T.C. Memo. 1997-256
UNITED STATES TAX COURT
JOHN DEVLIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7779-94. Filed June 9, 1997.
Randall L. Preheim, for respondent.
MEMORANDUM OPINION
FAY, Judge: This case is before the Court on respondent's
Motion for Summary Judgment pursuant to Rule 121.1 Respondent's
Motion for Summary Judgment was based on matters deemed admitted
by reason of petitioner's failure to respond to two requests for
1
All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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admissions served by respondent under Rule 90(c). Petitioner
resided in Lakewood, Colorado, at the time his petition was
filed.
Background
Respondent determined deficiencies in and additions to tax
as follows:
Additions to Tax
Sec. Sec.
Year Deficiency 6651(a)(1)1 6654
1990 $2,269 $1,632 $143
1991 27,458 20,357 1,559
1992 5,998 4,496 260
1
Respondent, in the Amended Answer to Amended
Petition, alleged that petitioner is liable for additions to
tax for fraud under sec. 6651(f) for 1990, 1991, and 1992.
Respondent relies on the additions to tax determined in the
notice of deficiency under sec. 6651(a)(1) as an alternative
position, if we find that petitioner is not liable for
additions to tax for fraud under sec. 6651(f).
Petitioner worked as an insurance agent for the Prudential
Life Insurance Company (Prudential) during 1990, 1991, and 1992.
Prudential employed him to sell insurance and annuities to
Prudential clients but did not authorize him to sell securities.
In his capacity as a Prudential insurance agent, petitioner
convinced Prudential clients to cancel their Prudential annuities
and transfer the proceeds to another company, named Project
Input, Inc., which petitioner alleged was sponsored by
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Prudential.2 The Prudential clients would write a check made
payable to petitioner, and in return the clients would receive an
installment note. The installment note stated that it was for an
investment known as Neo Genesis Paradigm, Inc.3 Petitioner would
then convert the proceeds from this transaction to his own use.
Such transactions occurred on three different occasions from 1991
through 1992. Each time, petitioner targeted an elderly client.
On May 6, 1992, petitioner was charged in Denver County
Court, Denver, Colorado, with theft from the elderly, fraud, and
selling securities without a license. Petitioner pleaded guilty
to attempted fraud and deceit in offering securities, was placed
on probation for 16 years, and was ordered to pay restitution to
Prudential in the amount of $107,000.
In the notice of deficiency, respondent determined that
petitioner did not file returns for the taxable years 1990, 1991,
and 1992. Respondent also determined that petitioner realized
gross income for those years in the amounts of $20,436, $107,301,
and $27,381, respectively.4 The gross income determined by
respondent resulted in deficiencies of $2,269, $27,458, and
2
In fact, Prudential does not have any connection with
Project Input, Inc., nor does the Colorado Secretary of State
have a record of it.
3
Respondent's first and second requests for admission refer
to Neo Genesis Paradigm, Inc. and Neo Genesis. These are
references to the same entity.
4
Petitioner also did not file individual Federal income tax
returns for the tax years 1986-89.
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$5,998, for the taxable years 1990, 1991, and 1992, respectively.
Additionally, in the Amended Answer to Amended Petition, respon-
dent asserted that petitioner was liable for the addition to tax
for fraud under section 6651(f). In the alternative, respondent
relies on the determination in the notice of deficiency that
petitioner was liable for a 25 percent addition to tax under
section 6651(a)(1).
Petitioner filed a petition in this Court on July 11, 1994.
On December 30, 1994, the case was calendared for trial during
the trial session beginning on June 5, 1995.
On March 8, 1995, this Court granted the parties' first
Joint Motion for Continuance and continued the case for trial
from the June 5, 1995, trial session. Subsequently, on May 25,
1995, the case was again calendared for trial during the trial
session beginning on October 30, 1995. On September 7, 1995, the
Court granted the parties' second Joint Motion for Continuance,
to allow time for petitioner's recovery from brain and spinal
cord injuries. On December 6, 1995, petitioner requested an
additional 90 days in which to answer Respondent's Requests for
Admission (First Admission Request), which had been mailed to
petitioner on October 31, 1995. This Court granted the extension
of time until April 25, 1996.
