Sandy Good, Petitioner

T.C. Memo. 2012-323 UNITED STATES TAX COURT SANDY GOOD, Petitioner y. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 13413-10.

Filed November 20, 2012.

Sandy Good, pro se.

Horace Crump, for respondent.

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:

IUnless otherwise indicated, section references are to the Internal Revenue (continued...)

OERVED ÅÛE 2 0 2012 Year 2002 2003 2004 2005 2006 Deficiency Sec. 6651(a)(2) Addifions to tax Sec. 6651(f)1 Sec. 6654(a) $15,889 16,403 64,969 44,044 12,705 $3,972 4,101 16,242 To be determined² To be determined² $11,520 11,892 47,103 s l,932 9,211 $531 1,862 1,767 iAlternatively, 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).

2The 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 wlÏich the failure to pay continues, up to a maximum of 25%. 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.

In the notice of deficiency respondent did The issues for decision are: (1) whether and if so to wh t 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 1(...continued) 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.

issue; and (6) whether we should impose a pena ty under section 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 m accordance with Rule 91(f).2 The deemed facts are incorporated herein by this reference. Petitioner resided in Alabama when he filed his petition.

¯ d nt filed a motion to show cause why proposed 2On March 4, 2011, respon e tablished under Rule 91(f) and facts and evidence should not be accepted as esder dated March 8, 2011, this Court attached a proposed stipulation of facts. By ndent's motion in accordance with ordered that petitioner file a response to respPetitioner failed to file a response to Rule 91(f)(2) on or before Mar ied with Rule 91(f)(2). By order dated April 7, der Rule 91(f) absolute and respondent's motion that comp 2011, this Court made the order to show caust forth in respondent's proposed neeeti ioner electronically submitted a deemed established the facts and ev dent's Stipulation of Facts". By order dated stipulation of facts. On April 12, 2 document titled "Response to Respon ve to file the response out of time April 13, 2011, this Court granted petitioned ti ely. By that same order, this Court because petitioner had attempted to rd ord red the Clerk of the Court to file vacated its order of April 7, 201 an 's Sti ulation of Facts" as petitioner's petitioner's "Response to Respond²⁰ 1 ord r to show cause. By order dated April under Rule 91(f) absolute and , response to the Court's March 8, 26, 2011, this Court made the order to show causrth in respondent's proposed deemed established the facts and evidence se stipulation of facts.

I.

B_aclig@Ls 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. Becaus .

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e 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 an at 32188 Bartel Street. On a date not apparent from the record, petitioner and Mrs.

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d Mrs Good subsequently moved into the house at 13450 County Road 91. Petitioner initially titled Good also acquired property all three properties in his name.

II.

P B_ackgrmind A. In 1999 petitioner founded Prepare the Way Ministries. He did not consult with a certified pubhc accountant .

about the tax aspects of operating through Prepare the Way Ministries. Petitioner, however, 1Serformed some research regarding Federal taxation and also read a book by Joseph N. Sweet³ 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.

3Mr Sweet has been permanently enjoined from "[o]rganizing, promoting, marketing, or selling the tax shelter, plan, or arrangement entitled 'GOOD WS for FORM 1040 Filers" and from "[o]rganizing, promoting, marketing, or se ing 'Unincorporated Business Trust Organizations' (a/k/a 'UBTOs') or any other abusive tax shelter, plan, or arrated ta esthat incites taxpa ers to att the internal revenue laws . U_ni . 2189 (M.D. Fla. 2002). Pursuant to Fed. R. Evid. 201, we take judicia notice o .

.

pt to y olate the District Court's order with respect to Mr. Sweet.

4David 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 art of which Swanson advocates for the noncompliance of the income tax aws or ax evasion, misrepresents the tax savings realized by using the arrangement, or conceals the receipt of income".

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 Investmenfs 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 5With respect to at least one of the properties, p¼titioner effectively transferred the property on February 2, 1999. However, neither petitioner nor any witness signed the instrument of transfer until September 13, 2000.

6Mrs. 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.

house at 13450 County Road 91 while thëy continued its construction.

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.

D C. Until 2004 petitioner operated Prepare the Way Ministries through the Field Investments UBTO.

In 2004 using a plan promoted by Glen Treasures in a Stoll, petitioner reorganized his alleged ministry into á 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 7In 2004 Hurricane Ivan struc k the house at 13450 County Roa d 91 . ortion of the house while (cid:16)042 .

