Collins v. Commissioner

T.C. Memo. 1997-291

UNITED STATES TAX COURT

JOHN L. COLLINS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8501-96. Filed June 26, 1997.

John L. Collins, pro se.

William R. McCants, for respondent.

MEMORANDUM OPINION

BEGHE, Judge: This case is before the Court on respondent’s

motion under Rule 1231 for entry of decision in favor of

respondent by reason of petitioner’s default and failure properly

to prosecute. Respondent determined that petitioner is liable

1
Rule references are to the Tax Court Rules of Practice and
Procedure. Section references are to the Internal Revenue Code,
as amended.
 - 2 -

for the taxable year 1994 for a deficiency in income tax in the

amount of $24,002, a fraudulent failure to file penalty under

section 6651(f) in the amount of $18,002, and an estimated tax

penalty under section 6654 in the amount of $1,237.

Background

On May 3, 1996, petitioner timely filed his petition and was

a resident of Tampa, Florida. On July 8, 1996, respondent filed

an answer denying all material allegations in the petition and

alleging facts in paragraph 7 of the answer in support of the

determination that petitioner had an underpayment of tax for the

taxable year 1994 that was due to fraud. A copy of the answer

was served on petitioner.

Petitioner did not file a reply. On September 20, 1996,

respondent filed a motion under Rule 37(c), asking the Court to

deem admitted the affirmative allegations of fact set forth in

paragraph 7 of respondent’s answer. The Court thereupon served

petitioner with a notice of filing stating that, if “petitioner

files a reply as required by Rule 37(a) and (b) of this Court’s

Rules on or before October 10, 1996, respondent’s motion will be

denied”, and if petitioner does not reply, “the Court will grant

respondent’s motion”. Petitioner did not respond to respondent’s

motion or the Court’s notice of filing. On October 23, 1996, the

Court granted respondent’s Rule 37(c) motion, and the pleadings

in this case were closed.
 - 3 -

Paragraph 7 of respondent’s answer contains the following

allegations, which have been deemed admitted by reason of our

granting of respondent’s Rule 37(c) motion.

7. FURTHER ANSWERING the petition, and in
support of the determination that the deficiency in
income tax for the taxable year 1994 is due to fraud
with the intent on the part of petitioner to evade tax,
and that the petitioner’s failure to file a federal
income tax return for the taxable year 1994 is due to
fraud, the respondent alleges:

a). John L. Collins, a/k/a John L. Collins, Jr.,
hereinafter “petitioner,” has been consistently
involved in illegal, income-producing activities, to
and through the taxable year 1994 involved in this
case.

b). Following his 1981 arrest for burglary and
grand larceny, petitioner was convicted and sentenced
to five years’ imprisonment.

c). Following his 1985 arrest for battery and
battery on a law enforcement officer, petitioner was
convicted and sentenced to another five years’
imprisonment.

d). Pursuant to the 1985 arrest and prosecution,
petitioner filed an affidavit of insolvency dated
May 22, 1985.

e). Following his 1989 arrest for possession of
illegal drugs, grand theft, and resisting arrest,
petitioner was placed on five years’ community control.

f). Following his 1990 arrest for strong-arm
robbery, violation of probation, possession of cocaine
and resisting arrest, petitioner was sentenced to four
years’, six month’s [sic] imprisonment, to be followed
by five years’ community service.

g). Petitioner was incarcerated between
September, 1990 and August 20, 1992.
 - 4 -

h). In September, 1995, petitioner was arrested
for money laundering and heroin trafficking offenses,
and awaits trial on these offenses.

i). For the taxable years 1990 through 1995, the
taxpayer has voluntarily filed federal income tax
returns, reported income and paid tax as follows:

Gross Income Reported
Year Return Filed? Reported Source Tax Paid
1990 Yes $1,672 Wages None
1991 No None None None
1992 No None None None*
1993 Yes $39,920 (5th Amendment) $11,211
1994 No None None None
1995 No None None $1,000**

* $33 was withheld from $548 received from Easy Staff, Inc. and
T.E.L.S.I.

** Estimated payment

j). On his federal income tax return delinquently
filed for the year 1993, petitioner admitted that he
had no books and records of his income and expenses,
and no business or personal bank accounts, except for a
savings account opened in 1991.

k). For the taxable year 1994, petitioner filed
an application for an automatic extension of time to
file his 1994 income tax return, representing that his
1994 federal income tax liability was approximately
$1,000.

l). For the taxable year 1994, petitioner filed
an additional application for an extension of time to
October 31, 1994 [sic], in which to file his 1994
income tax return.

m). Petitioner has never filed a federal income
tax return for the taxable year 1994.

n). Petitioner did not pay the $1,000 liability
estimated with his application for an automatic
extension of time to file his 1994 income tax return.
 - 5 -

o). During the taxable year 1994, petitioner was
engaged in illegal, drug-related, income-producing
activities.

