## Facts

- Richard and Brenda Nelon were married; Richard was the primary wage earner and the primary actor in the events at issue.
- For tax year 1985, Richard filed a federal income tax return prepared with an accountant’s assistance.
- After filing the 1985 return, Richard came to believe he was not required to pay federal income tax.
- Richard was not well educated and lacked knowledge of tax and business matters; he adopted these views after relying on statements from his house painter, who advanced tax-protester claims.
- Richard did not file federal income tax returns for tax years 1986 through 1991.
- In 1989, the IRS audited Richard’s 1985 return. The matter ultimately led the IRS to seize funds from his bank account, even though Richard believed his 1985 return had been properly filed.
- After the seizure, Richard stopped maintaining a bank account and conducted more transactions without using traditional banking.
- In 1992, the IRS notified the Nelons that it was examining their tax liabilities for 1986 through 1991.
- Richard responded with protest-style correspondence asserting that he was not subject to federal tax and was not required to correspond with the IRS, but he also acknowledged he had not filed returns for the years under examination and explained that he believed he had no legal duty to file or pay.
- The Commissioner determined income tax deficiencies for 1986–1991 and asserted civil fraud additions to tax under former I.R.C. § 6653(b), relying on circumstantial indicators such as repeated nonfiling, failure to report substantial income, inadequate records, failure to pay estimated tax, and the decision to stop using a bank account.
- The Nelons petitioned the United States Tax Court challenging the fraud additions. Richard argued that his conduct reflected a mistaken (though incorrect) belief about the law rather than an intent to evade tax. Brenda argued that the Commissioner had not shown fraud as to her.

## Issues

1. Whether the Commissioner proved by clear and convincing evidence that Richard Nelon’s underpayments for 1986–1991 were due to fraud, justifying additions to tax under former I.R.C. § 6653(b).
2. Whether the Commissioner proved fraud as to Brenda Nelon so that fraud additions could be imposed against her.

## Decision

- The Tax Court held that the Commissioner did not prove, by clear and convincing evidence, that Richard Nelon’s underpayments for 1986–1991 were due to fraud.
- The § 6653(b) fraud additions for 1986–1991 were not sustained as to Richard.
- The Tax Court also did not sustain fraud additions as to Brenda because the Commissioner did not prove fraudulent intent on her part.
- The Nelons remained liable for any properly determined underlying deficiencies for the years at issue, with amounts to be computed consistent with the court’s opinion (along with any applicable non-fraud additions, if any).

## Legal Principles

- The civil fraud addition requires intentional wrongdoing: an intent to evade tax the taxpayer knew was due and owing, shown through conduct intended to conceal, mislead, or otherwise prevent tax collection.
- The Commissioner bears the burden of proving fraud by clear and convincing evidence. I.R.C. § 7454(a); Tax Court Rule 142(b).
- Fraud is not presumed; the Commissioner must establish both an underpayment and fraudulent intent with affirmative evidence.
- Because direct proof of intent is uncommon, courts may consider circumstantial evidence and common indicators (for example, repeated nonfiling, inadequate records, and cash or non-bank dealings), but those indicators must collectively support a clear finding of intent to evade a known tax obligation.
- A taxpayer’s irrational or unreasonable tax-protester beliefs do not excuse tax liability, but the absence of convincing evidence of concealment or a plan to mislead may defeat the Commissioner’s higher burden on the fraud addition.
- Fraud must be proven separately for each spouse; a spouse’s liability for fraud additions cannot rest solely on marital status or another spouse’s conduct without proof of that spouse’s fraudulent intent.

## Conclusion

In Nelon, Richard Nelon stopped filing returns for 1986–1991 after adopting tax-protester views and after an IRS levy following an audit of his 1985 return; the Commissioner asserted § 6653(b) fraud additions based on repeated nonfiling and related conduct, but the Tax Court found the record did not clearly and convincingly show an intent to evade tax known to be owed, and it therefore denied the fraud additions for Richard and also denied fraud additions against Brenda while leaving the underlying deficiencies to be computed under the court’s holdings.


Nelon v. Commissioner, 73 TCM 1843 (1997)