Petitioner and Mrs. Good continued to hve m a p ds they received. Although repairing the remainder using the msurance proc ed the insurance proceeds into Mrs. Good testified that she and petiti one of the ministry bank accod a deposits of insurance procee from information in the record.

r deposinot identify any deposits as the Court could not identify any such deposits d in business transactions with 8During the years in issue petitioner enga he Work of His Hands Mr. Stoll.

In 2008 Mr. Stoll, acting as trustee oconveyed two parcels of land, 1 o n d y eti nemimst la trusod and conveyed to Treasures in a Field Investments, to Andy and Renee Knott.

Mr Stoll had been enjoined from engaging in 9The parties stipulated that omotion of m nistei 1 no trategy. Pursuant to Fed. R. e of th injunc ngproceeding. U_nite_d_Sjat_ea .

the .Stoll, 2005 WL 1763617 (W.D. Wash. 2005).

trustees of Treasures in a Field Investments took áction 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, pr ided 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 ex cuted 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, Aplálication 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.1° Petitioner materially altered*the Form ñV-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 1°Jason Evans, acting as '.'steward" for Prepare t ie Way Ministries, executed the Form W-8BEN.

to hold Prepare the Way Ministries out as a tax-exempt entity for transactions requiring third-party reportmg.

D.

B_a_nnk_AcgMLts 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 petitioner, Mrs. Good, Shane M. Good, Julie A. Good, Mr. Dornstadter, and .

Bank The signature card for account 9269 showed Summer C. Dornstadter, petitioner's daughter, as authorized signatories." The employer identification number (EIN) petitioner gave to Regions Bank was 929099107 and was false. Petitioner use d 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." Only petitioner an d Mrs Good were authorized .

"The record does not i dentify the relationships among peti i , fr the record as a whole that Shane M.

t'oner Shane M.

Good, and Julie A. Good, but we mfer o titioner's family. Good and Julia A. Good are members o p From April 29; 200e 1 31 2004 account 2952 was held under I vestment . Beginning in approximately August 200naa counta 9r⁵² a held under the name Prepare the Way Mmistries d.b.a.

Treasures in a Field Investments.

signatories for accoun t 2952. No EIN was provided to AmSouth Bank. We refer to account 9269 and account 2952 collectively as the ministry bank accounts."

III.

P etitioner went on numerous trips, including trips During the years in issue p to Europe, which he testified at trial were missionary trips.

Petitioner admitted during his testimony that he also performe carp d entry 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 person al bank acòount separate from the ministry bank accounts, and he ma de no distinction Êetween his personal finances and the finances of his alleged mmistry.

(cid:16)042 .

Petitioner deposited funds from his activities, including income he received for performing various services, into the which he had total do inion and control. The ministry bank accounts, over (cid:16)042 alleged ministry pai p .

d etitioner's living expenses, including room and board, as By collectively referring to the accont t a qu bank accounts, we are 1ed as a church under not concluding that petitioner operated an e t the Code. We refer to the accounts as mims ry bank accounts simply for convenience "He also testified that he conducted churc meetings and other events at his home.

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:

Y__ear 2002 2003 2004 2005 2006 $37,939 17,256 62,971 61,631 21,091 A_c_cco_utiH⁹ $37,913 59,477 87,356 30 824 $37,939 55,169 122,448 148,987 51,915 The revenue agent determined that petitioner made taxable deposits as follows:15 Y_ear 2002 2003 2004 2005 2006 $37,643 16,428 58,183 61,631 21,091 $36,113 59,013 65 058 27 767 $37,643 52,541 117,196 126,689 48,858 15With respect to account 2952, the 1voca ed axable deposits between gross t tabulated the total I e or Loss, and tabulated the results deposits, eliminated nontaxab edudepositsProfit or Loss From Business, and rental receipts from petitioner s Sc income from Schedules E, Supplemental neot e record contains a copy of the for each year. With respect to account (cid:16)042 dividual line items for the account. revenue agent's spreadsheet showi gd ce ain deposits as nontaxable deposits, Although the revenue agent i d Schedule E rental income, respondent's revenue Schedule C gross receipts, an agent failed to tabulate the results. ect to account 9269 by eliminating petitioner's total taxable deposits with resp ts the revenue agent identified as from petitioner's total deposits those depos ent's agent did not eliminate any d os ts from account 2969 as nontaxable deposits.

able. For 2005-06, however, respon Accordingly, for 2002-04 we have calculated The revenue agent treated the taxable deposits as income and allocated the income between petitioner's Schedules C and Schedules E as follows:'6 Schedule C: Year 2002 2003 2004 2005 2006 Schedule E: Year Account 9269 Account 2952 Total $24,659 12,803 57,880 61,631 21,091 $34,898 58,513 65,058 27,767 $24,659 47,701 116,393 126,689 48,858 Account 9269 Account 2952 Total 2002 2003 2004 $12,984 3,625 $1,215 $12,984 4,840 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:"

16Respondent'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.

