NO REFUND OF PENALTIES FOR COUPLE LACKING REASONABLE CAUSE FOR FAILURES.

                 IN THE UNITED STATES DISTRICT COURT

FINDINGS OF FACT

A. BACKGROUND

1. This is a suit for the refund of civil penalties assessed against Carley and Joyce Smith ("Plaintiffs" or "Smiths") for failing to timely file their 1985, 1990, and 1991 federal income tax returns and failing to pay the taxes on the due date of the returns under 26 U.S.C. sections 6651(a)(1) and (2).

2. As reflected on the Certificate of Assessments and Payments (IRS Form 4340) for the Smiths' 1985 tax year, the Smiths filed two extensions on April 15, 1986 and August 18, 1986 to file their 1985 federal income tax return. The Smiths made a $14,000 payment with the first extension. On April 15, 1985, the Smiths made an estimated tax payment of $1,800, and on June 17, 1985, the Smiths made an estimated tax payment of $3,000. The Smiths filed their 1985 federal income tax return with the IRS on July 5, 1994. On August 29, 1994, the IRS assessed the failure to file and failure to pay penalties against the Smiths for failing to timely file their 1985 federal income tax return and failing to pay the tax on the due date of the return in the amounts of $4,592.03 and $4,814.03, respectively. On April 24, 1995, the IRS abated a portion of the penalties in the amounts of $4,489.40 and $4,700, respectively. The Smiths paid the taxes and penalties assessed for the 1985 tax year on November 7, 1995.

3. As reflected on the IRS Form 4340 for the Smiths' 1990 tax year, the Smiths did not file an extension to file their 1990 federal income tax return. On June 17, 1990, the Smiths made an estimated tax payment of $3,000. The Smiths filed their 1990 federal income tax return with the IRS on June 5, 1992. On July 6, 1992, the IRS assessed the failure to file and failure to pay penalties against the Smiths for failing to timely file their 1990 federal income tax return and failing to pay the tax on the due date of the return in the amounts of $5,817.83 and $1,939.27, respectively. On July 13, 1992, the IRS abated a portion of the failure to pay penalty in the amount of $13.87. The Smiths paid the taxes and penalties assessed for the 1990 tax year in November, 1995. On December 11, 1995, the IRS assessed an additional failure to pay penalty against the Smiths for their 1990 tax year in the amount of $4,024.43.

4. As reflected on the IRS Form 4340 for the Smiths' 1991 tax year, the Smiths filed two extensions on April 15, 1992 and August 18, 1992, to file their 1991 federal income tax return. The Smiths did not make any payments with the extensions and the Smiths did not make any estimated tax payments during 1991. The Smiths filed their 1991 federal income tax return with the IRS on November 27, 1992. On December 28, 1992, the IRS assessed the failure to file and failure to pay penalties against the Smiths for failing to timely file their 1991 federal income tax return and failing to pay penalties against the Smiths for failing to timely file their 1991 federal income tax return and failing to pay the tax on the due date of the return in the amounts of $490.59 and $254.29, respectively. The Smiths paid the taxes and penalties assessed for the 1991 tax year on November 7, 1995. On December 11, 1995, the IRS assessed an additional failure to pay penalty against the Smiths for their 1991 tax year in the amount of $926.67.

5. On June 20, 1997, the Smiths filed a claim for refund with the IRS requesting that the IRS refund the failure to file and failure to pay penalties assessed against, and paid by, the Smiths for tax years 1985, 1990, and 1991. On August 17, 1998, the IRS denied the Smiths' claim for refund. The Smiths filed this suit on September 1, 1999.

