T.C. Memo. 1997-45
UNITED STATES TAX COURT
TIMOTHY C. SADLIER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22181-94. Filed January 27, 1997.
Timothy C. Sadlier, pro se.
Willie Fortenberry, Jr., for respondent.
MEMORANDUM OPINION
COLVIN, Judge: This case is before the Court on
respondent's motion for summary judgment under Rule 121. On
August 25, 1995, respondent filed a motion for summary judgment
to sustain the adjustments to income and additions to tax
determined in the notice of deficiency. Timothy C. Sadlier
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failed to appear at the calendar call on December 4, 1995, and no
one appeared on his behalf. We decide this motion on the basis
of the parties' pleadings, admissions, written submissions, and
other acceptable materials. For reasons stated below, we grant
respondent's motion.
Background
Petitioner lived in Florida when he filed the petition in
this case.
By notice of deficiency dated November 1, 1994, respondent
determined that petitioner has a deficiency in Federal income tax
and an addition to tax and penalties as follows:
Addition To Tax and Penalties
Year Deficiency Sec. 6651(a)(1) Sec. 6662 Sec. 6663
1989 $29,659 $6,589 $268 $21,240
Respondent determined that all but $1,339 of the deficiency
was attributable to fraud. Respondent also determined that
petitioner was liable for a penalty for negligence under section
6662 for this $1,339 part of the deficiency.
On February 27, 1995, respondent filed an answer to
petitioner's amended petition. In it, respondent alleged:
6. FURTHER ANSWERING the amended petition and in
support of the determination that a part or all of the
underpayment of tax required to be shown on the
petitioner's income tax return for the taxable year
1989 is due, in whole or in part, to fraud with the
intent on the part of the petitioner to evade tax, the
respondent alleges:
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(a) Prior to and during the year 1989, petitioner,
Timothy Charles Sadlier, was extensively involved in
gambling, especially horse and dog races. Also, prior
to and during 1989, petitioner was involved in other
business activities, whether illegal or legal, which
required the reporting of income.
(b) During the year 1989, the petitioner derived
unreported taxable income from the aforementioned
business activities as well as additional unreported
rental income and interest income.
(c) The records maintained by petitioner for the
taxable year 1989 were inadequate in that they were
incomplete and failed to disclose all sources of income
and did not properly reflect the correct taxable income
of petitioner.
(d) The petitioner's failure to maintain complete
and accurate records of his income-producing activities
and his failure to produce complete and accurate
records for respondent in connection with the
examination of his income tax return for the taxable
year 1989 were fraudulent acts conducted by petitioner
with the intent to evade tax for the taxable year 1989.
(e) Because of the petitioner's failure to
maintain adequate books and records of his income-
producing activities, his refusal to cooperate with
respondent's examining agents, and his failure to
voluntarily report his federal income tax for the
taxable year 1989, the respondent has determined the
petitioner's correct taxable income for the taxable
year 1989 by the use of a combination sources and
application of funds and specific item method of
reconstructing income. In making her determination,
the respondent has utilized all records, memoranda and
other sources of information which were available.
(f) Petitioner is an admitted gambler of many
years and was clearly aware that all gambling income
was includable in income in the year of receipt.
(g) Petitioner also had an extensive history of
arrest involving the distribution of marijuana
paraphernalia.
