T.C. Memo. 1996-493
UNITED STATES TAX COURT
PAGE G. STUART, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6664-95. Filed November 4, 1996.
Page G. Stuart, pro se.
Jillena A. Warner and Lynne A. Camillo, for respondent.
MEMORANDUM OPINION
DAWSON, Judge: This case was assigned to Chief Special
Trial Judge Peter J. Panuthos pursuant to the provisions of
section 7443A(b)(4) and Rules 180, 181, and 183.1 The Court
1
All section references are to the Internal Revenue Code
in effect for the years in issue, unless otherwise indicated.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
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agrees with and adopts the opinion of the Special Trial Judge,
which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
PANUTHOS, Chief Special Trial Judge: This matter is
presently before the Court on respondent's Motion for Summary
Judgment. As explained in greater detail below, we will grant
respondent's motion.
Background
On March 22, 1995, respondent mailed a notice of deficiency
to petitioner determining deficiencies in the amounts of $236,973
and $146,140 in petitioner's Federal income taxes for the taxable
years 1992 and 1993, respectively. In addition, respondent
determined that petitioner is liable for the penalty for fraud
under section 6663(a) in the amounts of $177,730 and $109,605 for
the taxable years 1992 and 1993, respectively.
Petitioner filed a timely petition for redetermination with
the Court on May 1, 1995.2
Respondent filed a timely answer to the petition which
includes affirmative allegations in support of respondent's
determination that petitioner is liable for the penalty for fraud
for the taxable years in issue. Petitioner failed to file a
reply to respondent's answer within the 45-day period prescribed
in Rule 37(a). As a consequence, respondent filed a motion
2
At the time that the petition was filed, petitioner was
incarcerated in a Federal prison in Lexington, Kentucky.
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pursuant to Rule 37(c) requesting that the Court issue an order
that undenied allegations in the answer be deemed admitted. By
order dated August 31, 1995, petitioner was notified of the
filing of respondent's Rule 37(c) motion and was ordered to file
a reply to respondent's answer.3 Petitioner failed to file a
reply to respondent's answer, or otherwise respond to the Court's
order. Consequently, we granted respondent's Rule 37(c) motion,
and the undenied allegations set forth in respondent's answer
were deemed to be admitted. See Doncaster v. Commissioner, 77
T.C. 334, 336 (1981); Gilday v. Commissioner, 62 T.C. 260, 261
(1974).
As indicated, respondent now moves for summary judgment with
respect to petitioner's liability for the deficiencies and
penalties set forth in the notice of deficiency. Petitioner was
notified that respondent's motion was calendared for hearing at
the motions session of the Court in Washington, D.C. In
addition, the Court issued an order directing petitioner to file
a written response to respondent's motion. Petitioner did not
respond to the Court's order.
Counsel for respondent appeared at the hearing and presented
argument in support of the motion. No appearance was made by or
3
The Court's order dated Aug. 31, 1995, expressly advised
petitioner of the potential consequences that would attend a
failure to file a reply.
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on behalf of petitioner at the hearing, nor did petitioner file a
statement with the Court pursuant to Rule 50(c).4
Facts Deemed Admitted
During 1992 and 1993, petitioner earned wage income as a
commercial truck driver and realized substantial income from the
sale of illegal drugs.
On August 11, 1992, a Texas Highway Patrol officer stopped
petitioner in his vehicle and, after obtaining petitioner's
consent, searched petitioner's vehicle and found currency in the
amount of $316,111. Petitioner's vehicle and the $316,111 in
currency were seized by, and forfeited to, the State of Texas.
During 1992 and 1993, the Organized Crime Drug Enforcement
Task Force secured and executed warrants to search petitioner's
residence in Nashville and other properties. As a result of the
execution of these search warrants, currency was discovered and
seized on the dates and in the amounts as follows:
Date Amount
9/8/92 $120,396
9/9/92 159,227
9/10/92 130,100
2/6/93 50,000
5/21/93 35,260
6/3/93 315,000
4
Petitioner was reminded of Rule 50(c) in the Court's
order. Petitioner was advised that he could submit a written
statement in lieu of (or in addition to) attendance at the
hearing.
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All of the currency seized in this manner was in petitioner's
possession and/or subject to petitioner's dominion and control at
the time that it was seized.
During 1992, petitioner paid $26,000 in cash to a general
contractor for work done on a residence located in Nashville,
Tennessee.
During 1994, petitioner was convicted of Federal money
laundering charges and was sentenced to 5 years in prison. At
the same time, petitioner was convicted of conspiracy to
distribute marijuana by the State of Tennessee.
Petitioner failed to maintain, or submit to respondent for
examination, adequate books or records regarding the income that
he derived from sales of illegal drugs during the years in issue.
At the start of the 1992 taxable year and at all times during the
1992 and 1993 taxable years, petitioner neither had nor received
any nontaxable or excludable income, receipts, cash, or other
assets.
Petitioner realized income from sales of illegal drugs in
the amounts of $751,823 and $400,260 during the taxable years
1992 and 1993, respectively.
