is exempt from Federal

taxation because his activities during the years in issue were religious. He contends that [*20] any

assets he acquired were for the purpose of his ministry and any disposition of those assets should not

be taxed to him. Petitioner also contends that he had no obligation to file Federal tax returns because

he did not have sufficient income to require him to file such returns.

We construe petitioner's argument, at least in part, to be that he was a minister entitled to exclude

all income and gain he received and that he was entitled to all benefits under the Code that generally

accrue to ministers and church organizations. Accordingly, we will consider: (1) whether petitioner's

alleged ministry constituted a church, as that term is defined for Federal tax purposes; and (2)

whether petitioner was a minister of the gospel, as that term is defined for Federal tax purposes. 22

A. Whether Petitioner's Alleged Ministry Constituted a Church Section 501(a) provides that certain

organizations, including churches, shall be exempt from Federal taxation. See also sec. 501(c)(3). A

church that qualifies as an exempt organization for purposes of section 501 is not required to file an

application for exemption from taxation. Sec. 508(c)(1)(A);see also sec. 1.508- 1(a)(3)(i)(a), Income

Tax Regs. Neither the Code nor the regulations define the term “church”. See Found. of Human

Understanding v. Commissioner 88 T.C. , [*21] 1341, 1356 (1987). However, as we have stated: “Although

every church may be a religious organization, not every religious organization is a church.”Id. at

1357.

Whether an entity is a church is a fact-specific inquiry. See id. In deciding whether an entity is a

church, this Court primarily considers the entity's religious purposes and “the means by which its

religious purposes are accomplished.” Id. “At a minimum, a church includes a body of believers or

communicants that assembles regularly in order to worship.” Id. (quoting Am. Guidance Found., Inc. v.

United States, 490 F. Supp. 304, 306 [46 AFTR 2d 80-5006] (D.D.C. 1980)).

The Internal Revenue Service (IRS) has articulated criteria that it uses to identify organizations that

qualify for church status. Id. at 1358. The criteria include the following: "(1) a distinct legal

existence;

(2) a recognized creed and form of worship;

672 (1977), but

th
(3) a definite and distinct ecclesiastical government;

(4) a formal code of doctrine and discipline;

(5) a distinct religious history;

(6) a membership not associated with any other church or denomination; [*22] (7) an organization of

ordained ministers; (8) ordained ministers selected after completing prescribed studies;

(9) a literature of its own;

(10) established places of worship;

(11) regular congregations;

(12) regular religious services;

(13) Sunday schools for religious instruction of the young; and

(14) schools for the preparation of its ministers.”

Id. (quoting Internal Revenue Manual 7(10)69, Exempt Organizations Examination Guidelines Handbook

321.3(3) (Apr. 5, 1982)); see also Chambers v. Commissioner, T.C. Memo. 2011-114 [TC Memo 2011-114],

slip op. at 14-15. While we have declined to adopt these criteria as a test, we have found that the

criteria are helpful in deciding whether an entity is a church. See Found. of Human Understanding v.

Commissioner, 88 T.C. at 1358.

Although Mrs. Good testified that petitioner held ministry meetings at his home, the record contains no

evidence regarding the identities of those who attended the meetings and their relationship to

petitioner or whether petitioner held these meetings regularly. Petitioner offered only minimal

testimony regarding his purported ministry activities. He did not call any of his alleged [*23]

parishioners to testify. Furthermore, the record shows that petitioner's purported ministry did not

have a distinct legal existence separate from petitioner. See, e.g., Hughes v. Commissioner, T.C. Memo.

1994-139 [1994 RIA TC Memo ¶94,139]. Petitioner failed to introduce any credible evidence to support a

finding that his purported ministry activity satisfied any of the other criteria outlined above.

Petitioner had the burden of proving that his purported ministry activity qualified as a church, and he

failed to do so. 23 See, e.g., Spiritual Outreach Soc'y v.

Commissioner, T.C. Memo. 1990-41 [¶90,041 PH Memo TC], aff'd, 927 F.2d 335 [67 AFTR 2d 91-611] (8th

Cir. 1991).

B. Whether Petitioner Was a Minister of the Gospel Generally, compensation for services rendered is

includable in gross income. See sec. 61(a)(1). However, section 107 provides that a minister of the

gospel may exclude from gross income a rental value or rental allowance provided to him as part of his

compensation. See also sec. 1.107-1, Income Tax Regs. A minister is an individual “authorized to

administer the sacraments, preach, and conduct services of worship.” Salkov v. Commissioner, 46 T.C.

190, 194 (1966). An individual is a [*24] minister if, acting pursuant to his or her authority as a

minister, he or she performs sacerdotal functions, conducts religious worship, participates in the

maintenance of “religious organizations and their integral agencies”, and performs “teaching and

administrative duties at theological seminars.”Sec. 1.107-1(a), Income Tax Regs.; see also Brannon v.

Commissioner, T.C. Memo. 1999-370 [1999 RIA TC Memo ¶99,370].

While petitioner testified as to his religious education and experience, his testimony alone is

insufficient to convince us that he was a minister within the meaning of section 107. Petitioner failed

to introduce any credible evidence to show that he was a minister or that he performed sacerdotal

functions, participated in the conduct or control of religious boards, societies, or other agencies

related to his religious affiliation, or performed any teaching or administrative duties at religiously

affiliated institutions. Accordingly, we find that petitioner has not established that he was a

minister for Federal tax purposes. See, e.g., Weeks v. Commissioner, T.C. Memo. 1987-198 [¶87,198 PH

Memo TC].

III. Petitioner's Unreported Income for the Years in issue

A. Bank Deposits

1. In General Gross income includes “all income from whatever source derived”. Sec. 61(a). A taxpayer

must maintain books and records establishing the amount of his [*25] or her gross income. Sec. 6001. If

a taxpayer fails to maintain and produce the required books and records, the Commissioner may determine

the taxpayer's income by any method that clearly reflects income. See sec. 446(b); Petzoldt v.

Commissioner, 92 T.C. 661, 693 (1989); sec. 1.446-1(b)(1), Income Tax Regs. The Commissioner's

reconstruction of income “need only be reasonable in light of all surrounding facts and circumstances.”

Petzoldt v. Commissioner, 92 T.C. at 687.

The bank deposits method is a permissible method of reconstructing income. See Clayton v. Commissioner,

102 T.C. 632, 645 (1994); see also Langille v. Commissioner, T.C. Memo. 2010-49 [TC Memo 2010-49],

aff'd, 447 Fed. Appx. 130 [108 AFTR 2d 2011-7254] (11th Cir. 2011). Bank deposits constitute prima

facie evidence of income. See Tokarski v. Commissioner, 87 T.C. at 77. The Commissioner need not show

the likely source of a deposit treated as income, but the Commissioner “must take into account any

nontaxable source or deductible expense of which *** [he] has knowledge” in reconstructing income using

the bank deposits method. See Clayton v. Commissioner, 102 T.C. at 645-646. However, the Commissioner

need not follow any “leads” suggesting that a taxpayer has deductible expenses. DiLeo v. Commissioner,

96 T.C. 858, 872 (1991), aff'd, 959 F.2d 16 [69 AFTR 2d 92-998] (2d Cir. 1992). [*26] After the

Commissioner reconstructs a taxpayer's income and determines a deficiency, the taxpayer bears the

burden of proving that the Commissioner's use of the bank deposits method is unfair or inaccurate. See

Clayton v. Commissioner, 102 T.C. at 645. The taxpayer must prove that the reconstruction is in error

and may do so, in whole or in part, by proving that a deposit is not taxable. See id.

Respondent introduced credible evidence that petitioner did not maintain adequate books and records

with respect to his income. 24 Therefore, we find that it was reasonable for respondent to use an

indirect method, i.e., the bank deposits method, to reconstruct petitioner's income. Accordingly,

petitioner bears the burden of proving that respondent's determinations are arbitrary or erroneous.

Petitioner's sole argument is that the deposits into the ministry bank accounts do , [*27] not

constitute taxable income to him because the deposits are attributable to his ministry and, as

religious funds, are not subject to taxation.

2. Whether Petitioner's Bank Deposits Constituted Taxable Income Section 61(a) defines gross income as

“all income from whatever source derived, including (but not limited to) the following items: (1)

Compensation for services, including fees, commissions, fringe benefits, and similar items; (2) Gross

income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents”.

The definition is construed broadly and extends to all accessions to wealth, clearly realized, over

which the taxpayer has complete control. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 [47

AFTR 162] (1955). As the Supreme Court explained, a gain “constitutes taxable income when its recipient

has such control over it that, as a practical matter, he derives readily realizable economic value from

it.” Rutkin v. United States, 343 U.S. 130, 137 [41 AFTR 596] (1952).

When the Commissioner reconstructs a taxpayer's income using the bank deposits method, the Commissioner

may include in gross income “deposits into all accounts over which the taxpayer has dominion and

control, not just deposits into the taxpayer's personal bank accounts.” Chambers v. Commissioner, slip

op. at 17-18; see also United States v. Goldberg, 330 F.2d 30, 38 [13 AFTR 2d 938] (3d Cir. 1964);

Davis [*28] v. United States, 226 F.2d 331, 334-335 [47 AFTR 2016] (6th Cir. 1955); Price v.

Commissioner, T.C. Memo. 2004-103 [TC Memo 2004-103], slip op. at 25; Cohen v. Commissioner, T.C. Memo.

2003-42 [TC Memo 2003-42], slip op. at 9; Woods v. Commissioner, T.C. Memo. 1989-611 [¶89,611 PH Memo

TC], aff'd without published opinion 929 F.2d 702 (6th Cir. 1991). A taxpayer has , dominion and

control when the taxpayer is free to use the funds at will. Rutkin, 343 U.S. at 137. Use of funds for

personal purposes indicates dominion and control. Woods v. Commissioner, T.C. Memo. 1989-611 [¶89,611

PH Memo TC].

The Court has extended this general principle to situations where a taxpayer has dominion and control

over an account titled in the name of a church or other religious organization. For example, inWoods,

this Court held that "[a]mounts deposited into bank accounts in the name of the church constituted

income of petitioners because they exercised total dominion and control over those funds and expended

them for their personal living expenses and other personal purposes”. See also Whittington v.

Commissioner T.C. Memo. 2000-296 [TC Memo 2000-296], slip op. at 8-9. , Similarly, in Chambers v.

Commissioner, slip op. at 19-24, this Court held that all deposits into church bank accounts properly

were includable in the taxpayers' gross income because the taxpayers “fully controlled the church

accounts, used money in those accounts at will, including to pay personal expenses, and were not

accountable to anyone in their congregation for their use [*29] of the church funds.” While the

taxpayers inChambers v. Commissioner, slip op. at 23, testified that they used the money for mission

trips and ministry expenses, this Court held that the church bank account funds were includable in the

taxpayers' gross income because they failed to supply any receipts, records, or other evidence to

substantiate the nature and use of the funds.

Petitioner testified that his primary occupation is minister of the gospel. He further testified that

he performed all of his secular work as a volunteer and that any payment he received as a result of

such work constituted a contribution to the ministry. With respect to the purported rental income,

petitionertestified that he made living space in the Bartel Street properties available to families in

his ministry, that the families contributed to Prepare the Way Ministries in exchange for use of the

space, and that he suggested the amount of the monthly contribution.

Petitioner testified that he relied on direct donations from people and other ministries as well as the

funds in the ministry bank accounts to support himself during the years in issue. He testified that he

received no salary and instead received only housing and food in exchange for his services. He further

testified that the money that came into the ministry was distributed to other people. He also testified

that he and Mrs. Good used the money in the ministry bank accounts [*30] to pay for ministry-related

expenses. We do not find this testimony convincing or credible.

Respondent introduced the signature cards for the ministry bank accounts showing that only petitioner

and his family members had signatory authority over the accounts. Respondent also introduced bank

statements for the ministry bank accounts which show that petitioner and Mrs. Good regularly used the

ministry bank accounts to pay their personal expenses. Finally, petitioner testified that he deposited

payments he received for services rendered into the ministry bank accounts and that he used the funds

in the ministry bank accounts to pay his personal expenses.

Petitioner had unfettered access to the funds in the ministry bank accounts. He used the money in the

ministry bank accounts at will, including to pay his personal expenses and those of his family members.

Petitioner did not maintain a separate personal bank account or attempt to separate his personal income

and expenses from the income and expenses of his alleged ministry. Instead, petitioner used the

ministry bank accounts as his own bank accounts and used the funds therein to pay his personal living

expenses, mortgage, property taxes, and home construction costs. [*31] Because petitioner exercised

dominion and control over the ministry bank accounts, all taxable deposits into those accounts are

includable in petitioner's gross income. See Chambers v. Commissioner, T.C. Memo. 2011-114 [TC Memo

2011-114]; see also Burke v. Commissioner, 929 F.2d 110, 113 [67 AFTR 2d 91-824] (2d Cir. 1991)

(holding that rental income the taxpayer deposited into a church account constituted taxable income to

the taxpayer upon receipt), aff'g in part, vacating in part, and remandingT.C. Memo. 1989-671 [¶89,671

PH Memo TC].

3. Reconstructing Petitioner's Income Using the Bank Deposits Method Under the bank deposits method,

the Commissioner may assume that all money deposited into the taxpayer's account is taxable income.

DiLeo v. Commissioner, 96 T.C. at 868. However, as noted supra, the Commissioner must take into account

any nontaxable source of income or deductible expense of which he has knowledge. Id. The Commissioner's

use of the bank deposits method is not invalidated simply because some of the calculations are in

error. See id.

Having decided that respondent acted reasonably in using an indirect method to reconstruct petitioner's

income and having rejected petitioner's sole argument regarding whether such income constituted taxable

income, we now review respondent's calculations of petitioner's taxable income for the years in [*32]

issue. To show the calculation of petitioner's taxable income, respondent introduced only the revenue

agent's workpapers. However, with respect to 2002, 2003, and 2005, in the notice of deficiency

respondent determined that petitioner had taxable income in excess of taxable deposits for those years

as determined by the revenue agent. Respondent has introduced no evidence to show the calculation of

petitioner's taxable income as set forth in the notice of deficiency. Accordingly, we will evaluate

respondent's determination of petitioner's taxable income using the revenue agent's workpapers for the

years in issue.ith respect to 2002, respondent's revenue agent determined that petitioner made taxable deposits into

the ministry bank account of $37,643. The revenue agent determined that the taxable deposits for 2002

consisted of Schedule C gross receipts of $24,659 and Schedule E rental income of $12,984. However, in

the notice of deficiency respondent determined that petitioner had Schedule C gross receipts of $44,260

and Schedule E rental income of $12,984. Respondent has not introduced any evidence to explain the

difference between the revenue agent's calculation of Schedule C gross receipts totaling $24,659 and

the $44,260 gross receipts figure in the notice of deficiency. Furthermore, an analysis of the ministry

bank account statements for 2002 reveals that the revenue agent properly [*33] reconstructed

petitioner's Schedule C gross receipts for 2002. An analysis of the revenue agent's spreadsheet with

respect to petitioner's Schedule E rental income shows that the revenue agent erroneously included in

petitioner's income a number of checks that were drawn on, rather than deposited into, the ministry

bank accounts. The revenue agent erroneously included $4,844 in petitioner's Schedule E rental income.

Accordingly, we find that petitioner had Schedule C gross receipts of $24,659 and Schedule E rental

income of $8,140 for 2002.