B. PATTERN OF LATE FILING

6. The Smiths have demonstrated a pattern of filing their federal income tax returns late for every tax year since 1988:

a. The Smiths filed their 1988 federal income tax return on June 8, 1992. They filed two extensions to October 15, 1989 to file their 1988 federal income tax return; accordingly, the return was approximately two years and eight months late. The adjusted gross income reported on their 1988 federal income tax return was $123,201.

b. The Smiths filed their 1989 federal income tax return on June 8, 1992. They filed two extensions to October 15, 1990, to file their 1989 federal income tax return; accordingly, the return was approximately one year and eight months late. The adjusted gross income reported on their 1989 federal income tax return was $133,725.

c. The Smiths filed their 1992 federal income tax return on October 27, 1993. They filed two extensions to October 15, 1993 to file their 1992 federal income tax return; accordingly, the return was twelve days late. The adjusted gross income reported on their 1992 federal income tax return was $19,406.

d. The Smiths filed their 1993 federal income tax return on February 10, 1995. They filed on [sic] extension to August 15, 1994 to file their 1993 federal income tax return; accordingly, the return was approximately six months late. The adjusted gross income reported on their 1993 federal income tax return was $8,779.

e. The Smiths filed their 1994 federal income tax return on April 3, 1997. They filed two extensions to October 15, 1995 to file their l994 federal income tax return; accordingly, the return was approximately one year and six months late. The adjusted gross income reported on their 1994 federal income tax return was $16,249.

f. The Smiths filed their 1995 federal income tax return on June 26, 1997. They filed two extensions to October 15, 1996 to file their 1995 federal income tax return; accordingly, the return was approximately eight months late. The adjusted gross income reported on their 1995 federal income tax return was $7,321.

g. The Smiths filed their 1996 federal income tax return on April 3. 1998. They filed two extensions to October 15, 1997, to file their 1996 federal income tax return; accordingly, the return was approximately five months late. The adjusted gross income reported on their 1996 federal income tax return was $9,415.

7. The Smiths timely filed their 1997 federal income tax return. The adjusted gross income reported on their 1997 federal income tax return was $12,817.

8. Mr. Smith filed as "married filing separate" for tax year 1998, and Mrs. Smith filed as "head of household" for taxyear 1998. Both Mr. and Mrs. Smith timely filed their 1998 federal income tax returns.

9. The IRS did not receive the Smiths' 1985 federal income tax return until July 5, 1994, over seven years and eight months after it was due. The return reflected a tax liability of $20,409 with a balance due, after crediting the previous payments and adding an underpayment penalty of $765.

10. The Smiths filed their 1990 federal income tax return on June 5, 1992, approximately one year and five months late. The return reflected a tax liability of $28,857, with a balance due, after crediting previous payments and credits and adding an underpayment penalty, of $20,836.

11. The Smiths filed their 1991 federal income tax return on November 27, 1992, 43 days late. The return reflected a tax liability of $5,451, with a balance due, after adding an underpayment penalty, of $5,765.

C. FAILURE TO FILE

12. The Smiths claim that their failure to timely file their tax returns for tax years 1985, 1990 and 1991 and to timely pay the taxes was due to "reasonable cause" and not willful neglect under 26 U.S.C. section 6651.

13. With respect to 1985, the Smiths, in their claim for refund, incorrectly state they "had always filed and paid their tax returns timely." As the evidence demonstrated, from 1988 through 1996, the Smiths filed every federal income tax return late. The Smiths further theorize that "there is no reason to believe that a man who made $90,000 a year and only owed $456.12 would not have filed a timely return." The Smiths therefore conclude that they "most likely filed a timely return that was either lost or misplaced."

14. The Smiths did not file their 1985 federal income tax return using certified or registered mail, and consequently, the Smiths are unable to produce any proof or evidence that they timely filed their 1985 federal income tax return in 1986. Additionally, the Smiths did not produce a copy of their 1985 federal income tax return reflecting the date they signed the form, except for the form that was signed and filed in 1994. The copy provided by the Smiths' accountant did not contain their signatures. Therefore, the Smiths did not file, and the IRS did not receive, their 1985 federal income tax return until July 5, 1994.

15. Unlike 1985, in which the Smiths contend they filed a timely return, the Smiths admit that they filed their federal income tax returns for tax years 1990 and 1991 late. The issue before this Court is whether the Smiths' failure to timely file their federal income tax returns was due to reasonable cause. With respect to 1990 and 1991, the Smiths, in their claim for refund, state that Mr. Smith became ill after taking multiple erroneous prescriptions. This alleged illness caused Mr. Smith to go into severe depression, and purportedly "incapacitated" him from 1990 to 1995. Due to Mr. Smith's problems, the Smiths, were unable to timely file their tax returns. The Smiths also claim that Mr. Smith's illness led to financial problems which prevented him from paying the taxes when the returns were filed. The Plaintiffs presented no medical evidence to support their claims.