Petitioner filed individual Federal income tax returns for
1992 and 1993 reporting adjusted gross income (comprised of wage
and interest income from a checking account) of $10,933 and
$6,169, respectively. Petitioner failed to report any income
and/or expenses from illegal drug sales on his 1992 and 1993 tax
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returns. Petitioner attempted to conceal the source and amount
of the income that he realized from sales of illegal drugs by
engaging in large cash purchases, acquiring assets through the
use of nominees, and burying $315,000 in a cemetery. During
1993, in an effort to avoid prosecution for his illegal
activities, petitioner acquired a false driver's license from the
State of California.
Petitioner fraudulently and with the intent to evade taxes
filed income tax returns for 1992 and 1993 in which he omitted
$751,823 and $400,260 in income from sales of illegal drugs,
respectively. The underpayments of tax required to be shown on
petitioner's 1992 and 1993 income tax returns are due to fraud
with intent to evade income tax.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Florida Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be
granted with respect to all or any part of the legal issues in
controversy "if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable materials,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that a decision may be
rendered as a matter of law." Rule 121(b); see Sundstrand Corp.
v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th
Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);
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Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The moving
party bears the burden of proving that there is no genuine issue
of material fact, and factual inferences will be read in a manner
most favorable to the party opposing summary judgment. Dahlstrom
v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.
Commissioner, 79 T.C. 340, 344 (1982).
The factual allegations deemed admitted under Rule 37(c)
establish that petitioner failed to report income in the amounts
of $751,823 and $400,260 from sales of illegal drugs on his 1992
and 1993 Federal income tax returns, respectively. Petitioner's
forfeiture of seized currency does not prevent it from being
included in his gross income. See, e.g., Gambina v.
Commissioner, 91 T.C. 826 (1988). In addition, petitioner failed
to maintain, or submit to respondent for examination, adequate
books or records regarding the income and expenses relating to
his illegal activities during the years in issue. At the start
of the 1992 taxable year and at all times during the 1992 and
1993 taxable years, petitioner neither had, nor received, any
nontaxable or excludable income, receipts, cash, or other assets.
Consistent with these deemed admissions, it follows that
respondent is entitled to summary judgment that petitioner is
liable for the deficiencies in tax for 1992 and 1993 as set forth
in the notice of deficiency.
Respondent also determined that petitioner is liable for the
penalty for fraud under section 6663(a) for 1992 and 1993.
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Section 6663(a) provides that, if any part of the underpayment of
tax required to be shown on the return is due to fraud, there
shall be added to the tax an amount equal to 75 percent of the
portion of the underpayment that is attributable to fraud.
Fraud is defined as an intentional wrongdoing designed to
evade tax believed to be owing. Zell v. Commissioner, 763 F.2d
1139, 1142-1143 (10th Cir. 1985), affg. T.C. Memo. 1984-152; Webb
v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. T.C.
Memo. 1966-81, and cases cited therein. Respondent has the
burden to prove fraud for each taxable year by clear and
convincing evidence. Sec. 7454(a); Rule 142(b). Fraud is a
question of fact to be resolved upon consideration of the entire
record and is never presumed. Estate of Pittard v. Commissioner,
69 T.C. 391, 400 (1977). Respondent's burden of proving fraud
can be met by facts deemed admitted pursuant to Rule 37(c).
Doncaster v. Commissioner, 77 T.C. at 337; see Marshall v.
Commissioner, 85 T.C. 267, 272-273 (1985).
In the instant case petitioner is deemed to have admitted,
pursuant to Rule 37(c), that he attempted to conceal the source
and amount of the income that he realized from sales of illegal
drugs in 1992 and 1993 by engaging in large cash purchases,
acquiring assets through the use of nominees, and burying
$315,000 in a cemetery. In addition, petitioner is deemed to
have admitted that, in an effort to avoid prosecution for his
illegal activities, he acquired a false driver's license from the
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State of California. Most importantly, petitioner is deemed to
have admitted that he fraudulently and with the intent to evade
taxes filed income tax returns for 1992 and 1993 in which he
omitted $751,823 and $400,260 in income from sales of illegal
drugs, respectively, and that the underpayments of tax required
to be shown on his income tax returns for 1992 and 1993 are due
to fraud with intent to evade income tax.
We hold that the facts deemed admitted pursuant to Rule
37(c) satisfy respondent's burden of proving fraud. Doncaster v.
Commissioner, 77 T.C. at 337. Those facts constitute clear and
convincing evidence that petitioner, fraudulently and with the
intent to evade taxes known to be owing, failed to report the
income that he derived from sales of illegal drugs during 1992
and 1993 and that the underpayment of taxes required to be shown
on each of petitioner's 1992 and 1993 income tax returns is due
to fraud. Consequently, respondent is entitled to summary
judgment that petitioner is liable for the penalty for fraud
under section 6663(a) for the taxable years 1992 and 1993.
In order to reflect our conclusions herein,
An order and decision granting
respondent's motion for summary judgment
will be entered.