With respect to 2003, respondent's revenue agent determined that petitioner made taxable deposits into

the ministry bank accounts of $52,541. The revenue agent determined that the taxable deposits for 2003

consisted of Schedule C gross receipts of $47,701 and Schedule E rental income of $4,840. However, in

the notice of deficiency respondent determined that petitioner had Schedule C gross receipts of $54,405

and Schedule E rental income of $4,840. Respondent has not introduced any evidence to explain the

difference between the revenue agent's calculation of Schedule C gross receipts totaling $47,701 and

the $54,405 gross receipts figure in the notice of deficiency. Furthermore, an analysis of the ministry

bank account statements for 2003 reveals that the revenue agent generally reconstructed petitioner's

Schedule C gross receipts for 2003 properly, with the [*34] following exception. We find that the

revenue agent included the same check for $10 in petitioner's Schedule E rental income for 2002 and in

his Schedule C gross receipts for 2003. Because we consider the $10 check as Schedule E rental income

for 2002, we will eliminate $10 from the revenue agent's calculation of petitioner's Schedule C gross

receipts for 2003. We also find that the revenue agent erroneously tabulated petitioner's Schedule E

rental income. The revenue agent determined that petitioner deposited into the ministry bank accounts

nine checks that constituted Schedule E rental income. The spreadsheet shows that the revenue agent

included in his calculation of petitioner's Schedule E rental income three checks twice. 25 We will

eliminate the duplications from the calculation of petitioner's Schedule E rental income. Accordingly,

we find that petitioner had Schedule C gross receipts of $47,061 and Schedule E rental income of $3,140

for 2003. [*35] With respect to 2004, 26 respondent determined that petitioner had Schedule E rental

income of $803 for 2004. Respondent included in petitioner's rental income a check for $500 from Samuel

J. Fitts and Iris K. Fitts. This check constituted earnest money for the purchase of the real property

at 32188 Bartel Street. Respondent properly included the earnest money as part of the selling price of

the property. Therefore, the $500 check should be excluded from petitioner's 2004 Schedule E rental

income. Accordingly, we find that petitioner had rental income of $303 for 2004.

With respect to 2005, respondent's revenue agent determined that petitioner made total taxable deposits

into the ministry bank accounts of $126,689. The [*36] revenue agent determined that the taxable

deposits for 2005 consisted of Schedule C gross receipts of $126,689. However, in the notice of

deficiency respondent determined that petitioner had Schedule C gross receipts of $132,990. Respondent

has not introduced any evidence to explain the difference between the revenue agent's calculation of

Schedule C gross receipts totaling $126,689 and the $132,990 gross receipts figure in the notice of

deficiency. Furthermore, our analysis of the ministry bank account statements for 2005 confirms that

the revenue agent properly reconstructed petitioner's Schedule C gross receipts for 2005. Accordingly,

we find that petitioner had Schedule C gross receipts of $126,689 for 2005.

In summary, we find that petitioner had Schedule C gross receipts of 24,659, $47,061, $83,440, and

$126,689 for 2002, 2003, 2004, and 2005, respectively. We sustain respondent's determinations regarding

petitioner's gross receipts for 2006. We also find that petitioner had Schedule E rental income of

$8,140, $3,140, and $303 for 2002, 2003, and 2004, respectively. [*37] B. 2004 Capital Gain A taxpayer

must recognize gain from the sale or exchange of property, unless the Code provides otherwise. 27  Sec.

1001(c). Section 1001(a) defines gain from the sale or other disposition of property as the excess of

the amount realized on the sale of property over the adjusted basis of the property sold or exchanged.

See also sec. 1.61-6(a), Income Tax Regs. Section 1011(a) generally provides that a taxpayer's adjusted

basis for determining the gain from the sale or other disposition of property shall be its cost,

adjusted to the extent provided by section 1016. If the taxpayer constructed his own house, the

taxpayer's basis is equal to the cost of building the house, including the amount paid for the

lot.Litterio v. Commissioner , T.C. Memo. 1992-524 [1992 RIA TC Memo ¶92,524], aff'd, 21 F.3d 423 [73

AFTR 2d 94-1649] (4th Cir. 1994); Granger v. Commissioner, T.C. Memo. 1970-155 [¶70,155 PH Memo TC].

The taxpayer has the burden of proving [*38] the basis of property for purposes of determining the

amount of gain the taxpayer must recognize. O'Neill v. Commissioner, 271 F.2d 44, 50 [4 AFTR 2d 5686]

(9th Cir. 1959), aff'g T.C. Memo. 1957-193 [¶57,193 PH Memo TC]; see also Kynell v. Commissioner T.C.

Memo. , 1954-174.

The 2004 capital gain relates to the sale by Treasures in a Field Investments of the real property at

32188 Bartel Street. Petitioner does not dispute that he originally owned the 32188 Bartel Street

property in his own name, that he transferred the property to Treasures in a Field Investments, and

that Treasures in a Field Investments sold the property to Samuel J. Fitts and Iris K. Fitts in 2004

for $120,000. Although not entirely clear, petitioner's only dispute appears to be whether the proceeds

from the sale of the property constitute taxable income to him.

Petitioner testified that all of the buildings, including the house at 32188 Bartel Street, “were

church buildings where church activities occurred.” Mrs. Good testified that she and petitioner resided

in the house at 32188 Bartel Street. She also testified that the ministry sold the house. She further

testified that she and petitioner used the proceeds from the sale of the house at 32188 Bartel Street

to fund construction of their new house at 13450 County Road 91. [*39] Respondent introduced a copy of

a resolution in which the Elder Board of Prepare the Way Ministries agreed to sell the 32188 Bartel

Street property to Samuel J. Fitts and Iris K. Fitts. Respondent also introduced a copy of a purchase

agreement dated February 6, 2004, showing the seller of the property as Treasures in a Field and the

purchase price as $120,000, with a provision for $500 in earnest money. The record shows that

petitioner deposited into account 2952 a $500 check from Samuel J. Fitts and Iris K. Fitts dated

February 6, 2004.

The evidence shows that petitioner used Treasures in a Field Investments to conduct his business and

sales transactions. While petitioner testified that he conducted some ministry activities from the

house at 32188 Bartel Street, he also used the property as his personal residence. We find that

Treasures in a Field Investments held title to and sold the 32188 Bartel Street property as

petitioner's nominee. 28 Accordingly, petitioner must include in gross income gain from the sale of the

32188 Bartel Street property. [*40] In calculating the gain on the sale of the 32188 Bartel Street

property, respondent used the stated sale price of $120,000 and an adjusted basis of zero. Petitioner

failed to introduce any evidence regarding his acquisition and construction costs, if any, for the

32188 Bartel Street property. While it is likely that petitioner incurred costs in acquiring the lot

and building the house on the 32188 Bartel Street property, petitioner did not introduce any credible

evidence regarding his cost basis or adjusted basis in the property. The record adequately supports

respondent's determination that Treasures in a Field Investments, acting as nominee for petitioner,

sold the property to Samuel J. Fitts and Iris K. Fitts for $120,000.

Neither petitioner nor respondent addressed the issue of whether petitioner's gain should be

characterized as long-term or short-term capital gain. In the notice of deficiency respondent

characterized petitioner's capital gain as short term. However, the record contains sufficient evidence

for us to decide whether the gain should be characterized as long-term or short-term gain; accordingly,

we consider this issue tried by consent of the parties. See Rule 41(b).

Section 1222(3) provides that long-term capital gain is “gain from the sale or exchange of a capital

asset held for more than 1 year, if and to the extent such [*41] gain is taken into account in

computing gross income.” While the record does not show when petitioner acquired the 32188 Bartel

Street property, the record does show that in 1999 petitioner transferred the 32188 Bartel Street

property to Treasures in a Field Investments. We infer that petitioner owned the 32188 Bartel Street

property at the time of the 1999 transfer. Accordingly, we find that petitioner's gain from the sale of

the 32188 Bartel Street property should be characterized as long-term capital gain.

We sustain respondent's determination as to the amount of petitioner's 2004 capital gain, but we do not

sustain respondent's determination that the capital gain was short-term gain.

IV. Self-Employment Tax A taxpayer's self-employment income is subject to self-employment tax. Sec.

1401(a) and (b). Self-employment tax is assessed and collected as part of the income tax, must be

included in computing any income tax deficiency or overpayment for the applicable tax period, and must

be taken into account for estimated tax purposes. Sec. 1401; see also sec. 1.1401-1(a), Income Tax

Regs. Self-employment income is generally defined as “the net earnings from self-employment derived by

an individual”. Sec. 1402(b). “The term `net earnings [*42] from self-employment' means the gross

income derived by an individual from any trade or business carried on by such individual, less the

deductions *** attributable to such trade or business”. Sec. 1402(a). Section 1402(c)(4) provides that

the term “trade or business” does not include “the performance of service by a duly ordained,

commissioned, or licensed minister of a church in the exercise of his ministry” if an exemption under

section 1402(e) is effective for the minister. See also Wingo v. Commissioner, 89 T.C. 922, 929 (1987).

If the minister does not file the application for exemption within the prescribed time, the minister is

subject to self-employment tax. Sec. 1402(e); see also Wingo v. Commissioner, 89 T.C. at 929-930.

Petitioner contends that he is not liable for self-employment tax because he is a minister. Petitioner,

however, did not introduce any credible evidence to prove that he was a minister of a church, see supra

p. 24, or that the Schedule C gross receipts determined by respondent were for the performance of

services as a minister. Moreover, the record contains no credible evidence that petitioner submitted a

Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of

Religious Orders and Christian Science Practitioners, for the years in issue that was approved by the

IRS. Accordingly, [*43] petitioner has failed to prove that he was exempt from self-employment tax

during the years in issue. We find that petitioner had self-employment income equal to the amounts of

his Schedule C gross receipts for 2002-05 as found in this opinion, and we hold that petitioner is

liable for self-employment tax with respect to these amounts. We sustain respondent's determination of

self-employment tax for 2006.

V. Obligation To File a Return Petitioner contends that he was not obligated to file returns for the

years in issue because he did not have sufficient income. See sec. 6012(a)(1)(A)(iv). Under section

6012(a)(1)(A)(iv), an individual who is entitled to make a joint return and whose gross income, when

combined with the gross income of his spouse, exceeds the sum of twice the exemption amount and the

standard deduction applicable to a joint return, must file a Federal income tax return. As discussed in

Part III, see supra pp. 32-36, we find that petitioner had unreported income of $32,799, $50,201,

$83,743, $126,689, and $48,859, for 2002, 2003, 2004, 2005, and 2006, respectively. Petitioner's income

for the years in issue exceeded the described threshold and, consequently, petitioner had an obligation

to file Federal income tax returns for those years. [*44] VI. Fraudulent Failure To File Returns

Section 6651(f) imposes an addition to tax of up to 75% of the amount of tax required to be shown on

the return in the case of a taxpayer's fraudulent failure to file a tax return. To prove that a

taxpayer is liable for the penalty, the Commissioner must prove by clear and convincing evidence that

(1) an underpayment of tax exists, and (2) some part of the underpayment is due to fraud. Sec. 7454(a);

Rule 142(b); Clayton v. Commissioner, 102 T.C. at 646. If the Commissioner proves that any part of an

underpayment is attributable to fraud, then the entire underpayment shall be treated as attributable to

fraud unless the taxpayer shows by a preponderance of the evidence that a part was not so attributable.

See, e.g., sec. 6663(b).

        A.      Underpayment of Tax
The Commissioner cannot rely upon the taxpayer's failure to meet the burden of proof on the issue of

the existence of a deficiency to sustain the burden of proving the existence of an underpayment by

clear and convincing evidence. See Parks v. Commissioner, 94 T.C. 654, 660-661 (1990); Otsuki v.

Commissioner, 53 T.C. 96, 106 (1969). However, the Commissioner need only show that there is some

underpayment for each of the years in issue. See Langworthy v. Commissioner T.C. Memo. 1998-218 [1998

RIA TC Memo ¶98,218]. Furthermore, when , [*45] allegations of fraud are intertwined with unreported

and indirectly reconstructed income, the Commissioner may prove the existence of an underpayment by

proving a likely source of income or disproving nontaxable sources alleged by the taxpayer. See Parks

v. Commissioner, 94 T.C. at 661. As noted supra pp. 36, 41 petitioner failed to report income of

$32,799, $50,201, $83,743, $126,689, and $48,859 for 2002, 2003, 2004, 2005, and 2006, respectively,

and failed to report a capital gain of $114,667 for 2004. In proving the existence of petitioner's

underpayments, respondent does not rely solely on petitioner's failure to meet his burden of proof.

Respondent appropriately reconstructed petitioner's taxable income using the bank deposits method, and

the reconstruction demonstrates clearly and convincingly that petitioner had an underpayment of tax for

each of the years in issue. Furthermore, respondent has proven a likely source of petitioner's

unreported income, namely, petitioner's construction, carpentry, and rental activities. Accordingly,

respondent has proven by clear and convincing evidence that petitioner underpaid his Federal income tax

for each of the years in issue.

B. Fraudulent Intent

1. Introduction If fraud is determined for multiple taxable years, the Commissioner's burden “applies

separately for each of the years.” Temple v. Commissioner, T.C. [*46] Memo. 2000-337, slip op. at 24-

25, aff'd, 62 Fed. Appx. 605 [91 AFTR 2d 2003-1806] (6th Cir. 2003). The Commissioner satisfies this

burden by showing that “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. at 874.

Fraud “does not include negligence, carelessness, misunderstanding or unintentional understatement of

income.” United States v. Pechenik, 236 F.2d 844, 846 [50 AFTR 221] (3d Cir. 1956).

The existence of fraud is a question of fact to be resolved upon consideration of the entire record.

See DiLeo v. Commissioner, 96 T.C. at 874. Fraud is never presumed and must be established by

independent evidence of fraudulent intent. See Baumgardner v. Commissioner 251 F.2d 311, 322 [1 AFTR 2d

507] (9th Cir. , 1957), aff'g T.C. Memo. 1956-112 [¶56,112 PH Memo TC]. Fraud may be shown by

circumstantial evidence because direct evidence of the taxpayer's fraudulent intent is seldom

available. See Petzoldt v. Commissioner, 92 T.C. at 699; Gajewski v. Commissioner, 67 T.C. 181, 199-200

(1976), aff'd without published opinion 578 , F.2d 1383 (8th Cir. 1978). The taxpayer's entire course

of conduct may establish the requisite fraudulent intent. See Stone v. Commissioner, 56 T.C. 213, 223-

224 (1971). Any conduct likely to mislead or conceal may constitute an affirmative act of evasion, see

Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943), and an intent to [*47] mislead may be

inferred from a pattern of such conduct,see Webb v. Commissioner, 394 F.2d 366, 379 [21 AFTR 2d 1150]

(5th Cir. 1968), aff'g T.C. Memo. 1966-81 [¶66,081 PH Memo TC]. However, fraud is not proven when a

court is left with only a suspicion of fraud, and even a strong suspicion is not sufficient to

establish a taxpayer's liability for the fraud penalty. See Olinger v. Commissioner 234 F.2d 823, 824

[49 AFTR 1526] (5th Cir. 1956), , aff'g in part, rev'g in part on another ground T.C. Memo. 1955-9

[¶55,009 PH Memo TC]; Davis v. Commissioner, 184 F.2d 86, 87 [39 AFTR 1012] (10th Cir. 1950); Green v.

Commissioner, 66 T.C. 538, 550 (1976).

2. Badges of Fraud

Because it is difficult to prove fraudulent intent by direct evidence, the Commissioner may establish

fraud by circumstantial evidence, which includes various “badges of fraud” (hereinafter, factors) on

which the courts often rely. See Bradford v. Commissioner, 796 F.2d 303, 307 [58 AFTR 2d 86-5532] (9th

Cir. 1986), aff'g T.C. Memo. 1984-601 [¶84,601 PH Memo TC]; DiLeo v. Commissioner, 96 T.C. at 875.

These factors focus on whether the taxpayer engaged in certain conduct that is indicative of fraudulent

intent, such as: (1) understating income; (2) failing to maintain adequate records;

(3) offering implausible or inconsistent explanations; (4) concealing income or assets; (5) failing to

cooperate with tax authorities; (6) engaging in illegal activities; (7) providing incomplete or

misleading information to the taxpayer's tax [*48] return preparer; (8) offering false or incredible

testimony; (9) filing false documents, including filing false income tax returns; (10) failing to file

tax returns; and (11) engaging in extensive dealings in cash. 29 See Bradford v.

Commissioner, 796 F.2d at 307-308; Parks v. Commissioner, 94 T.C. 654, 664-665 (1990); Recklitis v.

Commissioner, 91 T.C. 874, 910 (1988); Lipsitz v. Commissioner, 21 T.C. 917 (1954), aff'd, 220 F.2d 871

[47 AFTR 370] (4th Cir. 1955); see also Morse v. Commissioner, T.C. Memo. 2003-332 [TC Memo 2003-332],

slip op. at 8-9, aff'd, 419 F.3d 829 [96 AFTR 2d 2005-5814] (8th Cir. 2005). The existence of any one

factor is not dispositive, but the existence of several factors is persuasive circumstantial evidence

of fraud. See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Petzoldt v. Commissioner, 92 T.C.

at 700.