(h) During 1989, petitioner received the following
sources of funds totaling $70,901:
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Sources of Funds Tax Year: 1989
Interest income per return $145
Rental income per return 7,800
Rental income increase (herein) 600
Gambling winnings per return 23,298
Sch. C Reentries gross receipts
per return 3,260
Sch. C Reentries gr. receipts
increase (herein) 3,003
Reimbursement from New Horizons 11,700
NCNB acct #4319742 1/1/89 balance 9,998
Horse sale proceeds per return 2,500
Loan from mother 6,000
Credit card cash advances 2,597
Total $70,901
(i) During 1989, petitioner had the following
application of funds totaling $156,425:
Application of Funds Tax Year: 1989
Withholding credits per return $3,302
Sch. C Reentries purchases
per return 6,231
Sch. C Reentries purchases
decrease herein (271)
Sch. C Reentries expenses
per return 5,462
Sch. E expenses per return 4,200
Sch. E depreciation per return (1,677)
Loan to New Horizons 95,991
Personal expenses 38,180
NCNB acct #4319742 1/1/89 balance 5,007
Total $156,425
(j) For the year 1989, petitioner had unexplained
applications of funds in excess of sources of funds in
the amount of $85,524, which petitioner failed to
report on his fraudulent delinquent income tax return
filed for the taxable year 1989, all with the intent to
evade tax for the period.
(k) For 1989, petitioner failed to report bartered
rental income in the amount of $600, all with the
intent to evade tax for the period.
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(l) Petitioner failed to report income from the
operation of the business, Re-Entries Consignment Shop
in the amount of $3,003 for 1989, all with the
fraudulent intent to evade tax for the period.
(m) Petitioner filed his 1989 return on September
18, 1990, with the knowledge that he clearly failed to
report all income received for the year, whether
illegal or legal, all with the fraudulent intent to
evade tax for the year.
(n) Petitioner failed to report taxable income of
$94,469 for taxable year 1989, all with the fraudulent
intent to evade tax for the year.
(o) Petitioner failed to report his tax liability
in the amount of $29,659 for 1989, all with the
fraudulent intent to evade tax for the year.
(p) A part or all of the underpayment of tax which
petitioner was required to show on his income tax
return for the taxable year 1989 is due to fraud.
7. FURTHER ANSWERING the Amended Petition and in
the alternative to the additions to the tax for the
taxable year 1989 due from the petitioner under the
provisions of I.R.C. section 6663 and in support of
respondent's claim for additions to the tax for the
taxable year 1989 under the provisions of I.R.C.
section 6662(a) in the amount totaling $5,664, the
respondent alleges as follows:
(a) Petitioner was clearly aware that when he
filed his delinquent income tax return that he had not
reported all the income received by him for the taxable
year 1989.
(b) Petitioner's failure to file timely a return
for 1989 and report his income received during the year
and petitioner's underpayment of income tax for the
taxable year 1989 were due to negligence and the
intentional disregard of rules and regulations, as is
more fully set forth by the facts in paragraph 6 above,
which facts are incorporated herein by reference * * *.
Petitioner did not file a reply to respondent's allegations.
On May 22, 1995, respondent filed a motion under Rule 37(c) to
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have the undenied allegations of fact deemed admitted. By notice
of filing dated May 22, 1995, the Court directed petitioner to
file a reply on or before June 12, 1995. Petitioner did not
respond. We granted respondent's motion on June 19, 1995.
On August 28, 1995, we ordered petitioner to file a response
to respondent's motion for summary judgment. Petitioner did not
do so.
Discussion
A. Summary Judgment and Deemed Admissions
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Florida Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). We grant summary judgment
if the pleadings, answers to interrogatories, depositions,
admissions, affidavits, and any other acceptable materials 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);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.
17 F.3d 965 (9th Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753,
754 (1988). The moving party bears the burden of proving that
there is no genuine issue of material fact, and factual
inferences are 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).
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The Commissioner may carry the burden of proof by undenied
facts deemed admitted under Rule 37(c). Doncaster v.
Commissioner, 77 T.C. 334, 336-338 (1981); Marcus v.
Commissioner, 70 T.C. 562, 577 (1978), affd. without published
opinion 621 F.2d 439 (5th Cir. 1980); Gilday v. Commissioner, 62
T.C. 260, 262 (1974). If facts are deemed admitted under Rule
37(c), the Commissioner may move for judgment on the issues,
including fraud, on the basis of the facts deemed admitted under
Rule 121 (summary judgment). Gordon v. Commissioner, 73 T.C. 736,
739 (1980).