Respondent's Second Requests for Admission (Second Admission
Request) was mailed to petitioner on May 21, 1996. Petitioner
did not answer either the First Admission Request or the Second
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Admission Request. Not having received a response from petition-
er, respondent filed a Motion for Summary Judgment on August 8,
1996, asking that, based on matters deemed admitted by petitioner
as set forth in respondent's requests for admission, we find
petitioner liable for the deficiencies as determined by respon-
dent in the notice of deficiency. Further, respondent asked the
Court to find that respondent had met the burden of proving that
petitioner fraudulently failed to file a Federal income tax
return for each of the years at issue. The Court ordered a
response from petitioner to respondent's Motion for Summary
Judgment on or before September 9, 1996. Petitioner failed to
respond to the Court's order. By order dated October 3, 1996,
respondent's Motion for Summary Judgment was calendared for
hearing on December 2, 1996. At the hearing, no appearance by or
on behalf of petitioner was made. The Court heard respondent's
arguments on the Motion for Summary Judgment and took it under
advisement.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Kroh v. Commissioner, 98
T.C. 383, 390 (1992); Florida Peach Corp. v. Commissioner, 90
T.C. 678, 681 (1988). Rule 121 provides that either party may
move for summary judgment upon any or all parts of the legal
issues in controversy. When either party makes such a motion,
the opposing party must file "An opposing written response,
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with or without supporting affidavits * * * within such period
as the Court may direct." Rule 121(b). Summary judgment is
appropriate "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). The moving party
bears the burden of proving that there is no genuine issue of
material fact, and factual inferences are viewed in the light
most favorable to the nonmoving party. United States v. Diebold,
Inc., 369 U.S. 654, 655 (1962); Preece v. Commissioner, 95 T.C.
594, 597 (1990). A fact is material if it "tends to resolve any
of the issues that have been properly raised by the parties."
10A Wright et al., Federal Practice and Procedure, Civil 2d, sec.
2725, at 93 (2d ed. 1983).
The facts are established by the First Admission Request and
the Second Admission Request that respondent served on petition-
er. Under Rule 90(c), matters set forth in requests for admis-
sion are deemed admitted unless an answer or objection is served
on the requesting party "within 30 days after service of the
request or within such shorter or longer time as the Court may
allow". Since petitioner in the instant case has failed to
respond to respondent's requests, the facts set forth in the
requests for admission are deemed admitted.
A. Deficiencies
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Respondent seeks summary judgment that the deficiencies and
additions to tax determined in the notice of deficiency and
amended answer be sustained. The first issue is whether peti-
tioner is liable for the deficiencies. The deficiencies are in
the amounts of $2,269, $27,458, and $5,998 for the taxable years
1990, 1991, and 1992. The deficiencies arose because petitioner
failed to file Federal income tax returns and report gross income
for the taxable years 1990, 1991, and 1992 in the amounts of
$20,436, $107,301, and $27,381, as determined in the notice of
deficiency.
Section 61 defines gross income as income from whatever
source derived. The Supreme Court has held that, when earnings
are acquired, lawfully or unlawfully, without a consensual recog-
nition of an obligation to repay and without restriction on their
disposition, there is income to the taxpayer even though he may
be required to pay restitution at a later date. James v. United
States, 366 U.S. 213, 219 (1961). This proposition has been
extended to cover situations where the taxpayer "obtained loans
in bad faith without an intent to repay them," as well as where
the taxpayer obtained money by embezzlement, as in the James
case. United States v. Swallow, 511 F.2d 514, 519-520 (10th Cir.
1975). The evidence establishes that petitioner received wage
and interest income of $20,436 in 1990. In 1991, petitioner
received $92,000 of embezzlement income as well as wage and
interest income of $15,301. Further, the evidence establishes
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that, for the taxable year 1992, petitioner received $15,000 in
embezzlement income, $1,381 in wage income, and $11,000 in
taxable cash receipts. Based on the admitted facts, we sustain
the deficiencies for 1990, 1991, and 1992, as determined in the
notice of deficiency.
B. Additions to Tax for Fraud
The second issue is whether petitioner is liable for the
additions to tax for fraud under section 6651(f). Section
6651(f) provides for a maximum addition to tax of 75 percent if
any failure to file is fraudulent.