Respondent contends, and our review of the record shows, that the following factors are present in this

case: (1) petitioner underreported his income for the years in issue; (2) petitioner concealed income

and assets during the years in issue; (3) petitioner failed to cooperate with tax authorities regarding

the years in issue; (4) petitioner filed false documents; and (5) petitioner failed to file tax returns

for the years in issue. Respondent also contends that petitioner's reliance , T.C. 202, 211 (1992).

[*49] on frivolous arguments during these proceedings demonstrates his fraudulent intent. We analyze

each factor below. a. Understating Income A pattern of substantially underreporting income for several

years is strong evidence of fraud, particularly if the reason for the understatements is not

satisfactorily explained or is not due to innocent mistake. See Holland v. United States, 348 U.S. 121,

137-139 [46 AFTR 943] (1954); Spies, 317 U.S. at 499; Webb v. Commissioner, 394 F.2d at 379; see also

Green v. Commissioner, T.C. Memo. 2010-109 [TC Memo 2010-109] (finding that a satisfactory explanation

may weigh against a finding of fraud). The U.S. Court of Appeals for the Eleventh Circuit has stated

that “a `[c]onsistent and substantial understatement of income is by itself strong evidence of fraud.”

Korecky v. Commissioner, 781 F.2d 1566, 1568 [57 AFTR 2d 86-839] (11th Cir. 1986) (quoting Merritt v.

Commissioner, 301 F.2d 484, 487 [9 AFTR 2d 1236] (5th Cir. 1962), aff'g T.C. Memo. 1959-172 [¶59,172 PH

Memo TC]), aff'g T.C. Memo. 1985-63 [¶85,063 PH Memo TC].

Petitioner failed to file Federal income tax returns for the five years in issue. He thus failed to

report income of $32,799, $50,201, $83,743, $126,689, and $48,859 for 2002, 2003, 2004, 2005, and 2006,

respectively, and a capital gain of $114,667 for 2004. [*50] Although not entirely clear, petitioner's

contention appears to be that he underreported his income because he believed all of his income was

attributable to his alleged ministry. In the light of the other evidence in the record, we are not

prepared to find that petitioner simply was mistaken regarding his personal obligation to file income

tax returns and report income. Furthermore, as this Court has stated, a taxpayer's “mistaken contention

indicates little about whether *** [the taxpayer] had fraudulent intent.” Chambers v. Commissioner,

slip op. at 35.

Petitioner did not report any income for the years in issue. Given the substantial amounts of

petitioner's unreported income, his pattern of underreporting his income, and his lack of a

satisfactory explanation for the understatements, we conclude that petitioner's understatements are

persuasive evidence of fraudulent intent. See, e.g., Morse v. Commissioner, 419 F.3d at 832; see also

Lain v. Commissioner, T.C. Memo. 2012-99 [TC Memo 2012-99], slip op. at 12. b. Concealing Assets or

Income An intent to evade tax may be inferred by “concealment of assets or covering up sources of

income”. Spies, 317 U.S. at 499; Ruark v. Commissioner, 449 F.2d 311, 312-313 [28 AFTR 2d 71-5831] (9th

Cir. 1971), aff'g T.C. Memo. 1969-48 [¶69,048 PH Memo TC]. A taxpayer's [*51] use of “a complex series

of financial transactions and nominees is a badge of fraud.” Plotkin v. Commissioner, T.C. Memo. 2011-

260 [TC Memo 2011-260], slip op. at 43. This Court has previously held that a taxpayer's use of a UBTO

to conceal income supports a finding of fraud. Simmons v. Commissioner T.C. Memo. 2009-283 [TC Memo

2009-283], slip op. at 10-, 11. The mere existence of a paper trail documenting a taxpayer's income or

expenses does not negate a finding of fraudulent intent. See Evans v. Commissioner, T.C. Memo. 2010-199

[TC Memo 2010-199], slip op. at 16-17. Petitioner concealed his assets through a series of transactions

designed to transfer his assets to various organizations, including Treasures in a Field Investments, a

UBTO. Petitioner later transferred his assets from Treasures in a Field Investments to a ministerial

trust, Treasures in a Field. Despite these transfers, petitioner continued to control the use and

disposition of his assets. Furthermore, petitioner deposited all of his income into accounts titled in

the name of Prepare the Way Ministries and Treasures in a Field Investments.

Petitioner appears to contend that he did not conceal assets because he deposited all proceeds into

ministry bank accounts and recorded all properties that the ministry owned. First, this Court notes

that the mere existence of a paper trail documenting the transfer of assets does not negate a finding

of fraud. Second, petitioner's contention is refuted by the evidence showing that petitioner engaged

[*52] in a series of transactions the purpose of which was tax avoidance. Accordingly, this factor

supports a finding of fraud. c. Failing To Cooperate With Tax Authorities Failure to cooperate with

revenue agents during an investigation is a badge of fraud. See Korecky v. Commissioner, 781 F.2d at

1568; Lord v. Commissioner, 525 F.2d 741, 747-748 [36 AFTR 2d 75-6184] (9th Cir. 1975), aff'g in part,

rev'g in part 60 T.C. 199 (1973); Grosshandler v. Commissioner, 75 T.C. 1, 20 (198). This failure is

persuasive evidence of a taxpayer's guilty knowledge. See Prof'l Servs. v. Commissioner, 79 T.C. 888,

932-933 (1982). A taxpayer's failure to cooperate with the Commissioner and the Court during the

pretrial and trial proceedings also supports a finding of fraud. See Smith v. Commissioner 91 T.C.

1049, 1052, 1059-, 1060 (1988), aff'd, 926 F.2d 1470 [67 AFTR 2d 91-638] (6th Cir. 1991); Rice v.

Commissioner, T.C. Memo. 2003-208 [TC Memo 2003-208], slip op. at 15.

Petitioner failed to cooperate with respondent's revenue agent during respondent's investigation of

petitioner. Accordingly, respondent was forced to subpoena petitioner's ministry bank account records

to reconstruct petitioner's income. Petitio$ner also failed to respond to a summons issued by

respondent.

In addition, petitioner failed to cooperate with respondent's counsel and with the Court in preparing

this case for trial. Petitioner failed to cooperate with [*53] respondent's counsel in preparing a

stipulation of facts as required by our standing pretrial order. He failed to respond properly to

respondent's requests for admissions. At trial petitioner failed to respond to the questions posed by

respondent's counsel, continuing to assert an unidentified privilege. Accordingly, we find that

petitioner failed to cooperate with tax authorities, and this finding supports a finding of fraud. d.

Filing False Documents Fraudulent intent may be inferred when a taxpayer files a document intending to

conceal, mislead, or prevent the collection of tax. See Spies, 317 U.S. at 499. Filing false documents

with the IRS constitutes “an `affirmative act' of misrepresentation sufficient to justify the fraud

penalty.” Zell v. Commissioner, 763 F.2d 1139, 1146 [56 AFTR 2d 85-5128] (10th Cir. 1985), aff'g T.C.

Memo. 1984-152 [¶84,152 PH Memo TC]; see also Ernle v. Commissioner, T.C. Memo. 2010-237 [TC Memo 2010

-237], slip op. at 9. A taxpayer's creation of false documents, see Fairey v. Commissioner, T.C. Memo.

2005-129 [TC Memo 2005-129], slip op. at 24-25, and/or use of a false EIN, see Chambers v.

Commissioner, slip op. at 39, supports a finding of fraud, see also Vetrano v. Commissioner, T.C. Memo.

2000-128 [TC Memo 2000-128].

Petitioner used a false EIN when he opened account 2952 at Regions Bank. He also prepared a materially

altered and false Form W-8BEN. Petitioner [*54] stipulated that he used the materially altered and

false Form W-8BEN to hold out his purported ministry as a tax-exempt entity. We find that he engaged in

this practice of creating and using false documents to evade the payment of Federal tax. Consequently,

this factor supports a finding of fraud. e. Failing To File Tax Returns A taxpayer's failure to file

tax returns is a badge of fraud. See Petzoldt v. Commissioner, 92 T.C. at 701. While a failure to file

returns, even over an extended period, does not establish fraud per se, see Grosshandler v.

Commissioner, 75 T.C. at 19, an extended pattern of failing to file returns may be persuasive

circumstantial evidence of fraud, see Marsellus v. Commissioner, 544 F.2d 883, 885 [39 AFTR 2d 77-595]

(5th Cir. 1977), aff'g T.C. Memo. 1975-368 [¶75,368 PH Memo TC].

Petitioner failed to file returns for 2002-06. Petitioner's extended pattern of failing to file returns

constitutes persuasive circumstantial evidence of fraud. f. Asserting Frivolous Arguments A taxpayer's

assertion of frivolous arguments may provide evidence supporting a finding of fraud. See Kotmair v.

Commissioner 86 T.C. 1253, 1259-, 1261 (1986); Worsham v. Commissioner, T.C. Memo. 2012-219 [TC Memo

2012-219], slip op. at 19; Lain v. Commissioner, slip op. at 14; DeVries v. Commissioner, T.C. Memo.

2011-185 [TC Memo 2011-185], slip op. at 21-22. [*55] During the course of these proceedings,

petitioner repeatedly raised frivolous and groundless arguments. The U.S. Court of Appeals for the

Eleventh Circuit has held similar arguments to be frivolous and without merit. See United States v.

Morgan, 419 Fed. Appx. 958, 959 [107 AFTR 2d 2011-1550] (11th Cir. 2011) (taxpayers' argument that they

were not involved in a “trade or business” was frivolous);United States v. Morse,532 F.3d 1130, 1132-

1133 [102 AFTR 2d 2008-5004] (11th Cir. 2008) (taxpayer's assertion that the IRS had no power over the

taxpayer was meritless). We repeatedly cautioned petitioner against asserting frivolous and groundless

arguments. Despite these admonishments, petitioner continued to assert such arguments. Accordingly,

this factor supports a finding of fraud.

C. Conclusion

Respondent has proven by clear and convincing evidence that petitioner underpaid his tax liabilities

for 2002-06 and that some part of petitioner's underpayment for each year was due to fraud. Petitioner

has not argued or introduced any credible evidence to prove that any portion of his underpayments was

not attributable to fraud. He has not introduced any credible evidence to show [*56] that he acted

without fraudulent intent. Accordingly, we hold that petitioner is liable for the section 6651(f)

fraudulent failure to file additions to tax. 30

VII. Sections 6651(a)(2) and 6654(a) Additions to Tax If the taxpayer assigns error to the

Commissioner's determination that a taxpayer is liable for an addition to tax, the Commissioner has the

burden, under section 7491(c), of producing evidence with respect to the liability of the taxpayer for

the addition to tax. See Higbee v. Commissioner, 116 T.C. at 446-447. To meet his burden of production,

the Commissioner must come forward with sufficient evidence that it is appropriate to impose the

addition to tax. Id. Once the Commissioner meets his burden, the taxpayer must come forward with

evidence sufficient to persuade this Court that the determination is incorrect. Id.

Respondent determined that petitioner is liable under section 6651(a)(2) for additions to tax for

failure to timely pay tax shown on a return.Section 6651(a)(2) imposes an addition to tax for failure

to pay the amount of tax shown on a taxpayer's Federal income tax return on or before the payment due

date, unless such failure is due to reasonable cause and is not due to willful neglect. The section

6651(a)(2) addition to tax applies only when an amount of tax is shown on [*57] a return filed by the

taxpayer or prepared by the Secretary. Sec. 6651(a)(2), (g)(2); Cabirac v. Commissioner, 120 T.C. 163,

170 (2003). When a taxpayer has not filed a return, the section 6651(a)(2) addition to tax may not be

imposed unless the Secretary has prepared an SFR that satisfies the requirements of section 6020(b).

See Wheeler v. Commissioner, 127 T.C. 200, 210 (2006), aff'd, 521 F.3d 1289 [101 AFTR 2d 2008-1696]

(10th Cir. 2008).

Respondent satisfied his burden of production by introducing into evidence SFRs for the years in issue

that satisfy the requirements of section 6020(b). Consequently, petitioner had the burden of

introducing evidence to show that his failure to pay was due to reasonable cause. He did not do so.

Petitioner did not advance any argument regarding the section 6651(a)(2) additions to tax and

introduced no credible evidence to show reasonable cause for his failure to pay tax shown on the

returns. Accordingly, we sustain respondent's determination with respect to petitioner's liability for

the additions to tax under section 6651(a)(2) for the years in issue. 31

Respondent also determined that petitioner is liable for additions to tax for failure to pay estimated

tax under section 6654. Section 6654 imposes an addition [*58] to tax on an individual who underpays

his estimated tax. 32 The addition to tax is calculated with reference to four required installment

payments of the taxpayer's estimated tax liability. Sec. 6654(c) and (d). Each required installment of

estimated tax is equal to 25% of the “required annual payment”. Sec. 6654(d). In general, the “required

annual payment” is equal to the lesser of (1) 90% of the tax shown on the individual's return for that

year (or, if no return is filed, 90% of his tax for such year), or (2) if the individual filed a return

for the immediately preceding taxable year, 100% of the tax shown on that return. Sec. 6654(d)(1)(A),

(B), and (C). A taxpayer has an obligation to pay estimated tax only if he has a “required annual

payment”. Wheeler v. Commissioner, 127 T.C. at 212; see also Mendes v. Commissioner, 121 T.C. 308, 324

(2003).

Petitioner did not make any estimated tax payments for the years in issue. Respondent introduced deemed

stipulations that petitioner failed to file returns for 2002-06. On the basis of this information and

the evidence with respect to petitioner's income for the years in issue, we are able to conclude that

petitioner had required annual payments for 2003-06. However, we are unable to conclude [*59] that

petitioner had a required annual payment for 2002 because respondent failed to introduce any evidence

as to whether petitioner filed a return for 2001. See Wheeler v. Commissioner, 127 T.C. at 211-212.

Accordingly, we reject respondent's determination as to the section 6654(a) addition to tax for 2002

and sustain respondent's determinations as to petitioner's liability for the section 6654(a) additions

to tax for 2003-06. 33VIII. Section 6673 Penalty Section 6673(a)(1) provides that this Court may

require the taxpayer to pay a penalty not in excess of $25,000 whenever it appears to this Court that:

(1) the proceedings were instituted or maintained by the taxpayer 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 change in the law.” Williams

v. Commissioner , 114 T.C. 136, 144 (2000) (quoting Coleman v. Commissioner, 791 F.2d 68, 71 [57 AFTR

2d 86-1420] (7th Cir. 1986)). [*60] During the pretrial proceedings this Court warned petitioner that

if he continued to assert frivolous or groundless positions, this Court would consider imposing a

penalty under section 6673. This Court issued the warning to petitioner in three different orders

before trial. At trial this Court again warned petitioner that if he continued to assert frivolous or

groundless positions, this Court would consider imposing a penalty under section 6673. Despite this

warning, petitioner asserted the same arguments in his posttrial brief.

Respondent did not request that we impose a penalty pursuant to section 6673, and in the exercise of

our discretion we will not impose a section 6673 penalty on petitioner. However, we warn petitioner

that if in the future he maintains groundless positions in this Court, he runs the risk that he will be

sanctioned in accordance with section 6673(a)(1).

We have considered the parties' remaining arguments, and to the extent not discussed above, conclude

those arguments are irrelevant, moot, or without merit.

To reflect the foregoing, Decision will be entered under Rule 155.