"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.

* 4 Year [1] - 2002 2003 2004 2005 2006 _S4Lduk_E $12,984 4 840 Total $57,244 59,245 84,243 132,990 48,859 $44,260 54,405 83 440 132 990 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- erm capital gain of $114,667 for 2004.18 V.

P After receiving the notices of deficiency, petitioner filed a petition with this dent's determinations. The Court set this case for trial at Court contesting respon the Mobile, Alabama, trial session.

Following trial we held the record open to allok petitioner the opportunity to produce to respondent additional evidence, which, if appropriate, could then be 18The short-term capital gain o f $114 667 was.attributable to the sale of the d Iris K. Fitts. On March 22, ,i 32188 Bartel Street property to Samuel J. F ttsll he 52188 Bartel Street property to 2004, Prepare the Way Mm ts for 120,0 0 RespÊndent determined that Samuel J. Fitts and Iris Kf $5 323 and had "cost[s]" bf $10 with respect to the sale. petitioner incurred fees o had a basis of zero in the property.

, cco ngly espo d dete inpeetitioneretitioner realized gain of $114,667 from sale of the property.

f the trial record. The parties did not stipulated and submitted as part o submit a supplemental stipulation.¹⁹ Consequently, we decide this case on the trial record.

I.

P

OPINION

A.

P The Commissioner s deficiency determination ordinarily is entitled to a presumption of correctness. _S_ee B , 324 F.3d 1289, 1293 2001-43 However, when a case involves (11th Cir. 2003), affg T.C. Memo.

unreported income, an appeal in this case would lie absent a stipulation to the contrary, seg sec.

the U.S. Court of Appeals d for the Eleventh Circuit, to which 7482(b)(1)(A), (2), has held that the Commissioner .

(cid:16)042 's determination of unreporte ly if the determination is income is entitled to a presumption of correctness on supported by an evidentiary foundation linking the taxpayer to an income- .

.

producing activity, see B 1993), af£g T.C. Memo. 19 91-636 A determination that is unsupported by any evidence is arbitrary and erroneous, see , 596 F.2d 190n July 21, 2011, pet tioner "Petitioner's Status Report".

filed a document, with attached exhibits, titled 358, 362 (9th Cir. 1979), rev'a 67 T.C. 672 (1977), but the 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 dete ination 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 treet property.

Accordingly, we conclude that respondent laid the requi ite 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 deteríninations constitute a "naked" assessment because resþondent 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 whatsoe er". United States v. Janis, 428 U.S. 433, 441 (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.

Helverina, 290 U.S. 111, 115 (1933).

If, however, a taxpayer produces credible evidence2o with respect to any factual issue relevant to ascertaining the taxpayer's tax liability and satisfies the requirements of seption 7491(a)(2), the burden of proof on any such issue shifts to the Commissio er. 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 Secretary2i 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 een satisfied. Rolfs v.

Commissioner, 135 T.C. 471, 483 (2010), aff'd, 668 F.3d 888 (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.

20Credible 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).

2iThe term "Secretary" means "the Secretary of th Treasury or his delegate", sec. 7701(a)(11)(B), and the term "or his deleg;ate" 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 redélegations of authority, to perform the function mentioned or described in the context", sec. 7701(a)(12)(A)(i).

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 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 beåause 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 a¾crue to ministers and church organizations. Accordingly, we will consider:1(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 Cönstituted a Church Section 501(a) provides that certain organizatioí1s, 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)(il)(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.

22Neither party specifically addressed these issues in their post-trial briefs.

1341, 1356 (1987). However, as we av h è stated: "Although every church may be a religious organization, not every religious organization is a church." Il at 1357.

Whether an entity is a c hurch is a fact-specific inquify. S_g 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 áccomplished." IÅ hurch includes a body of believers or communicants that "'At a minimum, a c assembles regularly in order to worship.'" IÅ (quoting , 490 F. Supp. 304, 306 (D.D.C. 1980)) The Internal Revenue Service (IRS) has articulated criteria that it uses to lify for church status.