16. The Smiths claim that Mr. Smith was "incapacitated" during 1990 through 1995, and therefore they could not timely file their 1990 and 1991 federal income tax returns, is belied by (i) the pattern of late filing demonstrated above, (ii) the fact that the Smiths were able to file tax returns for tax years 1988, 1989, 1990, 1991, and 1992, in both 1992 and 1993, years which were in the middle of Mr. Smith's alleged "incapacity" and (iii) the fact that Mr. Smith was able to function in all other aspects of his life during these years.

17. Mr. Smith materially participated in the running of CJS Oil Company ("CJS Oil") during both 1990 and 1991. Mr. Smith exercised total control and responsibility over CJS Oil during 1990.

18. Mr. Smith oversaw two rental properties owned by the Smiths, and was able to make repairs on the rental properties during both 1990 and 1991.

19. Mr. Smith was never hospitalized during 1990 through 1995. Mr. Smith was able to work, and in fact worked, during the years at issue.

20. During 1991, Mr. Smith formed Professional Agents of Texas, inc. ("PAT").

21. Mr. Smith purchased the Kidd's Insurance Agency ("Kidd's Agency") during 1990 for approximately $214,000, and he personally handled the negotiations for the purchase of the Kidd's Agency. Mr. Smith (i) personally evaluated the purchase price of the Kidd's Agency, (ii) had access to the books and records (including loss ratios and quarterly reports) of the Kidd's Agency, and he spent a significant amount of time reviewing these books and records, (iii) prepared a schedule of commissions to be paid for new business generated for the Kidd's Agency following his purchase, (iv) signed, read and understood the secured note for the purchase of the Kidd's Agency, (v) signed, read and understood the financing statement filed with the purchase of the Kidd's Agency, and (vi) signed, read and understood the security agreement for the purchase of Kidd's Agency.

22. Following his purchase of the Kidd's Agency, Mr. Smith was in constant contact with Celeste Coffee, the previous owner of the Kidd's Agency who Mr. Smith retained to run the Kidd's Agency, concerning the agency operations. Furthermore, Mr. Smith went to the Kidd's Agency in Groesbeck at least one [sic] a week to review the operations.

23. When the Kidd's Agency failed and Mrs. Coffee sued Mr. Smith to get her agency back, Mr. Smith never raised his illness or "incapacity" as a defense to the lawsuit.

24. Mr. Smith purchased the Carter, Metsgar, Jones, Inc. Agency ("CMJ Agency") during 1990 for approximately $311,000, and he personally handled the negotiations for the purchase of the CMJ Agency. As with the Kidd's Agency, Mr. Smith (i) personally evaluated the purchase price of the CMJ Agency, (ii) had access to the books and records (including loss ratios and quarterly reports) of the CMJ Agency and he spent two months reviewing these books and records, (iii) went to several different banks during 1990 in an attempt to negotiate loans to buy the CMJ Agency, (iv) signed, read and understood the "disclaimer of oral agreement" included as part of the loan documents signed by Mr. Smith, (v) signed, read and understood the purchase and sales agreement for the purchase of the CMJ Agency, and (vii) signed, read and understood the "addendum to the sales agreement," which gave Mr. Smith additional time to verify the sales price of the CMJ Agency, and in fact, he spent additional time verifying the sales price of the CMJ Agency.

25. During 1990, Mr. Smith talked to the person hired to run the CMJ Agency on a daily basis. In 1991, Mr. Smith moved to Stephenville and personally ran the CMJ Agency. While he ran the CMJ Agency, Mr. Smith met with customers and potential customers and generally oversaw the daily operations of the CMJ Agency.