1
  Unless otherwise indicated, section references are to the Internal Revenue Code (Code) in effect for

the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. Some

monetary amounts have been rounded to the nearest dollar.
1
 
2
  On March 4, 2011, respondent filed a motion to show cause why proposed facts and evidence should not

be accepted as established under Rule 91(f) and attached a proposed stipulation of facts. By order

dated March 8, 2011, this Court ordered that petitioner file a response to respondent's motion in

accordance with Rule 91(f)(2) on or before March 28, 2011. Petitioner failed to file a response to

respondent's motion that complied with Rule 91(f)(2). By order dated April 7, 2011, this Court made the

order to show cause under Rule 91(f) absolute and deemed established the facts and evidence set forth

in respondent's proposed stipulation of facts. On April 12, 2011, petitioner electronically submitted a

document titled “Response to Respondent's Stipulation of Facts”. By order dated April 13, 2011, this

Court granted petitioner leave to file the response out of time because petitioner had attempted to

respond timely. By that same order, this Court vacated its order of April 7, 2011 and ordered the Clerk

of the Court to file petitioner's “Response to Respondent's Stipulation of Facts” as petitioner's

response to the Court's March 8, 2011, order to show cause. By order dated April 26, 2011, this Court

made the order to show cause under Rule 91(f) absolute and deemed established the facts and evidence

set forth in respondent's proposed stipulation of facts.
3
  Mr. Sweet has been permanently enjoined from "[o]rganizing, promoting, marketing, or selling the tax

shelter, plan, or arrangement entitled `GOOD NEWS for FORM 1040 Filers” and from "[o]rganizing,

promoting, marketing, or selling 'Unincorporated Business Trust Organizations' (a/k/a `UBTOs') or any

other abusive tax shelter, plan, or arrangement that incites taxpayers to attempt to violate the

internal revenue laws”. United States v. Sweet, 89 A.F.T.R.2d (RIA) 2002-2189 (M.D. Fla. 2002).

Pursuant to Fed. R. Evid. 201, we take judicial notice of the District Court's order with respect to

Mr. Sweet.
4
  David Marvin Swanson d.b.a. Dynamic Monetary Strategies, created the Treasures in a Field Investments

trust organization for petitioner. On November 15, 2006, the U.S. District Court for the Middle

District of Florida, Tampa Division, permanently enjoined Mr. Swanson from, among other things, “[s]

elling or organizing any type of trust, limited liability company, or similar arrangement, as part of

which Swanson advocates for the noncompliance of the income tax laws or tax evasion, misrepresents the

tax savings realized by using the arrangement, or conceals the receipt of income”.
5
  With respect to at least one of the properties, petitioner effectively transferred the property on

February 2, 1999. However, neither petitioner nor any witness signed the instrument of transfer until

September 13, 2000.
6
  Mrs. Good testified that the children of Samuel J. Fitts and Iris K. Fitts purchased the 32210 Bartel

Street property. The record contains a certificate of trust executed on June 9, 2003, by Shawn

Dornstadter, petitioner's son-in-law. The accompanying papers show that Treasures in a Field

Investments transferred real property to Michael J. Fitts and Doxie H. Fitts. We infer from the record

that Michael J. Fitts and Doxie H. Fitts purchased the 32210 Bartel Street property. The record does

not disclose the amount of the selling price with respect to the sale.
7
  In 2004 Hurricane Ivan struck the house at 13450 County Road 91. Petitioner and Mrs. Good continued

to live in a portion of the house while repairing the remainder using the insurance proceeds they

received. Although Mrs. Good testified that she and petitioner deposited the insurance proceeds into

one of the ministry bank accounts, petitioner did not identify any deposits as deposits of insurance

proceeds and the Court could not identify any such deposits from information in the record.
8
  During the years in issue petitioner engaged in business transactions with Mr. Stoll. In 2008 Mr.

Stoll, acting as trustee of the Work of His Hands Industries, an unincorporated ministerial trust,

conveyed two parcels of land, previously owned by petitioner and Mrs. Good and conveyed to Treasures in

a Field Investments, to Andy and Renee Knott.
9
  The parties stipulated that Mr. Stoll had been enjoined from engaging in the promotion of ministerial

trusts as a tax planning strategy. Pursuant to Fed. R. Evid. 201, we take judicial notice of the

injunction proceeding. United States v. Stoll, 2005 WL 1763617 (W.D. Wash. 2005).
10
  Jason Evans, acting as “steward” for Prepare the Way Ministries, executed the Form W-8BEN.
11
  The record does not identify the relationships among petitioner, Shane M. Good, and Julie A. Good,

but we infer from the record as a whole that Shane M. Good and Julia A. Good are members of

petitioner's family.
12
  From April 29, 2003, through July 31, 2004, account 2952 was held under the name Treasures in a Field

Investments. Beginning in approximately August 2004 account 2952 was held under the name Prepare the

Way Ministries d.b.a. Treasures in a Field Investments.
13
  By collectively referring to the accounts as ministry bank accounts, we are not concluding that

petitioner operated an entity that qualified as a church under the Code. We refer to the accounts as

ministry bank accounts simply for convenience.
14
  He also testified that he conducted church meetings and other events at his home.
15
  With respect to account 2952, the revenue agent tabulated the total deposits, eliminated nontaxable

deposits, allocated taxable deposits between gross receipts from petitioner's Schedules C, Profit or

Loss From Business, and rental income from Schedules E, Supplemental Income or Loss, and tabulated the

results for each year. With respect to account 9269, the record contains a copy of the revenue agent's

spreadsheet showing the individual line items for the account. Although the revenue agent identified

certain deposits as nontaxable deposits, Schedule C gross receipts, and Schedule E rental income,

respondent's revenue agent failed to tabulate the results. Accordingly, for 2002-04 we have calculated

petitioner's total taxable deposits with respect to account 9269 by eliminating from petitioner's total

deposits those deposits the revenue agent identified as nontaxable. For 2005-06, however, respondent's

agent did not eliminate any deposits from account 2969 as nontaxable deposits.
16
  Respondent's revenue agent did not tabulate the total amount of Schedule C gross receipts for 2002-06

with respect to account 9269. On the basis of the spreadsheets, we find that the revenue agent

determined that petitioner had unreported Schedule C gross receipts equal to the total amount of

taxable deposits in account 9269 minus the Schedule E rental income with respect to that account for

each year.
17
  The amounts of unreported income as finally determined in the notices of deficiency do not match in

all respects the reconstruction of income prepared by the revenue agent.
18
  The short-term capital gain of $114,667 was attributable to the sale of the 32188 Bartel Street

property to Samuel J. Fitts ad Iris K. Fitts. On March 22, 2004, Prepare the Way Ministries agreed to

sell the 32188 Bartel Street property to Samuel J. Fitts and Iris K. Fitts for $120,000. Respondent

determined that petitioner incurred fees of $5,323 and had “cost[s]" of $10 with respect to the sale.

Respondent also determined that petitioner had a basis of zero in the property. Accordingly, respondent

determined that petitioner realized gain of $114,667 from sale of the property.
19
  On July 21, 2011, petitioner filed a document, with attached exhibits, titled “Petitioner's Status

Report”.
20
  Credible evidence is evidence the Court would find sufficient upon which to base a decision on the

issue in the taxpayer's favor, absent any contrary evidence. See Higbee v. Commissioner, 116 T.C. 438,

442 (2001).
21
  The term “Secretary” means “the Secretary of the Treasury or his delegate”, sec. 7701(a)(11)(B), and

the term “or his delegate” means “any officer, employee, or agency of the Treasury Department duly

authorized by the Secretary of the Treasury directly, or indirectly by one or more redelegations of

authority, to perform the function mentioned or described in the context”, sec. 7701(a)(12)(A)(i).
22
  Neither party specifically addressed these issues in their post-trial briefs.
23
  Even if we held that petitioner's alleged ministry constituted a church under sec. 501, petitioner

would still have to include in income funds deposited into the ministry bank accounts because he

exercised full control over those accounts and used the funds to pay his personal expenses. See, e.g.,

Chambers v. Commissioner, T.C. Memo. 2011-114 [TC Memo 2011-114], slip op. at 23-24.
24
  Although not entirely clear, petitioner's contention appears to be that the IRS cannot require him to

maintain or produce financial records because the IRS may not regulate religious activities and because

such records are privileged. Sec. 6001 requires that "[e]very person liable for any tax” maintain

records. Petitioner has offered no support for his contention that he personally is exempt from the

recordkeeping requirement of sec. 6001. While exempt organizations are relieved of some recordkeeping

requirements, the Commissioner never recognized Prepare the Way Ministries as an exempt organization

under sec. 501(c)(3). See Church of Scientology v. Commissioner 83 T.C. 381, 452 (1984), aff'd, 823

F.2d 1310 [60 AFTR 2d 87-5386] (9th Cir. 1987). Additionally, while the IRS must comply with specific

procedures set forth in sec. 7611 before it can obtain church records, petitioner has not proven that

he operated a church or that the records sought by respondent qualified as church records. See also

Chambers v. Commissioner, slip op. at 20-21. Accordingly, we reject petitioner's argument.
25
  The revenue agent's spreadsheet shows the erroneous double inclusion of the following checks: (1)

check No. 1001 for $635; (2) check No. 274 for $215; and (3) check No. 1016 for $850.
26
  With respect to 2004, respondent's revenue agent determined that petitioner had Schedule C gross

receipts of $116,393. The revenue agent included in petitioner's income a check for $9,000 that was

deposited into account 9269. Although the bank statement for account 9269 shows that the check was

returned for insufficient funds, respondent's revenue agent failed to exclude the $9,000 check from

petitioner's taxable income.
Despite the revenue agent's error, we will refrain from adjusting petitioner's 2004 Schedule C gross

receipts. Respondent determined in the notice of deficiency that petitioner had Schedule C gross

receipts of $83,440, an amount that is $32,953 lower than the figure calculated by the revenue agent.

The record supports an inference that respondent subtracted from petitioner's totaled Schedule C

deposits amounts that constituted nontaxable income. Because the amount subtracted, $32,953, exceeds

the amount of the check at issue, we find that petitioner is not entitled to an additional reduction in

his Schedule C gross receipts for the value of the check. Accordingly, we will sustain respondent's

determination with respect to petitioner's 2004 Schedule C gross receipts.
27
  Sec. 121(a) allows a taxpayer to exclude from income gain on the sale or exchange of property if the

taxpayer has owned and used such property as his principal residence for at least two of the five years

immediately preceding the sale. Petitioner sold the 32188 Bartel Street property in 2004. Mrs. Good

testified that she and petitioner lived at the 32188 Bartel Street property before the 2004 sale.

However, until 2003 petitioner owned another home, at 32210 Bartel Street. The record does not show

whether petitioner and Mrs. Good moved to the 32188 Bartel Street property before petitioner sold the

32210 Bartel Street property (i.e., before 2003) or immediately after the sale of the property in 2003.

Accordingly, we are unable to determine whether petitioner used the 32188 Bartel Street property as his

principal residence for at least two of the five years preceding the sale of the property in 2004.

Petitioner has not established that he is entitled to exclude any gain from the sale of the property

pursuant to sec. 121(a).
28
  “A nominee is an entity or individual who holds bare legal title to assets owned by another entity or

individual.” Lain v. Commissioner, T.C. Memo. 2012-99 [TC Memo 2012-99], slip op. at 13; see also

Oxford Capital Corp. v. United States, 211 F.3d 280, 284 [85 AFTR 2d 2000-1840] (5th Cir. 2000).
29
  These factors are nonexclusive. See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).
30
  The amounts of the sec. 6651(f) additions to tax for 2002-05 must be adjusted to reflect the

adjustments to gross receipts calculated in this opinion.
31
  The amounts of the sec. 6651(a)(2) additions to tax for 2002-05 must be adjusted to reflect the

adjustments to gross receipts calculated in this opinion.
32
  Unless a statutory exception applies, the sec. 6654(a) addition to tax is mandatory. See sec. 6654

(a), (e); Recklitis v. Commissioner, 91 T.C. 874, 913 (1988).
33
  The amounts of the sec. 6654 additions to tax for 2003-05 must be adjusted to reflect the adjustments

to gross receipts calculated in this opinion.

www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com

Section 6111 Reportable Transaction Losses

Certain losses not taken into account in determining “reportable transaction” status

Rev Proc 2013-11, 2013-2 IRB

In a revenue procedure, IRS has provided guidance on certain types of losses that aren't taken into account in determining whether a transaction is a “reportable transaction” for purposes of Reg. § 1.6011-4(b)(5)'s disclosure rules. The guidance applies to taxpayers that may be required to disclose reportable transactions under Reg. § 1.6011-4, and material advisors that may be required to disclose reportable transactions under Code Sec. 6111 or maintain lists under Code Sec. 6112. Failure to provide this disclosure can subject the taxpayer (or advisor) to significant penalties.

Background. Every taxpayer that has participated in a “reportable transaction” within the meaning of Reg. § 1.6011-4(b) and is required to file a tax return must attach a completed Form 8886, Reportable Transaction Disclosure Statement, to its return for the tax year. (Reg. § 1.6011-4(a)) For this purpose, the term “taxpayer” includes an individual, trust, estate, partnership, association, company, or corporation (including an S corporation), and also includes an affiliated group of corporations that joins in the filing of a consolidated return. (Reg. § 1.6011-4(c)(1))

There are five categories of reportable transactions under Reg. § 1.6011-4(b), one being a “loss transaction.” (Reg. § 1.6011-4(b)(5)) A loss transaction is any transaction resulting in the taxpayer claiming a loss under Code Sec. 165 of at least:

... $10 million in any single tax year, or $20 million in any combination of tax years for corporations;
... $10 million in any single tax year, or $20 million in any combination of tax years for partnerships that have only corporations as partners (looking through any partners that are themselves partnerships), whether or not any losses flow through to one or more partners;
... $2 million in any single tax year or $4 million in any combination of tax years for all other partnerships, whether or not any losses flow through to one or more partners;
... $2 million in any single tax year or $4 million in any combination of tax years for individuals, S corporations, or trusts, whether or not any losses flow through to one or more beneficiaries or shareholders; or
... $50,000 in any single tax year for individuals or trusts, whether or not the loss flows through from an S corporation or partnership, if the loss arises with respect to a Code Sec. 988 transaction (i.e. relating to foreign currency transactions).
Under Reg. § 1.6011-4(b)(8)(i), a transaction won't be considered a reportable transaction, or it will be excluded from any individual category of reportable transaction, if IRS determines in published guidance that the transaction isn't subject to Reg. § 1.6011-4's reporting requirements.

Sale or exchange of an asset with a “qualifying basis.” The revenue procedure provides that losses from the sale or exchange of an asset with a “qualifying basis” aren't taken into account for determining whether a transaction is a reportable transaction under Reg. § 1.6011-4(b)(5). This exclusion applies if:

... the basis of the asset (for purposes of determining the loss) is a “qualifying basis” (see below);
... the asset is not an interest in a passthrough entity (within the meaning of Code Sec. 1260(c)(2), other than regular interests in a real estate mortgage investment conduit as defined in Code Sec. 860G(a)(1));
... the loss from the sale or exchange of the asset is not treated as ordinary under Code Sec. 988, except in the case of a loss that is recognized by a bank described in Code Sec. 581 or Code Sec. 582(c)(2)(A)(i) (concerning foreign banks as limited by Code Sec. 582(c)(2)(C));
... the asset has not been separated from any portion of the income it generates; and
... the asset is not, and has never been, part of a straddle within the meaning of Code Sec. 1092(c), excluding a mixed straddle under Reg. § 1.1092(b)-4T.
A taxpayer's basis in an assets (less adjustments for any allowable depreciation, amortization, or casualty loss) is a qualifying basis if:

(a) the basis of the asset is equal to, and is determined solely by reference to, the amount (including any option premium) paid in cash by the taxpayer for the asset and for any improvements to it;
(b) the basis of the asset is determined under Code Sec. 358 by reason of it being received in an exchange to which Code Sec. 354, Code Sec. 355, or Code Sec. 361 applies, and the taxpayer's basis in the property exchanged in the transaction was described in Rev Proc 2013-11, Sec. 4.02(2);
(c) the basis of the asset is determined under Code Sec. 1014 (property acquired from a decedent);
(d) the basis of the asset is determined underCode Sec. 1015 (property acquired by gifts and transfers in trust), and the donor's basis in the asset was described in Rev Proc 2013-11, Sec. 4.02(2);
(e) the basis of the asset is determined under Code Sec. 1031(d) , the taxpayer's basis in the property that was exchanged for the asset in the Code Sec. 1031 transaction (i.e., like-kind exchange) was described in Rev Proc 2013-11, Sec. 4.02(2), and any debt instrument issued or assumed by the taxpayer in connection with the Code Sec. 1031 transaction is treated as a payment in cash under Rev Proc 2013-11, Sec. 4.02(4);
(f) the basis of the asset is adjusted under Code Sec. 961 (relating to controlled foreign corporations) or Reg. § 1.1502-32 (consolidated return regs), and the taxpayer's basis in the asset immediately prior to the adjustment was described in Rev Proc 2013-11, Sec. 4.02(2); or
(g) the basis of the asset is adjusted under Code Sec. 1272(d)(2) or Code Sec. 1278(b)(4) (relating to original issue discount), and the taxpayer's basis in the asset immediately prior to the adjustment was described in Rev Proc 2013-11, Sec. 4.02(2).
In determining a taxpayer's basis under (a), above, an amount included as compensation income under Code Sec. 83 (property transferred in connection with performance of services) by the taxpayer will be treated as an amount paid in cash by the taxpayer for an asset if the amount is included in the taxpayer's basis in the asset.