The additions to tax in the case of fraud are civil
sanctions provided primarily as a safeguard for the protection of
the revenue and to reimburse the Government for the heavy expense
of investigation and for the loss resulting from the taxpayer's
fraud. Helvering v. Mitchell, 303 U.S. 391, 401 (1938). Respon-
dent has the burden of making a clear and convincing showing that
the failure to file a Federal income tax return for each year was
due to fraud. See Rule 142(b); sec. 7454(a). Fraud is
intentional wrongdoing on the part of the taxpayer with the
specific purpose of evading a tax believed to be owing. Petzoldt
v. Commissioner, 92 T.C. 661, 698 (1989). Fraud is shown by
proof that the taxpayer intended to conceal, mislead, or other-
wise prevent the collection of his taxes. Stoltzfus v. United
States, 398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner,
394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81. In
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evaluating petitioner's fraudulent intent under section 6651(f),
we consider the same elements as are relevant for section 6663
and former section 6653(b). See Clayton v. Commissioner, 102
T.C. 632, 652-653 (1994).
Over the years, courts have developed a number of objective
factors, or "badges", that tend to establish fraud. Recklitis v.
Commissioner, 91 T.C. 874, 910 (1988). These badges include:
(1) A pattern of understatement of income, (2) inadequate books
and records, (3) failure to file tax returns, (4) concealment of
assets, (5) failure to cooperate with tax authorities, (6) income
from illegal activities, (7) implausible or inconsistent explana-
tions of behavior, (8) an intent to mislead which may be inferred
from a pattern of conduct, (9) lack of credibility of the tax-
payer's testimony, and (10) dealings in cash. Laurins v. Commis-
sioner, 889 F.2d 910, 913 (9th Cir. 1989), affg. Norman v. Com-
missioner, T.C. Memo. 1987-265; Edelson v. Commissioner, 829 F.2d
828, 832 (9th Cir. 1987), affg. T.C. Memo. 1986-223; Petzoldt v.
Commissioner, supra at 699; Rowlee v. Commissioner, 80 T.C. 1111,
1125 (1983). Though this list of the badges of fraud is nonex-
clusive, it is illustrative. Miller v. Commissioner, 94 T.C.
316, 334 (1990).
Respondent based the Motion for Summary Judgment on the
facts set forth in respondent's requests for admission, which
were deemed admitted. Matters deemed admitted pursuant to Rule
90 are conclusively established and may be sufficient to support
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the granting of a motion for summary judgment. Morrison v.
Commissioner, 81 T.C. 644, 651 (1983). Respondent may establish
fraud by relying on facts deemed admitted under Rule 90(c).
Marshall v. Commissioner, 85 T.C. 267, 272-273 (1985); Doncaster
v. Commissioner, 77 T.C. 334, 336 (1981).
Respondent has established through petitioner's deemed
admissions that petitioner's failure to file a Federal income tax
return for each of the taxable years 1990, 1991, and 1992 was
fraudulent. Respondent has demonstrated petitioner's fraudulent
intent by establishing "badges of fraud".
The deemed admissions establish that petitioner failed to
file Federal income tax returns from taxable year 1986 through
taxable year 1992. Petitioner received payroll checks and Forms
W-2 from Prudential in 1990, 1991, and 1992. Petitioner also
submitted a false Form W-4 to Prudential for taxable year 1990.
Further, from 1991 to 1992, petitioner converted to his own use
$107,000 that he received from elderly individuals in his
capacity as a Prudential insurance agent.
To avoid summary judgment, petitioner must set forth
specific facts showing that there is a genuine issue for trial
and cannot rely upon mere allegations and denials in his peti-
tion. Rule 121(d); O'Neal v. Commissioner, 102 T.C. 666, 674
(1994). Petitioner has failed to refute the material facts on
which respondent's fraud claims are based for the taxable years
1990, 1991, and 1992. Through the deemed admission of facts set
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forth in respondent's requests for admission, respondent has
established by clear and convincing evidence that petitioner's
failure to file Federal income tax returns for the years in issue
was fraudulent. Thus, we shall grant respondent's Motion for
Summary Judgment and sustain the additions to tax for fraud
asserted in respondent's Amended Answer to Amended Petition for
the taxable years 1990, 1991, and 1992. Because we are granting
respondent's Motion for Summary Judgment for the additions to tax
for fraud, we do not need to consider respondent's alternate
position that petitioner is liable for additions to tax under
section 6651(a)(1).
To reflect the foregoing,
An order granting respondent's
Motion for Summary Judgment will be
issued, and decision will be
entered for respondent.