Id. at 1358. The criteria identify organizations that qua include the following:

"(1) a distinct legal existence; (2) a recognized creed and form of worship; (3) a definite and distinct e clesiastical 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; (7) an organization of ordained ministers; (8) ordained ministers selected after completing pre(cid:0)541eribedstudies; (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 O ganizations Examination Guidelines Handbook 321.3(3) (Apr. 5, 1982)); see also Chambers v.

Commissioner, T.C. Memo. 2011-114, slip op. at 14-15.

ile we have declined to adopt these criteria as a test, we have found that the cri eria 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 Ainistry meetings at his home, the record contains no evidence regarding the ide tities of those who attended the meetings and their relationship to petitioner or whether petitioner held these meetings regularly. Petitioner offered only m nimal testimony regarding his purported ministry activities. He did not c 11 any of his alleged parishioners to testify. Furthermore, the record shows that petitioner's purported ministry did not have a distinct legal existence separate from petitioner.

See, e.a., Hughes v. Commissioner, T.C. Memo. 1994-139. 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." See, e.a., Spiritual Outreach Soc'y v. Commissioner, T.C. Memo. 1990-41, aff'd, 927 F.2d 335 (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 minister if, acting pursuant to his or her authority as a minister, "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.a., Chambers v. Commissioner, T.C. Memo. 2011-114, slip op. at 23-24.

he or she performs sacerdotal functions, conducts religious worship, participates in the maintenance of "religious organizations nd their integral agencies", and performs "teaching and administrative duti s at theological seminars." Sec. 1.107-1(a), Income Tax Regs.; see also Brannon v.

Commissioner, T.C. Memo. 1999-370.

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 ad inistrative duties at religiously affiliated institutions. Accordingly, we find t at petitioner has not established that he was a minister for Federal tax purpose . See, e.a., Weeks v.

Commissioner, T.C. Memo. 1987-198.

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 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); P_et_glÅt_L . Co_ngn_msigneer, 92 .

T C 661 693 (1989); sec. 1.446-1(b)(1), Income Tax Regs.

.

(cid:16)042 , The Commissioner's reconstruction of income "need only be reasonable in light of all surrounding facts and circumstances." P , 92 T.C. at 687.

The bank deposits method is a permissi .

ble method of reconstructing income. _S_ee L (cid:16)042 .

.

, .

.

, T.C.

M mo 2010-49, afM, 447 Fed. Appx. 130 (11th e .

Cir. 2011). Bank deposits constitute prima facie evidence of income. S_e_e T .

.

, 87 T C at 77. The Commissioner need not show the .

(cid:16)042 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. _S_ee .

.

T C at 645-646. However, the Commissioner need C not follow any "leads" suggesting that a taxpayer has deductible expenses. D_ibeg , 102 (cid:16)042 .

. v⁹, 96 T.

.

.

, C 858 872 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992).

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. CommjLsiiomL 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 deposi is not taxable. S_m ii 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 ar arbitrary or erroneous.

Petitioner's sole argument is that the deposits into the ministry bank accounts do 24Although not entirely clear, petitioner's cont'ention appears to be that t f IRS cannot require him to mativi iesoand b a sfmanc al recordare pr vileged. Sec. tax" maintain records. Petitioner le f may not regulate religious ac 6001 requires that "[e]very ercont nt on that he pers nally is exempt from the has offered no suppo recordkeepmg requirement o sec. of some recordkeeping requirements, the Way Ministries as an exempt o gan381 452 (1984), afff d, 823 F.2d 1310 (9th Scientology v. Commi_sgoner, ecific procedures set Cir. 1987). Additionally, while the IRShmush rec r forth in sec. 7611 before it can obtam c urc that he operated a church or that the records sought by respon at 20 21 6001 While exen pt organizations are reheved the Commissio ier never recognized Prepare .th titioner has not proven alified as ization under sec. 501(c)(3). _Se_e Oilrclutf dent , .

.

church records. S_eee_als Accordingly, we reject petitioner's argument.

, slip op.

not constitute taxable income to him because the deposits are attributable to his ministry and, as religious funds, are not subject to taxation.

2.

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. _S_ee the Supreme Court explained, a gain "constitutes taxable income when its , 348 U.S. 426, 431 (1955). As recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it." R , 343 U.S. 130, 137 (1952).

When the Commissioner reconstructs a taxpayer's income using the bank deposits method, the Commissioner may inc accounts over which the taxpayer has dominion and control, not just deposits into lude in gross income "deposits into all the taxpayer's personal bank accounts., , slip op. at 17-18; ge_a_lso U , 330 F.2d 30, 38 (3d Cir. 1964); D_a_viis v⁹, 226 F.2d 331, 334-335 (6th Cir. 1955); P_ricee .