Except as otherwise provided, an amount paid in cash will not be disregarded for purposes of Rev Proc 2013-11, Sec. 4.02(2) merely because the taxpayer issued a debt instrument to obtain the cash. However, if the taxpayer has issued a debt instrument to the person (or a related party as described in Code Sec. 267(b) or Code Sec. 707(b)) who sold or transferred the asset to the taxpayer, assumed a debt instrument (or took an asset subject to a debt instrument) issued by the person (or a related party) who sold or transferred the asset to the taxpayer, or issued a debt instrument in exchange for improvements to an asset, the taxpayer will be treated as having paid cash for the asset or the improvement only if the debt instrument is secured by the asset and all amounts due under the debt instrument have been paid in cash no later than the time of the sale or exchange of the asset (except in the case of stock or securities traded on an established securities market, the settlement date) for which the loss is claimed.

“Other losses.” The revenue procedure also provides that certain “other losses” under Code Sec. 165 aren't taken into account for determining whether a transaction is a reportable transaction under Reg. § 1.6011-4(b)(5). This exclusion applies to:

(1) A loss from fire, storm, shipwreck, or other casualty, or from theft, under Code Sec. 165(c)(3);
(2) A loss from a compulsory or involuntary conversion under Code Sec. 1231(a)(3)(A)(ii) and Code Sec. 1231(a)(4)(B);
(3) A loss to which Code Sec. 475(a) (relating to the mark to market accounting method for securities dealers) or Code Sec. 1256(a) applies;
(4) A loss arising from any mark-to-market treatment of an item under Code Sec. 475(f), Code Sec. 1296(a), Reg. § 1.446-4(e), Reg. § 1.988-5(a)(6), or Reg. § 1.1275-6(d)(2), and any loss from a sale or disposition of an item to which one of the foregoing provisions applied, provided that the taxpayer computes its loss by using a qualifying basis (as defined above) or a basis resulting from previously marking the item to market, or computes its loss by making appropriate adjustments for previously determined mark-to-market gain or loss;
(5) A loss arising from a hedging transaction described in Code Sec. 1221(b), if the taxpayer properly identifies the transaction as a hedging transaction, or from a mixed straddle account under Reg. § 1.1092(b)-4T;
(6) A loss attributable to the abandonment of depreciable tangible property that was used by the taxpayer in a trade or business and that has a qualifying basis under Rev Proc 2013-11, Sec. 4.02(2);
(7) A loss attributable to the abandonment of depreciable tangible property that was used by the taxpayer in a trade or business and that has a qualifying basis under Rev Proc 2013-11, Sec. 4.02(2);
(8) A loss that is equal to, and is determined solely by reference to, a payment of cash by the taxpayer;
(9) A loss from the sale to a person other than a related party of property described in Code Sec. 1221(a)(4) in a factoring transaction in the ordinary course of business; or
(10) A loss arising from the disposition of an asset to the extent that the taxpayer's basis in the asset is determined under Code Sec. 338(b) (pertaining to stock purchases treated as asset acquisitions).
 RIA observation: The Revenue Procedure lists eleven items, but items (5) and (6) are identical.
Effective date. Rev Proc 2013-11 is effective Dec. 6, 2012. Except for Rev Proc 2013-11, Sec. 4.02(1)(c), as applied to losses recognized by certain banks with respect to Code Sec. 988 transactions, it applies to transactions that are entered into on or after Jan. 1, 2003. Rev Proc 2013-11, Sec. 4.02(1)(c),as applied to losses recognized by certain banks with respect to Code Sec. 988 transactions, applies to losses recognized on or after Dec. 6, 2012.

Rev. Proc. 2013-11, 2013-2 IRB, 12/06/2012, IRC Sec(s).

Headnote:


Reference(s):

Full Text:

1. Purpose

This revenue procedure provides that certain losses are not taken into account in determining whether a transaction is a reportable transaction for purposes of the disclosure rules under § 1.6011-4(b)(5) of the Income Tax Regulations. However, these transactions may be reportable transactions for purposes of the disclosure rules under ,,, § 1.6011-4(b)(2), (b)(3), (b)(4), (b)(6), or (b)(7).

2. Background

.01.  Section 1.6011-4 requires a taxpayer that participates in a reportable transaction to disclose the transaction in accordance with the procedures provided in § 1.6011-4. Under § 1.6011-4(b), there are five categories of reportable transactions. One category of reportable transaction is a loss transaction. A loss transaction is defined in § 1.6011 4(b)(5). Generally, a loss transaction is any transaction resulting in the taxpayer claiming a loss under § 165 of the Internal Revenue Code of (i) at least $10 million in a single taxable year or $20 million in any combination of taxable years for corporations or partnerships with only corporations as partners (looking through any partners that are themselves partnerships), whether or not any losses flow through to one or more partners; (ii) at least $2 million in any single taxable year or $4 million in any combination of taxable years for all other partnerships, individuals, S corporations, and trusts, whether or not any losses flow through to one or more partners, shareholders, or beneficiaries; or (iii) at least $50,000 in any single taxable year for individuals or trusts, whether or not the loss flows through from an S corporation or partnership, if the loss is attributable to a § 988 transaction.

.02.  Section 1.6011-4(b)(8)(i) provides that a transaction will not be considered a reportable transaction, or will be excluded from any individual category of reportable transaction, if the Commissioner makes a determination by published guidance that the transaction is not subject to the reporting requirements of § 1.6011-4.

3. Scope

This revenue procedure applies to taxpayers that may be required to disclose reportable transactions under § 1.6011-4, material advisors that may be required to disclose reportable transactions under § 6111, and material advisors that may be required to maintain lists under § 6112.

4. Application

.01. In general. Losses from the sale or exchange of an asset with a qualifying basis under section 4.02 of this revenue procedure or losses described in section 4.03 of this revenue procedure are not taken into account in determining whether a transaction is a reportable transaction under  § 1.6011-4(b)(5).

.02. Sale or exchange of an asset with a qualifying basis.

(1) General rule. A loss under § 165 from the sale or exchange of an asset is not taken into account in determining whether a transaction is a loss transaction under § 1.6011-4(b)(5) if —
(a) the basis of the asset (for purposes of determining the loss) is a qualifying basis;
(b) the asset is not an interest in a passthrough entity (within the meaning of § 1260(c)(2), other than regular interests in a REMIC as defined in § 860G(a)(1));
(c) the loss from the sale or exchange of the asset is not treated as ordinary under § 988, except in the case of a loss that is recognized by a bank described in § 581 or  § 582(c)(2)(A)(i) (concerning foreign banks as limited by § 582(c)(2)(C));
(d) the asset has not been separated from any portion of the income it generates; and
(e) the asset is not, and has never been, part of a straddle within the meaning of § 1092(c), excluding a mixed straddle under § 1.1092(b)-4T.
(2) Qualifying basis. For purposes of section 4 of this revenue procedure, a taxpayer's basis in an asset (less adjustments for any allowable depreciation, amortization, or casualty loss) is a qualifying basis if —
(a) the basis of the asset is equal to, and is determined solely by reference to, the amount (including any option premium) paid in cash by the taxpayer for the asset and for any improvements to the asset;
(b) the basis of the asset is determined under § 358 by reason of it being received in an exchange to which § § 354, 355, or 361 applies, and the taxpayer's basis in the property exchanged in the transaction was described in this section 4.02(2);
(c) the basis of the asset is determined under  § 1014;
(d) the basis of the asset is determined under  § 1015, and the donor's basis in the asset was described in this section 4.02(2);
(e) the basis of the asset is determined under  § 1031(d), the taxpayer's basis in the property that was exchanged for the asset in the § 1031 transaction was described in this section 4.02(2), and any debt instrument issued or assumed by the taxpayer in connection with the  § 1031 transaction is treated as a payment in cash under section 4.02(4) of this revenue procedure;
(f) the basis of the asset is adjusted under § 961 or § 1.1502-32, and the taxpayer's basis in the asset immediately prior to the adjustment was described in this section 4.02(2); or
(g) the basis of the asset is adjusted under  § 1272(d)(2) or § 1278(b)(4), and the taxpayer's basis in the asset immediately prior to the adjustment was described in this section 4.02(2).
(3)  Section 83 income. For purposes of section 4.02(2)(a) of this revenue procedure, an amount included as compensation income under § 83 by the taxpayer will be treated as an amount paid in cash by the taxpayer for an asset if the amount is included in the taxpayer's basis in the asset.
(4) Debt instruments. Except as provided below, an amount paid in cash will not be disregarded for purposes of section 4.02(2) of this revenue procedure merely because the taxpayer issued a debt instrument to obtain the cash. However, if the taxpayer has issued a debt instrument to the person (or a related party as described in § 267(b) or  § 707(b)) who sold or transferred the asset to the taxpayer, assumed a debt instrument (or took an asset subject to a debt instrument) issued by the person (or a related party as described in  § 267(b) or § 707(b)) who sold or transferred the asset to the taxpayer, or issued a debt instrument in exchange for improvements to an asset, the taxpayer will be treated as having paid cash for the asset or the improvement only if the debt instrument is secured by the asset and all amounts due under the debt instrument have been paid in cash no later than the time of the sale or exchange of the asset (except in the case of stock or securities traded on an established securities market, the settlement date) for which the loss is claimed.
.03. Other losses. The following losses under § 165 are not taken into account in determining whether a transaction is a loss transaction under § 1.6011-4(b)(5):

(1) A loss from fire, storm, shipwreck, or other casualty, or from theft, as those terms are defined for purposes of  § 165(c)(3);
(2) A loss from a compulsory or involuntary conversion as described in  § 1231(a)(3)(A)(ii) and (a)(4)(B);
(3) A loss to which § 475(a) or  § 1256(a) applies;
(4) A loss arising from any mark-to-market treatment of an item under § § 475(f), 1296(a), 1.446-4(e), 1.988-5(a)(6), or 1.1275-6(d)(2), and any loss from a sale or disposition of an item to which one of the foregoing provisions applied, provided that the taxpayer computes its loss by using a qualifying basis (as defined in section 4.02(2) of this revenue procedure) or a basis resulting from previously marking the item to market, or computes its loss by making appropriate adjustments for previously determined mark-to-market gain or loss;
(5) A loss arising from a hedging transaction described in  § 1221(b), if the taxpayer properly identifies the transaction as a hedging transaction, or from a mixed straddle account under § 1.1092(b)-4T;
(6) A loss attributable to basis increases under  § 860C(d)(1) during the period of the taxpayer's ownership;
(7) A loss attributable to the abandonment of depreciable tangible property that was used by the taxpayer in a trade or business and that has a qualifying basis under section 4.02(2) of this revenue procedure;
(8) A loss arising from the bulk sale of inventory if the basis of the inventory is determined under § 263A;
(9) A loss that is equal to, and is determined solely by reference to, a payment of cash by the taxpayer (for example, a cash payment by a guarantor that results in a loss or a cash payment that is treated as a loss from the sale of a capital asset under § 1234A or  § 1234B);
(10) A loss from the sale to a person other than a related party (within the meaning of § 267(b) or § 707(b)) of property described in  § 1221(a)(4) in a factoring transaction in the ordinary course of business; or
(11) A loss arising from the disposition of an asset to the extent that the taxpayer's basis in the asset is determined under  § 338(b).
5. Effect On Other Documents

This document modifies and supersedes Rev. Proc. 2004-66, 2004-50 C.B. 966.

6. Effective Date

This revenue procedure is effective December 6, 2012, the date this revenue procedure was released to the public. This revenue procedure, except for section 4.02(1)(c) as applied to losses recognized by certain banks with respect to section 988 transactions, applies to transactions that are entered into on or after January 1, 2003. Section 4.02(1)(c) as applied to losses recognized by certain banks with respect to section 988 transactions applies to losses recognized on or after December 6, 2012.

7. Drafting Information

The principal authors of this revenue procedure are Charles D. Wien and Caroline E. Hay of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding disclosures under this revenue procedure contact Mr. Wien or Ms. Hay at (202) 622-3070 (not a toll ree call). For further information regarding § 988 transactions under this revenue procedure contact Mark Erwin or Raymond Stahl at (202) 622-3870 (not a toll free call).


Reg §1.6011-4. Requirement of statement disclosing participation in certain transactions by taxpayers.

Caution: The Treasury has not yet amended Reg § 1.6011-4 to reflect changes made by P.L. 108-357

 Effective: August 3, 2007.

(a) In general. Every taxpayer that has participated, as described in paragraph (c)(3) of this section, in a reportable transaction within the meaning of paragraph (b) of this section and who is required to file a tax return must file within the time prescribed in paragraph (e) of this section a disclosure statement in the form prescribed by paragraph (d) of this section. The fact that a transaction is a reportable transaction shall not affect the legal determination of whether the taxpayer's treatment of the transaction is proper.

(b) WG&L Treatises Reportable transactions.

(1) WG&L Treatises In general. A reportable transaction is a transaction described in any of the paragraphs (b)(2) through (7) of this section. The term transaction includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement, and includes any series of steps carried out as part of a plan.

(2) WG&L Treatises Listed transactions. A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service (IRS) has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.

(3) Confidential transactions.

(i) In general. A confidential transaction is a transaction that is offered to a taxpayer under conditions of confidentiality and for which the taxpayer has paid an advisor a minimum fee.

(ii) Conditions of confidentiality. A transaction is considered to be offered to a taxpayer under conditions of confidentiality if the advisor who is paid the minimum fee places a limitation on disclosure by the taxpayer of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of that advisor's tax strategies. A transaction is treated as confidential even if the conditions of confidentiality are not legally binding on the taxpayer. A claim that a transaction is proprietary or exclusive is not treated as a limitation on disclosure if the advisor confirms to the taxpayer that there is no limitation on disclosure of the tax treatment or tax structure of the transaction.

(iii) Minimum fee. For purposes of this paragraph (b)(3), the minimum fee is—

(A) $250,000 for a transaction if the taxpayer is a corporation;

(B) $50,000 for all other transactions unless the taxpayer is a partnership or trust, all of the owners or beneficiaries of which are corporations (looking through any partners or beneficiaries that are themselves partnerships or trusts), in which case the minimum fee is $250,000.

(iv) Determination of minimum fee. For purposes of this paragraph (b)(3), in determining the minimum fee, all fees for a tax strategy or for services for advice (whether or not tax advice) or for the implementation of a transaction are taken into account. Fees include consideration in whatever form paid, whether in cash or in kind, for services to analyze the transaction (whether or not related to the tax consequences of the transaction), for services to implement the transaction, for services to document the transaction, and for services to prepare tax returns to the extent return preparation fees are unreasonable in light of the facts and circumstances. For purposes of this paragraph (b)(3), a taxpayer also is treated as paying fees to an advisor if the taxpayer knows or should know that the amount it pays will be paid indirectly to the advisor, such as through a referral fee or fee-sharing arrangement. A fee does not include amounts paid to a person, including an advisor, in that person's capacity as a party to the transaction. For example, a fee does not include reasonable charges for the use of capital or the sale or use of property. The IRS will scrutinize carefully all of the facts and circumstances in determining whether consideration received in connection with a confidential transaction constitutes fees.

(v) Related parties. For purposes of this paragraph (b)(3), persons who bear a relationship to each other as described in section 267(b) or 707(b) will be treated as the same person.

(4) Transactions with contractual protection.