26. During 1991, when Mr. Smith was attempting to sell the CMJ Agency, he entered into a "bill of sale," which he signed, read and understood. Furthermore, Mr. Smith executed and signed a Board of Directors Consent for PAT regarding the sale of the CMJ Agency.

27. During 1990 and 1991, Mr. Smith attempted to network his three agencies (PAT, Kidd's Agency, and CMJ Agency) via computer, Mr. Smith hired an outside company to network the three agencies and he oversaw the networking.

28. The Smiths had a retirement account at Paine Webber during 1991 through 1993. Mr. Smith controlled this retirement account. During 1991 through 1993, Mr. Smith directed the Paine Webber broker to buy and sell various assets and securities and he personally decided on the particular asset allocation in the account.

29. When Mr. Smith approached Harry Woods, his former partner with the Berkman & Woods Insurance agency ("Berkman & Woods"), about purchasing his interest in Berkman & Woods, Mr. Smith prepared the offer using several different calculations of the purchase price.

30. Mr. Smith engaged in the hobby of raising racing pigeons during 1990 and 1991.

31. For tax years in question, the Smiths employed an accountant to help them prepare their tax returns.

32. For tax years 1985, 1990 and 1991, the Smiths were clearly aware of their tax obligations and duty to timely file their federal tax returns and timely pay their taxes, as evidenced by the fact that the Smiths filed two timely extensions in 1985 and 1991 to file their federal income tax returns, and the Smiths employed accountants for each of these years to help them prepare their tax returns.

33. During 1990 and 1991, Mr. Smith's illness did not render him incapable of exercising ordinary business care and prudence, Furthermore, Mr. Smith's illness did not incapacitate him to such a degree that the Smiths were unable to timely file their 1990 and 1991 federal income tax returns.

34. During 1990 and 1991, Mrs. Smith was not rendered incapable of exercising ordinary business care and prudence. Mrs. Smith was not ill, and she was therefore certainly able to timely file the Smiths' 1990 and 1991 federal income tax returns.

D. FAILURE TO PAY

35. The Smiths' financial difficulties during 1990 and 1991 did not render them incapable for paying their 1990 and 1991 federal income taxes when the returns were filed.

36. The Smiths' adjusted gross income during 1990 was $140,508, and their adjusted gross income during 1991 was $59,175. Accordingly, the Smiths are presumed to have had the resources to pay the tax had ordinary prudence been exercised.

37. During 1990 and 1991, the Smiths paid numerous other creditors, including their mortgage and mortgage interest (for which the Smiths received a deduction), utility, phone, and water bill. Furthermore, despite their financial difficulties, the Smiths made a charitable gift in 1990 to the Speegleville Baptist Church of $5,470.

38. Despite their financial difficulties, the Smiths bought their children "Honda" mopeds during either 1990 or 1991.

39. Despite their financial difficulties, during 1990 and 1991, the Smiths bought their son Andrew (i) a ski boat for approximately $2,000, (ii) two motorcycles, and (iii) a "four-wheeler." The Smiths also bought Andrew a Ford Mustang in 1993 for approximately $5,000.

40. Despite their financial difficulties, Mr. Smith spent approximately $13,000 on an advertisement for the CMJ Agency during 1991.

41. Despite their financial difficulties, the Smiths paid their American Express bill during 1991 and 1992.

42. For tax year 1985, the Smiths failed to demonstrate that their failure to timely file their income tax return and timely pay the income tax was due to reasonable cause and not willful neglect. The Smiths have produced no credible evidence that their 1985 federal income tax return was timely filed, and therefore, the Smiths failed to carry their burden of proving the return was timely filed and the tax was timely paid.

43. For tax years 1990 and 1991, the Smiths have failed to demonstrate that their failure to timely file their income tax returns and timely pay the income tax was due to reasonable cause and not willful neglect. The evidence demonstrates that Mr. Smith was not incapacitated during this period, and the Smiths exercised ordinary care and prudence in other aspects of their life. Furthermore, the evidence demonstrates that (i) the Smiths earned significant amounts of income during 1990 and 1991, (ii) paid numerous other creditors, and (iii) made numerous lavish expenditures despite their claimed financial difficulties. Accordingly, the Smiths have failed to carry their burden of proving that they were unable to pay their income taxes when due because of undue hardship.