.

M o 2004-103, slip op. at 25; C C T.C. Memo. 2003-42, slip op. at 9; W , T.C.

em .

, T.C. Memo. 1989- 611, .

.

, 929 F.2 d 702 (6th Cir. 1991). A taxpayer has dominion and control when the taxpayer is free to use the funds at will.

R_u_ttkin, 343 U.S. at 137. Use of funds for personal purposes in dicates dominion and control. W , T.C. Memo. 1 89-611.

The Court has extended this general princip le 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, m W__o_oo&, this Court held that "[a]mounts deposited into bank accounts in the name o f the church constituted income of petitioners because they exercise .

d total dominion an control over those funds and . expended them for their personal living exp .

.

enses and other personal purposes .

Similarly, in , T.C. Memo. 2000-296, slip op. at 8-9.

.

.

at 19-24 this Court held , slip op.

, that all deposits into church bank accounts properl were includable in the taxpayers' gross income because the taxpayers "fu ly 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 of the church funds." While the taxpayers in Chambers 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 pui.ported rental income, petitioner testified 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 to pay for ministry-related expenses. We do not;find this testimony convincing or credible.

Respondent introduced the signature cards for tlie 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 wjll, 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 accoimts and used the funds therein to pay his personal living expenses, mortgage, property taxes, and home construction costs.

Because petitioner exercised dominion and control over the ministry bank accounts, all taxable deposits into those accounts are includable in petitioner's gross income. S_ge Chambers v. Commi_sgiooner, T.C. Memo. 2011-114; Sg_-also B , 929 F.2d 110, 113 (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 irmart, and remandin_g T.C.

Memo. 1989-671.

3. Reconstructin9me Using the Bank D_epo_sits__Met__gíl Under the bank deposits method, the Commissioner may assume that all money deposited into the taxpayer's account is taxable income. D._lheILL .

. C_omanssigner, 9 take into account any nontaxable source of income or deductible expense of which

.

he has knowledge. EL The Commissioner's use of the bank deposits method is not invalidated simply because some of the calculations are in error. See ish 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 issue. To show the calculation of petitioner's taxable income, respondent introduced only the revenue agent's workpapers. Howe er, with respect to 2002, 2003, and 2005, in the notice of deficiency respon dent determined that petitioner had taxable income in exëess o f taxable deposits for tho e years as determined by the revenue agent. Respondent has introduced no evid ce to show the calculation of petitioner's taxable income as set forth i the notice of deficiency.

Accordingly, we will evaluate respondent's determinat on of petitioner's taxable income using the revenue agent's workpapers for the ybars in issue.

With respect to 2002, respondent's revenue age t determined that petitioner made taxable deposits into the ministry bank account f $37,643. The revenue agent determined that the taxable deposits for 2002 c sisted 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 petit ner had Schedule C gross receipts of $44,260 and Schedule E rental income of 12 984 Respondent has not , (cid:16)042 introduced any evidence to explain the difference between the revenue agent's calculation of Schedule C gross receipts tot al ing $2 659 and the $44,260 gross , receipts figure in the notice of deficiency. Furthe re, an analysis of the ministry bank account statements for 2002 reveals that the re enue agent properly _·33 _ reconstructed petitioner's Schedule C gross receipts for 2002. An analysis of the revenue agent's spreadsheet with respect to pétitioner'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 renfal=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 réspondent 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 following exception. We find that the revenue agent included the same check for $10 in petitioner's Schedule E rental income f 2002 and in his Schedule C gross receipts for 2003. Because we conside 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.

25The 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.

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 26With 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.

revenue agent determined that the taxable deposits for 2005 consisted of Schedule C gross receipts of $126,689. However, in th notice of deficiency respondent determined that petitioner had Schedule C gross receipts of $132,990.

Respondent has not introduced any evidence to explai the difference between the revenue agent's calculation of Schedule C gross receipts totaling $126,689 and the $132,990 gross receipts ig analysis of the ministry bank account statements for 2 05 confirms that the f ure in the notice of deficiency. Furthermore, our 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 determinatio s 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.

B.

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

27 S ec.

1001(c). Section 1001(a) defines gam 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.

Seulso 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 shall be its cost, adjusted to the extent provided by section disposition of property 1016. If the taxpayer cons the cost of building the house, including the amount paid for the lot. L_itteristvm tructed his own house, the taxpayer's basis is equal to .