(i) WG&L Treatises In general. A transaction with contractual protection is a transaction for which the taxpayer or a related party (as described in section 267(b) or 707(b)) has the right to a full or partial refund of fees (as described in paragraph (b)(4)(ii) of this section) if all or part of the intended tax consequences from the transaction are not sustained. A transaction with contractual protection also is a transaction for which fees (as described in paragraph (b)(4)(ii) of this section) are contingent on the taxpayer's realization of tax benefits from the transaction. All the facts and circumstances relating to the transaction will be considered when determining whether a fee is refundable or contingent, including the right to reimbursements of amounts that the parties to the transaction have not designated as fees or any agreement to provide services without reasonable compensation.

(ii) Fees. Paragraph (b)(4)(i) of this section only applies with respect to fees paid by or on behalf of the taxpayer or a related party to any person who makes or provides a statement, oral or written, to the taxpayer or related party (or for whose benefit a statement is made or provided to the taxpayer or related party) as to the potential tax consequences that may result from the transaction.

(iii) WG&L Treatises Exceptions.

(A) Termination of transaction. A transaction is not considered to have contractual protection solely because a party to the transaction has the right to terminate the transaction upon the happening of an event affecting the taxation of one or more parties to the transaction.

(B) Previously reported transaction. If a person makes or provides a statement to a taxpayer as to the potential tax consequences that may result from a transaction only after the taxpayer has entered into the transaction and reported the consequences of the transaction on a filed tax return, and the person has not previously received fees from the taxpayer relating to the transaction, then any refundable or contingent fees are not taken into account in determining whether the transaction has contractual protection. This paragraph (b)(4) does not provide any substantive rules regarding when a person may charge refundable or contingent fees with respect to a transaction. See Circular 230, 31 CFR part 10, for the regulations governing practice before the IRS.

(5) WG&L Treatises Loss transactions.

(i) In general. A loss transaction is any transaction resulting in the taxpayer claiming a loss under section 165 of at least—

(A) $10 million in any single taxable year or $20 million in any combination of taxable years for corporations;

(B) $10 million in any single taxable year or $20 million in any combination of taxable years for partnerships that have only corporations as partners (looking through any partners that are themselves partnerships), whether or not any losses flow through to one or more partners; or

(C) $2 million in any single taxable year or $4 million in any combination of taxable years for all other partnerships, whether or not any losses flow through to one or more partners;

(D) $2 million in any single taxable year or $4 million in any combination of taxable years for individuals, S corporations, or trusts, whether or not any losses flow through to one or more shareholders or beneficiaries; or

(E) $50,000 in any single taxable year for individuals or trusts, whether or not the loss flows through from an S corporation or partnership, if the loss arises with respect to a section 988 transaction (as defined in section 988(c)(1) relating to foreign currency transactions).

(ii) Cumulative losses. In determining whether a transaction results in a taxpayer claiming a loss that meets the threshold amounts over a combination of taxable years as described in paragraph (b)(5)(i) of this section, only losses claimed in the taxable year that the transaction is entered into and the five succeeding taxable years are combined.

(iii) WG&L Treatises Section 165 loss.

(A) For purposes of this section, in determining the thresholds in paragraph (b)(5)(i) of this section, the amount of a section 165 loss is adjusted for any salvage value and for any insurance or other compensation received. See §1.165-1(c)(4). However, a section 165 loss does not take into account offsetting gains, or other income or limitations. For example, a section 165 loss does not take into account the limitation in section 165(d) (relating to wagering losses) or the limitations in sections 165(f), 1211, and 1212 (relating to capital losses). The full amount of a section 165 loss is taken into account for the year in which the loss is sustained, regardless of whether all or part of the loss enters into the computation of a net operating loss under section 172 or a net capital loss under section 1212 that is a carryback or carryover to another year. A section 165 loss does not include any portion of a loss, attributable to a capital loss carryback or carryover from another year, that is treated as a deemed capital loss under section 1212.

(B) For purposes of this section, a section 165 loss includes an amount deductible pursuant to a provision that treats a transaction as a sale or other disposition, or otherwise results in a deduction under section 165. A section 165 loss includes, for example, a loss resulting from a sale or exchange of a partnership interest under section 741 and a loss resulting from a section 988 transaction.

(6) WG&L Treatises Transactions of interest. A transaction of interest is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has identified by notice, regulation, or other form of published guidance as a transaction of interest.

(7) WG&L Treatises [Reserved].

(8) WG&L Treatises Exceptions.

(i) In general. A transaction will not be considered a reportable transaction, or will be excluded from any individual category of reportable transaction under paragraphs (b)(3) through (7) of this section, if the Commissioner makes a determination by published guidance that the transaction is not subject to the reporting requirements of this section. The Commissioner may make a determination by individual letter ruling under paragraph (f) of this section that an individual letter ruling request on a specific transaction satisfies the reporting requirements of this section with regard to that transaction for the taxpayer who requests the individual letter ruling.

(ii) WG&L Treatises Special rule for RICs. For purposes of this section, a regulated investment company (RIC) as defined in section 851 or an investment vehicle that is owned 95 percent or more by one or more RICs at all times during the course of the transaction is not required to disclose a transaction that is described in any of paragraphs (b)(3) through (5) and (b)(7) of this section unless the transaction is also a listed transaction or a transaction of interest.

(c) Definitions. For purposes of this section, the following definitions apply:

(1) Taxpayer. The term taxpayer means any person described in section 7701(a)(1), including S corporations. Except as otherwise specifically provided in this section, the term taxpayer also includes an affiliated group of corporations that joins in the filing of a consolidated return under section 1501.

(2) Corporation. When used specifically in this section, the term corporation means an entity that is required to file a return for a taxable year on any 1120 series form, or successor form, excluding S corporations.

(3) Participation.

(i) In general.

(A) Listed transactions. A taxpayer has participated in a listed transaction if the taxpayer's tax return reflects tax consequences or a tax strategy described in the published guidance that lists the transaction under paragraph (b)(2) of this section. A taxpayer also has participated in a listed ftransaction if the taxpayer knows or has reason to know that the taxpayer's tax benefits are derived directly or indirectly from tax consequences or a tax strategy described in published guidance that lists a transaction under paragraph (b)(2) of this section. Published guidance may identify other types or classes of persons that will be treated as participants in a listed transaction. Published guidance also may identify types or classes of persons that will not be treated as participants in a listed transaction.

(B) Confidential transactions. A taxpayer has participated in a confidential transaction if the taxpayer's tax return reflects a tax benefit from the transaction and the taxpayer's disclosure of the tax treatment or tax structure of the transaction is limited in the manner described in paragraph (b)(3) of this section. If a partnership's, S corporation's or trust's disclosure is limited, and the partner's, shareholder's, or beneficiary's disclosure is not limited, then the partnership, S corporation, or trust, and not the partner, shareholder, or beneficiary, has participated in the confidential transaction.

(C) Transactions with contractual protection. A taxpayer has participated in a transaction with contractual protection if the taxpayer's tax return reflects a tax benefit from the transaction and, as described in paragraph (b)(4) of this section, the taxpayer has the right to the full or partial refund of fees or the fees are contingent. If a partnership, S corporation, or trust has the right to a full or partial refund of fees or has a contingent fee arrangement, and the partner, shareholder, or beneficiary does not individually have the right to the refund of fees or a contingent fee arrangement, then the partnership, S corporation, or trust, and not the partner, shareholder, or beneficiary, has participated in the transaction with contractual protection.

(D) Loss transactions. A taxpayer has participated in a loss transaction if the taxpayer's tax return reflects a section 165 loss and the amount of the section 165 loss equals or exceeds the threshold amount applicable to the taxpayer as described in paragraph (b)(5)(i) of this section. If a taxpayer is a partner in a partnership, shareholder in an S corporation, or beneficiary of a trust and a section 165 loss as described in paragraph (b)(5) of this section flows through the entity to the taxpayer (disregarding netting at the entity level), the taxpayer has participated in a loss transaction if the taxpayer's tax return reflects a section 165 loss and the amount of the section 165 loss that flows through to the taxpayer equals or exceeds the threshold amounts applicable to the taxpayer as described in paragraph (b)(5)(i) of this section. For this purpose, a tax return is deemed to reflect the full amount of a section 165 loss described in paragraph (b)(5) of this section allocable to the taxpayer under this paragraph (c)(3)(i)(D), regardless of whether all or part of the loss enters into the computation of a net operating loss under section 172 or net capital loss under section 1212 that the taxpayer may carry back or carry over to another year.

(E) Transactions of interest. A taxpayer has participated in a transaction of interest if the taxpayer is one of the types or classes of persons identified as participants in the transaction in the published guidance describing the transaction of interest.

(F) [Reserved].

(G) Shareholders of foreign corporations.

 (1) In general. A reporting shareholder of a foreign corporation participates in a transaction described in paragraphs (b)(2) through (5) and (b)(7) of this section if the foreign corporation would be considered to participate in the transaction under the rules of this paragraph (c)(3) if it were a domestic corporation filing a tax return that reflects the items from the transaction. A reporting shareholder of a foreign corporation participates in a transaction described in paragraph (b)(6) of this section only if the published guidance identifying the transaction includes the reporting shareholder among the types or classes of persons identified as participants. A reporting shareholder (and any successor in interest) is considered to participate in a transaction under this paragraph (c)(3)(i)(G) only for its first taxable year with or within which ends the first taxable year of the foreign corporation in which the foreign corporation participates in the transaction, and for the reporting shareholder's five succeeding taxable years.

 (2) Reporting shareholder. The term reporting shareholder means a United States shareholder (as defined in section 951(b)) in a controlled foreign corporation (as defined in section 957) or a 10 percent shareholder (by vote or value) of a qualified electing fund (as defined in section 1295).

(ii) Examples. The following examples illustrate the provisions of paragraph (c)(3)(i) of this section:

Example (1). Notice 2003-55 (2003-2 CB 395), which modified and superseded Notice 95-53 (1995-2 CB 334) (see §601.601(d)(2) of this chapter), describes a lease stripping transaction in which one party (the transferor) assigns the right to receive future payments under a lease of tangible property and treats the amount realized from the assignment as its current income. The transferor later transfers the property subject to the lease in a transaction intended to qualify as a transferred basis transaction, for example, a transaction described in section 351. The transferee corporation claims the deductions associated with the high basis property subject to the lease. The transferor's and transferee corporation's tax returns reflect tax positions described in Notice 2003-55. Therefore, the transferor and transferee corporation have participated in the listed transaction. In the section 351 transaction, the transferor will have received stock with low value and high basis from the transferee corporation. If the transferor subsequently transfers the high basis/low value stock to a taxpayer in another transaction intended to qualify as a transferred basis transaction and the taxpayer uses the stock to generate a loss, and if the taxpayer knows or has reason to know that the tax loss claimed was derived indirectly from the lease stripping transaction, then the taxpayer has participated in the listed transaction. Accordingly, the taxpayer must disclose the transaction and the manner of the taxpayer's participation in the transaction under the rules of this section. For purposes of this example, if a bank lends money to the transferor, transferee corporation, or taxpayer for use in their transactions, the bank has not participated in the listed transaction because the bank's tax return does not reflect tax consequences or a tax strategy described in the listing notice (nor does the bank's tax return reflect a tax benefit derived from tax consequences or a tax strategy described in the listing notice) nor is the bank described as a participant in the listing notice.

Example (2). XYZ is a limited liability company treated as a partnership for tax purposes. X, Y, and Z are members of XYZ. X is an individual, Y is an S corporation, and Z is a partnership. XYZ enters into a confidential transaction under paragraph (b)(3) of this section. XYZ and X are bound by the confidentiality agreement, but Y and Z are not bound by the agreement. As a result of the transaction, XYZ, X, Y, and Z all reflect a tax benefit on their tax returns. Because XYZ's and X's disclosure of the tax treatment and tax structure are limited in the manner described in paragraph (b)(3) of this section and their tax returns reflect a tax benefit from the transaction, both XYZ and X have participated in the confidential transaction. Neither Y nor Z has participated in the confidential transaction because they are not subject to the confidentiality agreement.

Example (3). P, a corporation, has an 80% partnership interest in PS, and S, an individual, has a 20% partnership interest in PS. P, S, and PS are calendar year taxpayers. In 2006, PS enters into a transaction and incurs a section 165 loss (that does not meet any of the exceptions to a section 165 loss identified in published guidance) of $12 million and offsetting gain of $3 million. On PS' 2006 tax return, PS includes the section 165 loss and the corresponding gain. PS must disclose the transaction under this section because PS' section 165 loss of $12 million is equal to or greater than $2 million. P is allocated $9.6 million of the section 165 loss and $2.4 million of the offsetting gain. P does not have to disclose the transaction under this section because P's section 165 loss of $9.6 million is not equal to or greater than $10 million. S is allocated $2.4 million of the section 165 loss and $600,000 of the offsetting gain. S must disclose the transaction under this section because S's section 165 loss of $2.4 million is equal to or greater than $2 million.

(4) WG&L Treatises Substantially similar. The term substantially similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another transaction. Further, the term substantially similar must be broadly construed in favor of disclosure. For example, a transaction may be substantially similar to a listed transaction even though it involves different entities or uses different Internal Revenue Code provisions. (See for example, Notice 2003-54 (2003-2 CB 363), describing a transaction substantially similar to the transactions in Notice 2002-50 (2002-2 CB 98), and Notice 2002-65 (2002-2 CB 690).) The following examples illustrate situations where a transaction is the same as or substantially similar to a listed transaction under paragraph (b)(2) of this section. (Such transactions may also be reportable transactions under paragraphs (b)(3) through (7) of this section.) See §601.601(d)(2)(ii)(b) of this chapter. The following examples illustrate the provisions of this paragraph (c)(4):

Example (1). Notice 2000-44 (2000-2 CB 255) (see § 601.601(d)(2)(ii)(b) of this chapter), sets forth a listed transaction involving offsetting options transferred to a partnership where the taxpayer claims basis in the partnership for the cost of the purchased options but does not adjust basis under section 752 as a result of the partnership's assumption of the taxpayer's obligation with respect to the options. Transactions using short sales, futures, derivatives or any other type of offsetting obligations to inflate basis in a partnership interest would be the same as or substantially similar to the transaction described in Notice 2000-44. Moreover, use of the inflated basis in the partnership interest to diminish gain that would otherwise be recognized on the transfer of a partnership asset would also be the same as or substantially similar to the transaction described in Notice 2000-44. See § 601.601(d)(2)(ii)(b).

Example (2). Notice 2001-16 (2001-1 CB 730) (see § 601.601(d)(2)(ii)(b) of this chapter), sets forth a listed transaction involving a seller (X) who desires to sell stock of a corporation (T), an intermediary corporation (M), and a buyer (Y) who desires to purchase the assets (and not the stock) of T. M agrees to facilitate the sale to prevent the recognition of the gain that T would otherwise report. Notice 2001-16 describes M as a member of a consolidated group that has a loss within the group or as a party not subject to tax. Transactions utilizing different intermediaries to prevent the recognition of gain would be the same as or substantially similar to the transaction described in Notice 2001-16. An example is a transaction in which M is a corporation that does not file a consolidated return but which buys T stock, liquidates T, sells assets of T to Y, and offsets the gain on the sale of those assets with currently generated losses. See § 601.601(d)(2)(ii)(b).

(5) Tax. The term tax means Federal income tax.

(6) Tax benefit. A tax benefit includes deductions, exclusions from gross income, nonrecognition of gain, tax credits, adjustments (or the absence of adjustments) to the basis of property, status as an entity exempt from Federal income taxation, and any other tax consequences that may reduce a taxpayer's Federal income tax liability by affecting the amount, timing, character, or source of any item of income, gain, expense, loss, or credit.

(7) Tax return. The term tax return means a Federal income tax return and a Federal information return.

(8) Tax treatment. The tax treatment of a transaction is the purported or claimed Federal income tax treatment of the transaction.

(9) Tax structure. The tax structure of a transaction is any fact that may be relevant to understanding the purported or claimed Federal income tax treatment of the transaction.