E. ULTIMATE FINDINGS OF FACT

44. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely file their 1985 federal income tax return.

45. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely pay their 1985 federal income tax.

46. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely file their 1990 federal income tax return.

47. The Smiths did not have "reasonable cause" under 26 U.S.C. 6651 for failing to timely pay their 1990 federal income tax.

48. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely file their 1991 federal income tax return.

49. The Smiths did not have ureasonable cause" under 26 U.S.C. section 6651 for failing to timely pay their 1991 federal income tax.

Any of the foregoing findings of fact which may be deemed to constitute conclusions of law shall be so considered.

CONCLUSIONS OF LAW

[2] The appropriate legal standard is not disputed.

1. The Court has jurisdiction over this case pursuant to 28 U.S.C. sections 1340 and 1346(a)(1) and 26 U.S.C. section 7402(a). Venue is proper in this district pursuant to 28 U.S.C. sections 1391(b) and 1402(a)(1).

2. In a tax refund suit, the determination of the IRS is presumed to be correct. The taxpayer has the burden of rebutting this presumption, except in certain circumstances unrelated to this case. In order to prevail, the taxpayer must prove both that an overpayment was made and the amount of the overpayment. The Smiths, therefore, have the burden of proof on all issues in this matter.

3. A Certificate of Assessment and Payment (IRS Form 4340) is sufficient evidence to establish that the penalty assessments were properly made and are presumptively correct, absent evidence to the contrary.

4. Section 6012(a) of Title 26 requires every individual having taxable income in excess of the exemption amount for a tax year to file a federal tax return. Section 6013(a) allows married individuals to file "joint" tax returns. Section 6072(a) requires that federal income tax returns by [sic] filed on April 15 following the close of the calendar year. Section 6081 (a) allows taxpayers an extension of time to file their federal income tax returns.

5. Taxpayers have the burden of proving their federal income tax return was timely filed. Taxpayers may offer documentary "proof of mailing" to meet their burden. Proof of mailing requires some proof that the return was placed in an envelope, properly addressed, stamped, and placed in the mail.

6. Section 6651(a)(1) imposes a civil penalty on taxpayers who fail to timely file their tax return on the due date of the return. Section 6651(a)(2) imposes a civil penalty on taxpayers who fail to timely pay the tax shown on the return.

7. The failure to file and failure to pay penalties may be abated if the taxpayer can demonstrate that the failure to perform was due to reasonable cause and not willful neglect. 26 U.S.C. section 6651. The standard adopted for determining whether reasonable cause existed for the failure by a taxpayer to comply with any of the Internal Revenue Code provisions is whether such person exercised ordinary business care and prudence but was nevertheless unable to perform the act(s) required of him. See Treas. Reg. section 301.6651- 1(c)(1). Willful neglect may be read as meaning a conscious, intentional failure or reckless indifference. Boyle v. United States, 469 U.S. 241 (1985).

8. A failure to pay will be considered due to reasonable cause to the extent that the taxpayer makes a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship if he paid on the due date. Treas. Reg. section 301.6651-1(c)(1). The term "undue hardship" means more than just an inconvenience to the taxpayer. It must appear that substantial financial loss, for example, loss due to the sale of property at a sacrifice price, will result to the taxpayer from making the payment on the due date. Treas. Reg. sections 301.6651- 1(c)(1) and 1.6161-1(b).

9. Lack of funds on the due date which is the result of payments to other creditors is not reasonable cause. Jones v. Commissioner, 25 T.C. 1100 (1956), rev'd. on other grounds and rem'd, 259 F.2d 300 (5th Cir. 1958). Because income taxes are levied on realized net income, a taxpayer will be presumed to have had the resources to pay the tax had ordinary prudence been exercised. Accordingly, a portion of such income belongs to the Government, and the taxpayer spends or invests that portion at his peril. If the funds are not available when the return is due, the hardship is of the taxpayer's own making.