.

.

v T.C. Memo. 1992-524, gf'd, 21 F.3d 423 (4th Cir. 1994); G_ran..gser .

T C Memo. 1970-155. The taxpayer has the burden of proving clude from income gain on the sale or 27Sec. 121(a) allows a taxpayer to eowned and used such property as his exchange of property if the taxpayer f the five years immediately preceding the in 2004. Mrs. Good testified St eet property before the 2004 rincipal residence for at least two o ale. Petitioner sold the 32188t artel1S⁸⁸ B d another home, at 32210 Bartel Street. that she and petitioner lived at sale. However, until 2003 petitioner owne d Mrs Good moved to the 32188 The record does not show whether petitionerth 32210 Bartel Street property (i.e., Bartel Street property before titi he sale of the property in 2003. Accordingly, before 2003) or immediate y we are unable to determine whether petat le t t property as his principal resid ti ioner has not established that he is entitled to excluof thany gain f o d the 32188 Bartel Street of the five years preceding the the sale of the property pursuant to sec. 121(a).

the basis of property for purposes of determining the amount of gain the taxpayer must recognize.

F 2d 44 50 (9th Cir.

, 271 1959), aff'g T.C. Memo. 1957-193; s_eee also K , 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 1 is own name, that he transferred the property to Treasures in a Field Investments, and that Treasures m 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 e nstitute 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 resi ded in the house at 32188 Bartel Street.

She also testified that the mmistry sold the ouse. and petitioner used the proceeds from the sale of the house at 32188 Bartel Street .

.

h She further testified that she to fund construction of their new house at 13450 County Road 91.

Respondent introduced a copy of a reso lution in which the Elder Board of 11 the 32188 Bartel Street property to Prepare the Way Ministries agreed to se Samuel J. Fitts and Iris K. Fitts. Respondent also introduced a copy of a purchase 6 2004 showing the seller of the property as Treasures a reement dated February , in a Field and the purchase price as $120 000, with a provision , for $500 m earnest money. The record shows that petitioner deposi ted into account 2952 a $500 check from Samuel J. Fitts and Ir s .

i K Fitts dated February 6, 2004.

The evidence shows that petitioner use d Treasures in a Field Investments to conduct his business and sales transactions.

While petitioner testified that he conducted some ministry ac tivities from the house at 32188 Bartel Street, he also .

1 residence. We find that Treasures in a Field used the property as his persona ld the 32188 Bartel Street property as petitioner s Investments held title to and so nominee.²⁸ Accordingly, petitioner mus t include in gross income gain from the sale of the 32188 Bartel Street property.

28"A nominee is an entity ord a .' L owned by another r⁰ , T.C. Memo 2012- , 211 F.

idual who holds bare legal title to assets 284 (5th Cir. 2000).

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 óharacterized as long-term or short-term c pital 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; (cid:16)040ccordingly,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 gain is taken into account in computing gross income." While the record does not show when petitioner ac¿luire record does show that in 1999 petitioner:transferre d the 32188 Bartel Street d the 32188 Bartel Street property, the 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 the sale of the 32188 Bartel Street property should find that petitioner's gain from 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 respon dent's determination that the capital gain was short-term gam.

IV.

A taxpayer's self-employment income is subject to self-employment tax.

Sec. 1401(a) and (b). Self-employment tax is assesse d and collected as part of the income tax, must be included in computing any inco me tax deficiency or overpayment for the applicable tax period, an d must be taken into account for estimated tax purposes.

Sec. 1401;È sec. 1.1401-1(a), Income Tax Regs.

Self-employment income is gener employment derived by an individual". Sec. 1402(b). "The term 'net earnmgs ally defined as "the net earnings from self- from self-employment' means the gross income deriÕed by an individual from any trade or business carried on by suc h individual, less the deductions * * * " S 1402(a). Section 1402(c)(4) provides attributable to such trade or business .

ec..

that the term "trade or business " does not include "the pe formance of service by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry" if an exemption under section e , 89 T.C. 922, 929 (1987). If the minister does 1402( ) is effective for the minister.

not file the application for exemption within the prescribed time, the minister is subject to self-employment tax. Sec. 1402(e); sgg aho W

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, seee s_gp_m 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 F om 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, 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 equa his Schedule C gross receipts fo 2002-05 as found in this opinion, and we hold r 1 to the amounts of 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.

.

Petitioner contends that he was not obligated to file returns for the years m issue because he did not have sufficient income.