(d) Form and content of disclosure statement. A taxpayer required to file a disclosure statement under this section must file a completed Form 8886, “Reportable Transaction Disclosure Statement” (or a successor form), in accordance with this paragraph (d) and the instructions to the form. The Form 8886 (or a successor form) is the disclosure statement required under this section. The form must be attached to the appropriate tax return(s) as provided in paragraph (e) of this section. If a copy of a disclosure statement is required to be sent to the Office of Tax Shelter Analysis (OTSA) under paragraph (e) of this section, it must be sent in accordance with the instructions to the form. To be considered complete, the information provided on the form must describe the expected tax treatment and all potential tax benefits expected to result from the transaction, describe any tax result protection (as defined in §301.6111-3(c)(12) of this chapter) with respect to the transaction, and identify and describe the transaction in sufficient detail for the IRS to be able to understand the tax structure of the reportable transaction and the identity of all parties involved in the transaction. An incomplete Form 8886 (or a successor form) containing a statement that information will be provided upon request is not considered a complete disclosure statement. If the form is not completed in accordance with the provisions in this paragraph (d) and the instructions to the form, the taxpayer will not be considered to have complied with the disclosure requirements of this section. If a taxpayer receives one or more reportable transaction numbers for a reportable transaction, the taxpayer must include the reportable transaction number(s) on the Form 8886 (or a successor form). See §301.6111-3(d)(2) of this chapter.

(e) Time of providing disclosure.

(1) In general. The disclosure statement for a reportable transaction must be attached to the taxpayer's tax return for each taxable year for which a taxpayer participates in a reportable transaction. In addition, a disclosure statement for a reportable transaction must be attached to each amended return that reflects a taxpayer's participation in a reportable transaction. A copy of the disclosure statement must be sent to OTSA at the same time that any disclosure statement is first filed by the taxpayer pertaining to a particular reportable transaction. If a reportable transaction results in a loss which is carried back to a prior year, the disclosure statement for the reportable transaction must be attached to the taxpayer's application for tentative refund or amended tax return for that prior year. In the case of a taxpayer that is a partnership, an S corporation, or a trust, the disclosure statement for a reportable transaction must be attached to the partnership, S corporation, or trust's tax return for each taxable year in which the partnership, S corporation, or trust participates in the transaction under the rules of paragraph (c)(3)(i) of this section. If a taxpayer who is a partner in a partnership, a shareholder in an S corporation, or a beneficiary of a trust receives a timely Schedule K-1 less than 10 calendar days before the due date of the taxpayer's return (including extensions) and, based on receipt of the timely Schedule K-1, the taxpayer determines that the taxpayer participated in a reportable transaction within the meaning of paragraph (c)(3) of this section, the disclosure statement will not be considered late if the taxpayer discloses the reportable transaction by filing a disclosure statement with OTSA within 60 calendar days after the due date of the taxpayer's return (including extensions). The Commissioner in his discretion may issue in published guidance other provisions for disclosure under §1.6011-4.

(2) Special rules.

(i) Listed transactions and transactions of interest. In general, if a transaction becomes a listed transaction or a transaction of interest after the filing of a taxpayer's tax return (including an amended return) reflecting the taxpayer's participation in the listed transaction or transaction of interest and before the end of the period of limitations for assessment of tax for any taxable year in which the taxpayer participated in the listed transaction or transaction of interest, then a disclosure statement must be filed, regardless of whether the taxpayer participated in the transaction in the year the transaction became a listed transaction or a transaction of interest, with OTSA within 90 calendar days after the date on which the transaction became a listed transaction or a transaction of interest. The Commissioner also may determine the time for disclosure of listed transactions and transactions of interest in the published guidance identifying the transaction.

(ii) Loss transactions. If a transaction becomes a loss transaction because the losses equal or exceed the threshold amounts as described in paragraph (b)(5)(i) of this section, a disclosure statement must be filed as an attachment to the taxpayer's tax return for the first taxable year in which the threshold amount is reached and to any subsequent tax return that reflects any amount of section 165 loss from the transaction.

(3) Multiple disclosures. The taxpayer must disclose the transaction in the time and manner provided for under the provisions of this section regardless of whether the taxpayer also plans to disclose the transaction under other published guidance, for example, §1.6662-3(c)(2).

(4) Example. The following example illustrates the application of this paragraph (e):

Example. In January of 2008, F, a calendar year taxpayer, enters into a transaction that at the time is not a listed transaction and is not a transaction described in any of the paragraphs (b)(3) through (7) of this section. All the tax benefits from the transaction are reported on F's 2008 tax return filed timely in April 2009. On May 2, 2011, the IRS publishes a notice identifying the transaction as a listed transaction described in paragraph (b)(2) of this section. Upon issuance of the May 2, 2011 notice, the transaction becomes a reportable transaction described in paragraph (b) of this section. The period of limitations on assessment for F's 2008 taxable year is still open. F is required to file Form 8886 for the transaction with OTSA within 90 calendar days after May 2, 2011.

(f) Rulings and protective disclosures.

(1) Rulings. If a taxpayer requests a ruling on the merits of a specific transaction on or before the date that disclosure would otherwise be required under this section, and receives a favorable ruling as to the transaction, the disclosure rules under this section will be deemed to have been satisfied by that taxpayer with regard to that transaction, so long as the request fully discloses all relevant facts relating to the transaction which would otherwise be required to be disclosed under this section. If a taxpayer requests a ruling as to whether a specific transaction is a reportable transaction on or before the date that disclosure would otherwise be required under this section, the Commissioner in his discretion may determine that the submission satisfies the disclosure rules under this section for the taxpayer requesting the ruling for that transaction if the request fully discloses all relevant facts relating to the transaction which would otherwise be required to be disclosed under this section. The potential obligation of the taxpayer to disclose the transaction under this section will not be suspended during the period that the ruling request is pending.

(2) WG&L Treatises Protective disclosures. If a taxpayer is uncertain whether a transaction must be disclosed under this section, the taxpayer may disclose the transaction in accordance with the requirements of this section and comply with all the provisions of this section, and indicate on the disclosure statement that the disclosure statement is being filed on a protective basis. The IRS will not treat disclosure statements filed on a protective basis any differently than other disclosure statements filed under this section. For a protective disclosure to be effective, the taxpayer must comply with these disclosure regulations by providing to the IRS all information requested by the IRS under this section.

(g) Retention of documents.

(1) In accordance with the instructions to Form 8886 (or a successor form), the taxpayer must retain a copy of all documents and other records related to a transaction subject to disclosure under this section that are material to an understanding of the tax treatment or tax structure of the transaction. The documents must be retained until the expiration of the statute of limitations applicable to the final taxable year for which disclosure of the transaction was required under this section. (This document retention requirement is in addition to any document retention requirements that section 6001 generally imposes on the taxpayer.) The documents may include the following:

(i) Marketing materials related to the transaction;

(ii) Written analyses used in decision-making related to the transaction;

(iii) Correspondence and agreements between the taxpayer and any advisor, lender, or other party to the reportable transaction that relate to the transaction;

(iv) Documents discussing, referring to, or demonstrating the purported or claimed tax benefits arising from the reportable transaction; and documents, if any, referring to the business purposes for the reportable transaction.

(2) A taxpayer is not required to retain earlier drafts of a document if the taxpayer retains a copy of the final document (or, if there is no final document, the most recent draft of the document) and the final document (or most recent draft) contains all the information in the earlier drafts of the document that is material to an understanding of the purported tax treatment or tax structure of the transaction.

(h) Effective/applicability date.

(1) In general. This section applies to transactions entered into on or after August 3, 2007. However, this section applies to transactions of interest entered into on or after November 2, 2006. Paragraph (f)(1) of this section applies to ruling requests received on or after November 1, 2006. Otherwise, the rules that apply with respect to transactions entered into before August 3, 2007, are contained in §1.6011-4 in effect prior to August 3, 2007 (see 26 CFR part 1 revised as of April 1, 2007).

(2) [Reserved].

T.D. 9046, 2/28/2003, amendT.D. 9108, 12/29/2003 ,T.D. 9295, 11/1/2006 ,T.D. 9350, 7/31/2007 .





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Abuse of discretion Installment Agreement - no financials

Jean Bridgmon v. Commissioner, TC Memo 2012-322 , Code Sec(s) 6330.

JEAN BRIDGMON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .

Case Information:

Code Sec(s):       6330

Docket:                Docket No. 24708-10L.

Date Issued:       11/20/2012

HEADNOTE

Official Tax Court Syllabus

MEMORANDUM OPINION

MORRISON, Judge: The IRS notified petitioner, Ms. Jean Bridgmon, that it intended to use its levy power to collect her income-tax liabilities for the tax years 2003, 2004, and 2005. Bridgmon requested a collection-review hearing with the IRS Appeals Office (Appeals Office). She received an adverse determination [*2] from that office. She has appealed that determination to this Court. We do not sustain the Appeals Office's determination. We direct that Bridgmon's case be remanded to the Appeals Office.

The second error Bridgmon alleges is that the Appeals Office failed to consider her proposal to make installment payments of her tax liabilities. The reasons the Appeals Office did not consider the proposal are that Bridgmon allegedly failed to telephone the Appeals Office at the time and date scheduled for her hearing with the Appeals Office and that she did not submit financial information that the Appeals Office had requested. We find that Bridgmon did [*3] call the Appeals Office at the scheduled date and time. We further find that the Appeals Office did not telephone Bridgmon at the scheduled date and time. The scheduled telephone conference was to be Bridgmon's primary opportunity to discuss her installment agreement proposal with the Appeals Office. Under these circumstances, we hold that the Appeals Office erred in failing to make better efforts to contact Bridgmon (such as telephoning her) even though Bridgmon did not submit the requested financial information. Bridgmon should be afforded another opportunity for a hearing with the Appeals Office.

Analysis

2.

Bridgmon also contends that the Appeals Office erred in failing to consider her proposal to make installment payments of $500 per month. The IRS responds that the Appeals Office could not consider the installment-agreement proposal because Bridgmon had failed to submit a collection-information statement to the Appeals Office. In addition, the IRS contends that Bridgmon failed to call the Appeals Office on June 16, 2010, at the scheduled time.

We believe that Bridgmon did call the Appeals Office at that time. Bridgmon testified that she called the Appeals Office at this time and several other times. Bridgmon was a credible witness. Although the records of the Appeals [*17] Office do not reflect that it received a telephone call from Bridgmon at the scheduled time, and although the Appeals Office wrote a letter on the scheduled day stating that she had not called at the scheduled time, we believe Bridgmon. We find as a matter of fact that Bridgmon called the Appeals Office at the scheduled time and at numerous other times. The IRS asserts that the Appeals Office may have called Bridgmon. As support for this proposition, the IRS points to the following note made by the Appeals Office in its files on May 5, 2010: “ACS history—made several telephone attempts—no response.” We believe this is a reference to a record entitled “Referral Request for CDP Hearing from ACS Support”. This record indicates that on May 20, 2010, “ACS Support” referred Bridgmon's “case file” to the Appeals Office and made the following notes on the record: on February 10, 2010, “LEFT MESSAGE FOR TAXPAYER.”, on February 18, 2010, “NO RESPONSE FROM TAXPAYER, SECOND MESSAGE LEFT.”, and on April 9, 2010, “NO RESPONSE FROM TAXPAYER.” These notes refer to telephone calls made by IRS employees other than those working in the Appeals Office. We find that the Appeals Office did not telephone Bridgmon.

The significance of the telephone call that was scheduled for June 16, 2010, was described in the May 6, 2010 letter of the Appeals Office to Bridgmon. The letter advised her: “This call will be your primary opportunity to discuss with me [*18] [the Appeals Officer] the reasons you disagree with the collection action and/or to discuss alternatives to the collection action.” The telephone call was important. It would have been an opportunity for Bridgmon to ask about the Appeals Office's requests for financial statements, which may have been confusing to Bridgmon. Bridgmon may not have known, for example, whether the Appeals Office wanted her to submit a Form 433-A, a Form 433-B, a Form 433-F, or all three forms. The fact that Bridgmon did not submit any of these forms leads the IRS to argue that it was not an abuse of discretion for the Appeals Office to reject collection alternatives. The courts have recognized that the Appeals Office needs financial information in order to evaluate collection alternatives such as installment agreements and offers-in-compromise. Thus, it has not been held it not to be an abuse of discretion for the Appeals Office to decline to consider collection alternatives when (1) the taxpayer had refused to contact the Appeals Office for the hearing and had failed to submit the financial information requested by the Appeals Office, see Yoel v. Commissioner, T.C. Memo. 2012-222 [TC Memo 2012-222], at *3, *8; Picchiottino v. Commissioner T.C. Memo. 2004-231 [TC Memo 2004-231], slip op. at 13, or (2) the , taxpayer had participated in a hearing with the Appeals Office and had failed to submit the financial information requested by the Appeals Office. See Long v. Commissioner, T.C. Memo. 2010-7 [TC Memo 2010-7], slip op. at 4. Bridgmon, however, falls into [*19] neither of these two categories. She attempted to participate in the telephone hearing, but her attempt was unsuccessful.

We hold that the Appeals Office's failure to do more to contact Bridgmon was an abuse of discretion. We will remand the case to the Appeals Office to hold a hearing. At the hearing on remand, the Appeals Office will not be required to consider any challenges by Bridgmon to the underlying tax liabilities, such as additions to tax.

To reflect the foregoing,

An appropriate order will be issued.

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Switzerland FATCA Agreement

Switzerland, U.S. initial FATCA agreement

Switzerland has initialed an intergovernmental agreement (IGA) with the U.S. that will eventually be used by Swiss financial institutions to report information on U.S. account holders directly to the IRS. The agreement was reached by both sides on December 3 in Washington, the Secretariat for International Financial Matters (SIF) said in a statement. The text of the IGA will be made available after both countries have signed it.

In February 2012, the IRS issued proposed regulations implementing FATCA. These regulations generally would make it easier to comply with the FATCA rules, expand the types of FFIs deemed to be in FATCA compliance without the need to enter into an agreement with the IRS, and phase-in FATCA reporting and withholding obligations over an extended transition period. The regulations generally would apply when they are finalized. In conjunction with the proposed regulations, Treasury announced that it had entered into an agreement with several European governments to pursue a framework for implementing FATCA and released a Joint Statement with those countries.

On July 26, Treasury, released model IGAs for intergovernmental information sharing under FATCA (Model I approach). A reciprocal model agreement was released for countries with which the U.S. has a tax treaty or tax information exchange agreement (in effect), and a largely identical nonreciprocal model agreement. The agreements clarify the responsibilities of financial institutions in reviewing and reporting accounts based on the identity of the account holder and the balance or value of the account. They also suspend certain requirements relating to recalcitrant account holders.

Treasury said that it hoped Model I agreements would be signed with countries, including Germany, France, Italy, and Spain. A second alternative framework (Model II approach) was also set forth by Treasury, and was outlined in June statements with Japan and Switzerland and will require foreign financial institutions to generally report directly to the IRS. To date, Denmark, Mexico, and the U.K. have signed bilateral reciprocal IGAs (Model I) with the U.S.

Swiss carve-outs. Although the text of the agreement has not been released, SIF said that IGA would simplify procedures for large parts of the Swiss financial sector. Social security, private pension funds, and life and property insurers are excluded from FATCA. Collective investment schemes and financial institutions with mostly local clientele will be deemed to comply with FATCA and will only be subject to registration requirements. Additionally, the agreement establishes simplified due diligence requirements with respect to the identification of U.S. clients already subject to reporting by other Swiss financial institutions in order to avoid excessive administrative burden of compliance to avoid excessive compliance burdens.

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Tax Return - what is a good tax return?

N RE: MARTIN, Cite as 110 AFTR 2d 2012-XXXX, 11/14/2012

In re Peter George MARTIN, Debtor.
Case Information:

Code Sec(s):
Court Name: United States Bankruptcy Court, D. Colorado,
Docket No.: Bankruptcy No. 10-37360 ABC; Adversary No. 11-1536 ABC,
Date Decided: 11/14/2012.
Disposition:
HEADNOTE

.

Reference(s):

OPINION

Charles S. Parnell, Wheat Ridge, CO, for Debtor/Plaintiff.

United States Bankruptcy Court, D. Colorado,

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

Judge: A. BRUCE CAMPBELL, United States Bankruptcy Judge.

THIS MATTER comes before the Court on the Cross Motions for Summary Judgment filed by Plaintiff, Peter George Martin (“Plaintiff” or “Debtor”), and by the United States of America (“Defendant” or “United States”). The Court, having reviewed the file and being otherwise advised in the premises, finds as follows.

