Nelon v. Commissioner

Richard Nelon (plaintiff) filed a federal tax return for 1985 with an accountant’s help, but Nelon later came to believe that he did not have to pay federal tax. Nelon, who was not well educated or knowledgeable about tax or business matters, came to this belief based on the advice of his tax-protestor house painter. Nelon did not file returns for 1986 through 1991. In 1989, the commissioner (defendant) of the Internal Revenue Service (IRS) audited Nelon’s 1985 return, ultimately leading the IRS to seize Nelon’s bank account despite Nelon’s belief that his 1985 return was correct. This experience led Nelon to stop maintaining a bank account. In 1992, the IRS notified Nelon that it was examining his 1986 through 1991 taxes. Nelon responded that he was not obliged to communicate with the IRS and was not subject to federal tax, but Nelon acknowledged that he did not file returns for the relevant years and explained why. The IRS imposed a fraud-based addition to tax (i.e., penalty) for 1986 through 1991. Nelon challenged the penalty in the United States Tax Court, arguing that he did not commit fraud. The commissioner responded that Nelon’s fraud was evidenced by, among other things, his failure to (1) file returns, (2) report substantial income, (3) maintain sufficient books and records, (4) pay estimated taxes, and (5) maintain a bank account.