_S_eee sec. 6012(a)(1)(A)(iv).

i Under section 6012(a)(1)(A)(iv), an ind v idual who is entitled to make a joint when combined with the gross income of his return and whose gross income, spouse, exceeds the sum of twice the exemption amount and the standard fil Federal income tax return. As deduction applicable to a joint return, must e a discussed in Part III, Lee sjip_La pp. income of $32,799, $50,201, $83,743, $126,689, and $48,859, for 2002, 2003, 32-36 we firid that petitioner had unreported 2004, 2005, and 2006, respective y.

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.

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 för 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 attribtitable 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. Furthermore, when 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 ine'ome using the bank deposits method, and the reconstruction demonstrates clearly and coiivincingly 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.

ppx. 605 (6th Cir.

2003). The Commissioner satisfies this burden by showing that "the taxpayer intended to evade taxes known to be owing by conduct i tended to conceal, mislead or otherwise prevent the collection of taxes." D Leo v. Commissioner, 96 T.C. at 874. Fraud "does not include negligence, carelessness, misunderstanding or unintentional understatement of income." United St es v. Pechenik, 236 F.2d 844, 846 (3d Cir. 1956).

. The existence of fraud is a question of fact to be r solved upon consideration of the entire record: See DiLeo v. Commi sioner, 96 T.C. at 874.

Fraud is never presumed and must be established by ind pendent evidence of fraudulent intent.. See Baumgardner v. Commissioner, 2 1 F.2d 311, 322 (9th Cir.

1957), aff'g T.C.-Memo. 1956-112. 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 69 ; Gajewski v.

Commissioher, 67 T.C. 181, 199-200 (1976), aff'd with ut 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 onstitute an affirmative act of evasion, see Spies v. United States, 317 U.S. 492, 499 (1943), and an intent to niislead may be inferred from a pattern of such conduct, see Webb v.

Commissioner, 394 F.2d 366, 379 (5th Cir. 1968), aff'g T.C. Memo. 1966-81.

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 (5th Cir.

1956), aff'g in part, rev'g in part on another ground T.C. Memo. 1955-9; Davis v.

Commissioner, 184 F.2d 86, 87 (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 (9th Cir. 1986), gff g T.C. Memo.

1984-601; 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 return preparer; (8) offering false or incredible testimony; (9) filing false documents, including filing false income tax returns; (1 ) failing to file tax returns; and (11) engaging in extensive dealings in cash.?' 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 (4th Cir. 1955); see also Morse v. Commissioner, T.C. Memo. 2003-332, slip op. at 8-9, aff'd, 419 F.3d 829 (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 recor 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 29These factors are nonexclusive. See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).

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 (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 (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 (11th Cir. 1986) (quoting Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), af_g T.C.

Memo. 1959-172), aLf'g T.C. Memo. 1985-63.

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.

Although not entirely clear, petitioner's contention appears to be that he underreported his income because he believed all of his neome 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 liktle 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 understatþments 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, 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 (9th Cir. 1971), aff'a T.C. Memo. 1969-48. A taxpayer's use of "a complex series of financial transactions and nominees is a badge of fraud." Plotkin v. Commissioner, T.C. 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, 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, 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 in a series of transactions the purpose o f which w s tax avoidance.

Accordingly, this factor supports a finding of fraud.

c.

F Failure to cooperate with revenue agents during n investigation is a badge of fraud. S_ee K 781 F.2d at 1568; L 525 F.2d 741, 747-748 (9th Cir. 1975),

60 T.C. 199 (1973); .

.

persuasive evidence of a taxpayer s gui T C 1 20 (198). This failure is .

.

, , 75 Ity knowledge S_eee P . CJ, 79 .

.

.

T C 888 932-933 (1982). A taxpayer's failure to cooperate , d the Court during the pretrial and trial proceedings also with the Commissioner an supports a finding of fraud. S_ee , 91 T.C. 1049, 1052, 1059-1060 (1988), a_fffM, 926 F.2d 1470 (6th Cir. 19Ól); Ri T.C. Memo. 2003-208, slip op. at 15.

Petitioner failed to cooperate with respondent's revenue agent during respondent's investigation of petitioner. Accordin ly, respondent was forced to , .

.

bank account records to reconstruct petitioner's subpoena petitioner s mmistry income. Petitioner also failed to respond to a summons issued by respondent.

In addition, petitioner failed to cooperate w h respondent's counsel and with the Court in preparing this case for tria .

ti ulation of facts as required by our 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.