Background

In this adversary proceeding, Debtor seeks a declaration that the debt he owes the United States for his 2000 and 2001 federal income taxes was discharged in his Chapter 7 bankruptcy. The United States asserts that this tax debt is non-dischargeable under 11 U.S.C. § 523(a)(1)(B)(i). This outcome of this case turns on the Court's interpretation of this section's exception from discharge of debts for taxes “with respect to which a return ... was not filed.”

This issue was addressed by another division of this Bankruptcy Court in Wogoman v. Internal Revenue Service (In re Wogoman), 2011 WL 3652281 [108 AFTR 2d 2011-5891] (Bankr.D.Colo.2011). Pending the appeal of theWogoman decision to the Bankruptcy Appellate Panel for the Tenth Circuit, the parties' cross-motions for summary judgment in this case were held in abeyance. The Tenth Circuit BAP's opinion affirming Judge Brooks' decision was recently issued. See, Wogoman v. Internal Revenue Service (In re Wogoman), 475 B.R. 239 [110 AFTR 2d 2012-5108] (10th Cir.BAP2012). 1 The time for appeal of the BAP's decision has passed without further appeal. The parties cross-motions for summary judgment in this case are now ripe for consideration.

Undisputed Facts

The parties have stipulated to the following material undisputed facts. 2

(1.) Debtor filed his voluntary Chapter 7 case on October 28, 2010. The Court issued a discharge to Debtor on February 18, 2011.
(2.) At the time the petition was filed, Debtor owed tax liabilities for 2000 and 2001.
(3.) The Internal Revenue Service (“IRS”) made an assessment of Debtor's tax debt for the 2000 and 2001 periods after conclusion of an examination and issuance of statutory notices of deficiency pursuant to 26 U.S.C. §§ 6212–13. The assessment was made on November 8, 2004.
(4.) Debtor submitted Forms 1040 signed under penally of perjury to the IRS for his 2000 and 2001 federal income tax liability on or about May 5, 2005.
(5.) The IRS partially abated Debtor's 2000 and 2001 liabilities in September 2005. After abatement, the amount of the tax liabilities for 2000 and 2001 are equal to the amounts reported on the Forms 1040 submitted by Debtor in May 2005.
(6.) Debtor does not dispute the amount of his 2000 and 2001 federal income tax liabilities currently outstanding.
Arguments of the Parties

The dispute in this adversary proceeding concerns whether the Debtor's 2000 and 2001 Forms 1040, filed some 5 months after his tax liability for these years was assessed by the IRS, were “returns” such that the taxes owed by Debtor for 2000 and 2001, after the IRS abated a portion of its assessment, are dischargeable.

Debtor relies on a literal reading of § 523(a)(1)(B)(i). He notes that it is not disputed that all other requirements for discharge of tax debt are met in this case. 3 Debtor argues that whether a “return” was filed should depend on an objective analysis of the document filed, not a subjective test of the taxpayer's motivation for filing the return. Finally, he asserts that the United States' position—that a return filed after a tax debt is assessed is not a “return”—is not logical. Debtor contends that the BAPCPA amendment to § 523(a) does not change the analysis in this case.

The United States argues that tax returns filed after assessment of a tax liability are not “returns” under § 523(a)(1)(B)(i). It contends that such a return does not “satisf[y] the requirements of applicable nonbankruptcy law,” as required by the BAPCPA amendment, because the purpose of the filing—to generate a self-assessment of tax—has been made moot by the prior IRS tax assessment. The taxpayer, by post-assessment filing, “cannot alter the fact that the tax debt was not self-assessed [and is, therefore,] a tax debt “for which no return was filed.”” United States' Motion for Summary Judgment [Docket # 20] at p. 5–6. The United States notes that this was also the majority view of cases that considered this issue prior to BAPCPA.

Discussion

1. Summary Judgment Standards

Fed.R.Civ.P. 56(a), made applicable in this adversary proceeding Fed. R. Bankr.P. 7056, provides that summary judgment shall be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Both Debtor and the United States contend that the undisputed facts of this case entitle them to judgment as a matter of law.

2. Section 523 of the Bankruptcy Code

This section provides in relevant part that:

((a)) A discharge under section 727,  1141, 1228(a),  1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt—
((1)) for a tax ...—
((B)) with respect to which a return if required—
((i)) was not filed....
3. The BAPCPA Amendment

Prior to October, 2005, the Bankruptcy Code had no definition of the term “return.” 4 BAPCPA added the following definition of “return” in an unnumbered section at the end of § 523(a) (the “BAPCPA Amendment”):

For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.
Neither Debtor nor the United States argues that this case involves returns prepared pursuant to section 6020(a) or  6020(b) of the Tax Code. See, United States' Motion for Summary Judgment at p. 6. Nor does it involve a written stipulation to a judgment or a final order of a nonbankruptcy tribunal. Thus, the only sentence of the BAPCPA Amendment that impacts the analysis in this case is the first—which defines a return as something that “satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”

Some courts have interpreted “applicable filing requirements” in the BAPCPA Amendment to encompass the time for filing a tax return. Under this reading any late-filed return, other than one prepared pursuant to section 6020(a) of the Tax Code, or a similar provision in a State or local law, does not meet the BAPCPA definition of a “return,” and all taxes relating to late-filed returns are non-dischargeable under § 523(a)(1)(B)(i). See, McCoy v. Miss. State Tax. Comm (In re McCoy), 666 F.3d 924, 932 (5th Cir.2012). This interpretation says too much, however, essentially rendering § 523(a)(1)(B)(ii) superfluous. Section 523(a)(1)(B)(ii) provides that taxes for which a return was filed “after such return was last due” and less than 2 years prior to the date of bankruptcy are not discharged. This section refers specifically to late-filed tax returns, and is the only place in § 523(a) where late filing is specifically referenced. To read “return” in § 523(a)(1)(B)(i) as meaning “timely-filed return” would make the discharge exception of § 523(a)(1)(B)(ii) entirely coincidental with that of § 523(a)(1)(B)(i), except in the case of tax returns prepared under section 6020(a) of the Tax Code more than 2 years prior to bankruptcy.

A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant.
Hibbs v. Winn, 542 U.S. 88, 101, 124 S.Ct. 2276, 159 L.Ed.2d 172 (2004)(quoting 2A N. Singer, Statutes and Statutory Construction § 4606, pp. 181–186 (rev. 6th ed.2000)).

Such an interpretation also requires the use of a different definition of the term “return” in § 523(a)(1)(B)(i) and in § 523(a)(1)(B)(ii), because  § 523(a)(1)(B)(ii) speaks of “returns” filed “after the date on which such return ... was last due.” This contraveneshe normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning.
Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 570, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995). There is nothing in the legislative history to the BAPCPA Amendment that indicates it was intended to have such an effect on § 523(a)(1)(B)(ii). The legislative history says only that the amendment was intended to provide that a return prepared pursuant to section 6020(a) of the Internal Revenue Code, or similar State or local law, constitutes filing a return (and the debt can be discharged), but that a return filed on behalf of a taxpayer pursuant to section 6020(b) of the Internal Revenue Code, or similar State or local law, does not constitute filing a return (and the debt cannot be discharged).
H.R.Rep. No. 109-31(I) (2005), reprinted in 2005 U.S.C.C.A.N. 88, 167.

For all these reasons, the Court rejects the interpretation of the BAPCPA Amendment in which timeliness of a return is deemed an “applicable filing requirement.” “Applicable filing requirements” must refer to considerations other than timeliness, such as the form and contents of a return, the place and manner of filing, and the types of taxpayers that are required to file returns. These “applicable filing requirements” are found in statutes, e.g. 26 U.S.C. § 6011, regulations, and in case law. Pre-BAPCPA case law is therefore relevant to determine whether a disputed document sufficiently complies with requirements concerning form, manner, contents, and place of filing, and whether a document otherwise “satisfies the requirements of nonbankruptcy law” so to be considered a “return” for purposes of  § 523(a).

4. Pre-BAPCPA Case Law

Prior to the effective date of BAPCPA, courts looked to Supreme Court and Tax Court cases to determine whether a document filed by a debtor constituted a “return” sufficient to avoid the discharge exception of § 523(a)(1)(B)(i). The most common rubric used, referred to as the “Beard test,” has four elements. To be considered a “return,” a document must: (1) contain sufficient information to permit a tax to be calculated; (2) purport to be a return; (3) be sworn to as such; and (4) evince an honest and genuine endeavor to satisfy the law. Beard v. Commissioner, 82 T.C. 766, 774–79, 1984 WL 15573 (1984), aff'd, 793 F.2d 139 [58 AFTR 2d 86-5290] (6th Cir.1986). The Beard test is a compilation of factors from two Supreme Court decisions involving whether forms filed by taxpayers constituted “returns” for the purpose of determining the date on which the statute of limitations for deficiency assessments began to run. InZellerbach Paper Co. v. Helvering , 293 U.S. 172, 180 [14 AFTR 688], 55 S.Ct. 127, 79 L.Ed. 264 (1934), the Court explained that “[p]erfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such, and evinces an honest and genuine endeavor to satisfy the law.” In Germantown Trust Co. v. Commissioner, 309 U.S. 304, 309 [23 AFTR 1084], 60 S.Ct. 566, 84 L.Ed. 770 (1940), the Court stated that “where a [taxpayer], in good faith, makes what it deems the appropriate return, which discloses all of the data from which the tax ... can be computed,” a return has been filed.

When faced with the question of whether a “return” has been filed for discharge purposes, if a taxpayer files a sworn 1040 containing accurate information after an assessment is made by the IRS, the Courts of Appeals have differed in their application of the fourth element of the Beard test. The Sixth Circuit has ruled in favor of the government in this situation, finding that 1040 forms filed after an assessment has been made “serve no tax purpose,” thus the debtor's actions in filing the 1040s were not an “honest and reasonable attempt to satisfy the requirements of the tax law,” the 1040s were not “returns” for purposes of § 523(a)(1)(B)(i), and the assessed liabilities were not dischargeable. United States v. Hindenlang (In re Hindenlang), 164 F.3d 1029, 1034 [83 AFTR 2d 99-509]–35 (6th Cir.1999). The Fourth and Seventh Circuits have come to the same conclusion. See, Moroney v. United States (In re Moroney), 352 F.3d 902, 906 [92 AFTR 2d 2003-7381] (4th Cir.2003)(form filed after assessment does not serve the basic self-reporting purpose of tax return) and In rePayne  431 F.3d 1055, 1059 [96 AFTR 2d 2005-7392]–60 (7th Cir.2005).

The opposite conclusion was reached by the Eighth Circuit inColsen v. United States , 446 F.3d 836 [97 AFTR 2d 2006-2333] (8th Cir.2006). Agreeing with the reasoning and conclusion of Judge Easterbrook's dissent in Payne, the Eighth Circuit ruled that, for the purposes of § 523(a)(1)(B)(i), the determination of whether a document evinces an honest and genuine attempt to satisfy the law under the Beard test does not require consideration of the timing of the taxpayer's filing or of the filer's intent. Rather, this prong of the test should be an objective one, “determined from the face of the form itself, not from the filer's delinquency or the reasons for it. The filer's subjective intent is irrelevant.” 446 F.3d at 840. Thus, where the debtor's 1040s contained data that allowed for the accurate computation of his taxes, they served a valid purpose of the tax laws and were properly found to be “returns.” Accordingly, the tax liability shown on the returns was dischargeable in the debtor's bankruptcy filed four years later.

This Court agrees with the analysis of Judge Easterbrook and the Eighth Circuit. 5 The policies promoted by excepting taxes resulting from untimely and/or fraudulent tax returns from discharge are addressed in other sections of § 523(a)(1).  Section 523(a)(1)(B)(ii) provides that if a return is not filed when it is due, the taxes are not discharged in any bankruptcy filed within the two-year period after the return is actually filed. Section 523(a)(1)(C) provides no discharge at all for tax debts resulting from fraudulent returns or if the debtor willfully attempts to evade or defeat a tax. To graft the concepts of timeliness and fraud into the meaning of “return” in § 523(a)(1)(B)(i) is not only unnecessary in light of §§ 523(a)(1)(B)(ii) and 523(a)(1)(C), but distorts what is otherwise plain statutory language concerned only with whether a “return” was “filed.”

Adding the further distinction, as the United States argues in this case, between a return filed prior to an assessment and one filed after an assessment, with the former considered a “return” for purposes of § 523(a)(1)(B)(i), but the latter not, does violence to the convention of statutory interpretation referenced above. Moreover, the only purpose served by this distinction is to promote self-assessment of tax liability. No matter the importance of self-assessment to the functioning of our system of tax collection, Congress has so far elected not specifically to include it as an additional condition to discharge of tax liability under § 523(a)(1)(B)(i). Congress knew how to make the date of assessment relevant to dischargeability as it did by incorporating  § 507(a)(8)(A)(ii) (taxes “assessed within 240 days before the date of the filing of the petition”) into the discharge exception of § 523(a)(1)(A). If filing a return after an assessment is made was relevant to discharge under  § 523(a)(1)(B)(i), one would certainly expect more explicit reference in the statute. 6

Conclusion

A document is a “return” for purposes of  § 523(a)(1)(B)(i) if it complies with “applicable filing requirements” concerning the form and contents of a return, the place and manner of filing, and the types or classifications of taxpayers that are required to file returns, and if it otherwise complies with requirements of nonbankruptcy law. In making the determination of whether a document “evinces an honest and genuine endeavor” to satisfy the law, an objective test, based on the face of the document, not the timeliness of its filing, must be used. Using these tests, the undisputed facts in this case demonstrate that Debtor's 2000 and 2001 Forms 1040 were “returns,” and the debt owed to the United States as shown on these returns is not within the discharge exception of § 523(a)(1)(B)(i). Accordingly, it is

ORDERED that Plaintiff's Motion for Summary Judgment is GRANTED; and it is

FURTHER ORDERED that Defendant's Motion for Summary Judgment is DENIED; and it is

FURTHER ORDERED that judgment shall enter in favor of Plaintiff declaring that the debt owed by Plaintiff to the United States for his 2000 and 2001 taxes was discharged by the discharge issued on February 18, 2011 in Case No. 10-37360 ABC.

1
  The BAP affirmed Judge Brooks' opinion, but declined to affirmatively adopt his reasoning. It also declined to adopt any single one of the other criteria it considered for determining whether a return filed after an IRS assessment qualifies as a “return,” for purposes of  § 523(a)(1)(B)(i). Instead the BAP affirmed, applying various standards, without specifying which was controlling on the facts of Wogoman.
2
  See, Joint Stipulation Regarding Undisputed Facts, filed on February 27, 2012 at Docket # 19. For simplicity, some of the undisputed facts are paraphrased in this Order.
3
  Other types of non-dischargeable taxes are: taxes for which a return was last due less than three years prior to the date of filing of the petition, or those assessed within 240 days before the date of the filing of the petition (§§ 523(a)(1)(A) and 507(a)(8)); taxes for which a return was filed late and less than two years before the date of the filing of the bankruptcy petition (§ 523(a)(1)(B)(ii)); and taxes with respect to which the debtor made a fraudulent return or willfully attempted to evade or defeat the tax (§ 523(a)(1)(C)). None of these exceptions from discharge apply to the taxes in this case.
4
  The Tax Code still contains no definition of “return.”
5
  The Court acknowledges that indicta in Payne, Judge Easterbrook said of the BAPCPA Amendment: “[a]fter the 2005 legislation, an untimely return can not lead to a discharge—recall that the new language refers to “applicable nonbankruptcy law (including applicable filing requirements).”” 431 F.3d at 1060. Judge Easterbrook may have made this aside without fully considering the implications of his statement or the interplay between § 523(a)(1)(B)(i) and § 523(a)(1)(B)(ii). See p. 4–5, supra.
6
  Some courts, including the Bankruptcy Court in Wogoman, have reached the result sought by the United States not by defining “return” differently depending on when an assessment was made, but by deeming the debt at issue when returns are filed post-assessment a “debt based upon the IRS's examination and assessment ... and not on any return filed by the [debtor].” 2011 WL 3652281 [108 AFTR 2d 2011-5891] at 5. This court declines so to construe the statute's language. In the case before the Court, the debt which is the subject of this dischargeability contest is agreed to be in the amount set forth in the Debtor's post-assessment Forms 1040, not the amount contained in the IRS assessment.

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