10. The overall financial situation of the taxpayer is taken into consideration in determining whether the taxpayer was or was not able to pay the tax in spite of the exercise of ordinary business care and prudence. In making this determination, an examination should be made of the taxpayers lifestyle relative to his income and tax obligations. If the taxpayer incurs lavish or extravagant living expenses in light of the income he receives or could expect to receive by the due date of the tax, then he will be deemed to have failed to exercise ordinary business care and prudence. An analysis of whether the taxpayer has invested in speculative or illiquid assets, without having additional funds to pay taxes, is also relevant to determining reasonable cause. Treas. Reg. section 301.6651-1(c)(1).

11. The duty of ensuring that tax returns are timely filed and the tax is timely paid is a personal and nondelegable duty. Boyle, 469 U.S. at 247. Financial difficulties generally do not constitute reasonable cause for failing to timely file a tax return. Barber v. Commissioner, 71 T.C.M. (RIA) paragraph 97,206 (1997). Furthermore, a spouse's reliance on the other spouse to prepare and file the federal income tax return generally does not constitute reasonable cause for failing to timely file the return. McGee v. Commissioner, 979 F.2d 66, 70-71 (5th Cir. 1992).

12. To establish a defense of emotional illness as reasonable cause, a taxpayer must show that he or she was unable to exercise ordinary business care and prudence during the tax years at issue. Akins v. Commissioner 63 T.C.M. (RIA) paragraph 93,256 (1993). Generally, the claimed mental illness must be sufficiently incapacitating to the extent it affects the taxpayers ability to exercise ordinary business care and prudence in all aspects of the taxpayer's life, not just with regard to the filing of income tax returns.

13. The courts have generally refused to find that mental illness is a basis for reasonable cause for failing to file returns and pay income taxes if there is evidence that the taxpayer was able to function with ordinary care and prudence in other aspects of his life. Carlson v United States, 126 F.3d 915 (7th Cir. 1997), cert. denied, 523 U.S. 1060 (1998). See also Farley v. Commissioner, 63 T.C.M. (RIA) paragraph 93,031 (1993); Bear v. Commissioner, 62 T.C.M. (RIA) paragraph 92,690 (1992).

14. With regard to tax year 1985, the Smiths failed to sustain their burden or [sic] proving that they timely mailed and filed their 1985 federal tax return.

15. With regard to tax years 1990 and 1991, the Smiths earned income of $140,508, and $59,175, respectively. Because the Smiths earned significant income during these two tax years, it is presumed that the Smiths had the resources to pay the tax for these tax years. This is further evidenced by the fact that the Smiths paid numerous other creditors and made numerous lavish expenditures, including purchasing mopeds, motorcycles, a ski boat, and cars.

16. The Smiths' argument that they had reasonable cause for failing to file their 1990 and 1991 returns and failing to pay the tax when due because of Mr. Smith's illness and "incapacity" is not supported by the evidence. Mr. Smith clearly was able to function with ordinary care and prudence in all other aspects of his life.

17. The Smiths were aware of their duty to timely file their federal income tax returns and timely pay the taxes.

18. Additionally, the fact that the Smiths, at all times during 1990 and 1991, had an accountant available to help prepare the tax returns indicates the Smiths' problems did not prevent them from exercising ordinary care and prudence.

ULTIMATE CONCLUSIONS OF LAW

19. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely file their 1985 federal income tax return.

20. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely pay their 1985 federal income tax.

21. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely file their 1990 federal income tax return.

22. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely pay their 1990 federal income tax.

23. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely file their 1991 federal income tax return.

24. The Smiths did not have "reasonable cause" under 26 U.S.C. section 6651 for failing to timely pay their 1991 federal income tax.

[3] Any of the foregoing conclusions of law which may be deemed to constitute findings of fact shall be so considered.

[4] In accordance with the foregoing findings of fact and conclusions of law,

[5] It is ORDERED that Judgment be entered in favor of Defendant.

[6] It is further ORDERED that any motions not previously ruled upon by the Court are DENIED.

[7] SIGNED this 8th day of August, 2000.

                                   Walter S. Smith, Jr.