F Fraudulent intent may be inferred when a taxpayer files a document intending to conceal, mislead, or prevent the collection of tax. S_ee Spjigs, 317 U.S.

at 499. Filing false documents with the IRS constitutes "an 'affirmative act' of misrepresentation sufficient to justify the fraud penalty." Z 763 F.2d 1139, 1146 (10th Cir. 1985), aff'g T.C. Memo. 1984-152; see_alsg E_mig.

99, T.C. Memo. 2010-237, slip op. at 9. A taxpayer's creation of false documents, s_ee F , T.C. Memo. 2005-129, slip op. at 24-25, and/or use of a false EIN, s_ee , slip op. at 39, supports a finding of fraud, s_e_e_a_lsg V , T.C. 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 stipulated that he used the materially altered and false Form W-8BEN to hold out his purported ministry as a tax-exemp t entity. We find that he engaged in this practice of creating and using false documents to e ade the payment of Federal tax. Consequent y, this factor supports a findiÅg of fraud.

e.

F A taxpayer's failure to file tax returns is a bad e of fraud. Sg P_j:t_pl_1L g .

. Cogggs_sjoner, 92 extended period, does not establish fraud per se, g GæsdutfEL T C at 701. While a failure to file returns, even over an .

.

. Cogngusgner, 75 .

T C at 19 an extended pattern of failing to file returns may be .

.

persuasive circumstantial evidence of fraud, 9 M , 544 F.2d 883, 885 (5th Cir. 1977), aff'g T.C. Memo. 19 5-368.

Petitioner failed to file returns for 2002-06 Petitioner's extended pattern of failing to file returns constitutes persuasive circumstantial evidence of fraud.

f.

A taxpayer's assertion of frivolous argument may provide evidence supporting a finding of fraud. See K 1261 (1986); W , 86 T.C. 1253, 1259- , T.C. Memo. 2012-219, slip op. at 19; L .

.

, s ip op.

at 14; D , T.C. Memo.

2011-185, slip op. at 21-22.

During the course o f these proceedings, petitioner repeatedly raised The U.S. Court of Appeals for the Eleventh frivolous and groundless arguments.

to be frivolous and without merit. S_ee U_nt_ed Circuit has held similar arguments , 419 Fed. Appx. 958, 959 (11th Cir. 2011) (táxpayers' argument lved in a "trade or business" was frivolous); U__n_i_ted Stajøi that they were not invo v , 532 F.3d 1130, 1132-1133 (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 d to assert such arguments. Accordingly, this admonishments, petitioner continue factor supports a finding of fraud.

C.

(cid:16)042 Conclus9n b lear and convincing evidence that petitioner Respondent has proven y c underpaid his tax liabilities for 2002-06 anÊ 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 p ortion of his underpayments was not attributable to fraud. He has not introduced any credible evidence to show that he acted without fraudulent intent. According}y, we hold that petitioner is liable for the section 6651(f) fraudulent failure to file additions to tax.3° VII. Sections 6651(a)(2) and 6654(a_)_Mdltions hLa² 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 respec t to the liability of the taxpayer for the addition to tax. Sen H_igbee v. Commissio_n_er, 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 det rmination is incorrect. I_i 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 amo nt 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 30The amounts of the sec. 6651(f) additions to tax for 20 2-05 m adjusted to reflect the adjustments to gross receipts ca e a return filed by the taxpayer or prepared by the Secretary. Sec. 6651(a)(2), (g)(2); .

.

, 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). Se_e , 127 T.C. 200, 210 (2006), aff'd, 521 F.3d 1289 (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."

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 "The amounts of the sec. 6651(a)(2) additions toc ted in th s opi io be adjusted to reflect the adjustments to gross receipts ca to tax on an individual who underpays his estimated tax." The addition to tax is calculated with reference to four required installm nt 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 retuip 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 petitiorier 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 "Unless a statutory exception applies, the sec. 66 4(a) addition to tax is mandatory. See sec. 6654(a), (e); Recklitis v. Commissioner, 91 T.C. 874, 913 (1988).

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.

VIII. 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 (7th Cir. 1986)).

"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.

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 i¼pose a section 6673 penalty on petitioner. However, we warn petitioner thatl 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. Pet tioner failed to cooperate with [*53} respondent's counsel m preparing a s p standing pretrial order. He failed to respond properly to respondent's requests for .
2. T C 632 645 (1994); Se-e-alJia , 10 .
4. F 2d 1542, 1549 (11th Cir.
6. T C at 868 However, as nofed supra, the Commissioner must .