B. Deficiency
Respondent seeks summary judgment that the deficiency and
addition to tax and penalties determined in the notice of
deficiency be sustained. The allegations in respondent's answer
to petitioner's amended petition were deemed admitted under Rule
37(c) when we granted respondent's motion on June 19, 1995. On
the basis of those deemed admissions respondent seeks to hold
petitioner liable for the deficiency in income tax and addition
to tax and penalties respondent determined in the notice of
deficiency.
We conclude that there are no genuine issues of material
fact, and that respondent is entitled to judgment sustaining
respondent's determination of the deficiency and addition to tax
and penalties for 1989 as a matter of law.
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C. Fraud
Respondent determined that petitioner is liable for fraud
under section 6663. Respondent affirmatively pled fraud and the
facts in support of fraud in the answer. Respondent has the
burden of proving, by clear and convincing evidence, that some
part of the underpayment for the year in issue was due to fraud.
Secs. 6663(b), 7454(a); Rule 142(b). Respondent must establish
that petitioner underpaid tax and that part of the underpayment
was due to fraud. Sec. 6663(b). The deemed admissions under
Rule 37(c) establish that petitioner underpaid tax for 1989 in
the amount determined by respondent. Doncaster v. Commissioner,
supra.
Respondent must prove by clear and convincing evidence that
petitioner had fraudulent intent. Parks v. Commissioner, 94 T.C.
654, 664 (1990). Fraud means actual, intentional wrongdoing,
Mitchell v. Commissioner, 118 F.2d 308, 310 (5th Cir. 1941),
revg. 40 B.T.A. 424 (1939), or the intentional commission of an
act for the specific purpose of evading a tax believed to be
owing, Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968),
affg. T.C. Memo. 1966-81. The deemed admissions also establish
that petitioner did not report all of his income.
The courts have developed a number of objective indicators
or "badges" of fraud. Recklitis v. Commissioner, 91 T.C. 874,
910 (1988). Several badges of fraud are present in this case:
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(1) A large understatement of income, (2) inadequate records, and
(3) failure to cooperate with tax authorities. Bradford v.
Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.
Memo. 1984-601; Ruark v. Commissioner, 449 F.2d 311, 312-313 (9th
Cir. 1971), affg. T.C. Memo. 1969-48.
1. Large Understatement of Income
The deemed admissions establish that petitioner knowingly
underreported $94,469 in income for 1989 that he derived from
business, gambling, and barter activities, and that he knew that
gambling income was includable in income in the year of receipt.
2. Inadequate Records
A taxpayer's failure to maintain accurate records is a badge
of fraud. Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir.
1962), affg. T.C. Memo. 1959-172; Reaves v. Commissioner, 295
F.2d 336, 338 (5th Cir. 1961), affg. 31 T.C. 690 (1958). The
deemed admissions establish that petitioner's records were
incomplete and did not disclose all of his sources of income.
3. Failure To Cooperate With Tax Authorities
A taxpayer's failure to cooperate with the Commissioner's
examining agents is a badge of fraud. Bradford v. Commissioner,
supra. The deemed admissions establish that petitioner refused
to cooperate with respondent's examining agents, forcing them to
use alternative methods to reconstruct petitioner's income.
Respondent has established by clear and convincing evidence
that petitioner intended to evade tax. We conclude that
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petitioner is liable for the fraud penalty under section 6663 for
1989 and that $28,320 of the underpayment for 1989 was due to
fraud. In the memorandum of authorities in support of the motion
for summary judgment, respondent conceded that $1,339 of the
underpayment for 1989 was not due to fraud. Respondent contends
that this amount is due to negligence under section 6662. The
deemed admissions establish that petitioner is liable for the
negligence penalty as to the $1,339 because petitioner failed to
keep adequate records and negligently failed to report income.
We will grant respondent's motion for summary judgment to
sustain the adjustments to income and addition to tax and
penalties determined in the notice of deficiency.
An appropriate order and
decision will be entered.