p). During 1994, petitioner derived substantial
unreported income from the aforementioned business
activities.

q). For the taxable year 1994, petitioner failed
to maintain complete books and records of his income-
producing activities as required by the applicable
provisions of the Internal Revenue Code and the
regulations thereunder.

r). The records that were maintained by or on
behalf of petitioner for the taxable year 1994 were
deceptive, incomplete, and failed to disclose all of
petitioner’s receipts, and were not properly reflective
of the complete, correct income of petitioner.

s). Petitioner also engaged in numerous
activities using large quantities of currency during
1994 and other years, and used friends and relatives to
hold title to his assets and to register telephones,
beepers and utilities, all to evade recordkeeping
requirements, and to avoid a “paper trail” of his
receipt of income, and accumulation of assets, and
thereby his true federal income tax liability.

t). Due to the failure of petitioner to maintain
adequate books and records of his income-producing
activities, the secretive nature of his illegal
business activities involving drugs, his use of large
amounts of currency and nominees to avoid the
respondent’s detection of his income, expenses, and
accumulation of assets, and his failure to report his
true taxable income, the respondent has been required
to determine, and has determined, the petitioner’s
correct taxable income for the taxable year 1994 under
the cash expenditures method of reconstructing income.

u). In making her determination of the
petitioner’s correct taxable income for the taxable
year 1994, the respondent has utilized all records,
memoranda and other sources of information that were
available.
 - 6 -

v). During the taxable year 1994, the petitioner
did not receive any non-taxable gifts.

w). During the taxable year 1994, the petitioner
did not receive any non-taxable inheritances.

x). During the taxable year 1994, the petitioner
did not receive any non-taxable loans to make the
expenditures reflected in respondent’s reconstruction
of petitioner’s source of funds.

y). During the taxable year 1994, the petitioner
did not rely on a cash hoard, refund, or any other non-
taxable source for the making of the expenditures
reflected in respondent’s reconstruction of his income.

z). During the taxable year 1994, the petitioner
made expenditures in the amount of at least $72,731, as
follows:

Down payment on residence at 4117 Muriel Place $ 12,862
Commission paid to real estate agent on purchase 500
Escrow deposit on above purchase 2,000
1993 tax amounts paid in 1994 5,800
Furnishings from Roberd’s 12,565
Gold jewelry (810 pennyweight @ $16 each) 12,960
Tax return preparation fees 1,800
Payments on 1993 Toyota 4-Runner 6,245
Personal living expenses per BLS for 1 person 17,999

Total $ 72,731

aa). Against his unreported income of $72,731,
petitioner was entitled to a personal exemption of
$2,450 a self-employment tax deduction of $4,731, and a
standard deduction of $3,800.

ab). Accordingly, for the taxable year 1994,
petitioner failed to report his receipt of taxable
income in the amount of at least $61,750, all with
fraudulent intent to underpay his income taxes for
1994.

ac). For the taxable year 1994, the petitioner’s
taxable income, his taxable income as reported on his
return, and his understatement of taxable income, were
as follows:
 - 7 -

1994

Taxable Income as Corrected $ 61,750
Taxable Income as Reported (no return filed) (none)
Understatement of Taxable Income $ 61,750

ad). For the taxable year 1994, the petitioner’s
correct income tax liability, the income tax liability
he reported on his return for said year, and his
understatement of income tax liability for said year,
were as follows:

1994

Correct Income Tax Liability $ 24,002.00
Income Tax Liability Reported (no return filed) (none)
Understatement of Income Tax Liability $ 24,002.00

ae). Petitioner fraudulently, and with intent to
evade tax, filed an application requesting an automatic
extension that understated his estimated 1994 federal
income tax liability by over $23,000.00.

af). Petitioner fraudulently, and with intent to
evade tax, failed to report his gross receipts, failed
to report his taxable income, and failed to report his
income tax liabilities on a federal income tax return
for the taxable year 1994.

ag). Petitioner fraudulently, and with intent to
evade tax, used false entities and names to disguise
his receipt of income.

ah). Petitioner fraudulently, and with intent to
evade tax, relied extensively on cash transactions to
avoid a “paper trail” of his receipt of income.

ai). Petitioner fraudulently, and with intent to
evade tax, failed to maintain books and records of his
income-producing activities.

aj). Petitioner fraudulently, and with intent to
evade tax, attempted to conceal his 1994 expenditures
after he became aware of the audit of his 1994 year.

ak). Petitioner also, with intent to evade tax,
delayed and neglected to fully and timely satisfy his
admitted federal income tax liability for the 1993
 - 8 -

year, by delinquently filing his 1993 return in late
May, 1994, and then delaying the payment of his 1993
admitted tax liability throughout 1994, while making
large expenditures for real estate and other assets.

al). Despite the petitioner’s arrest in 1995 and
respondent’s I.R.C. § 6861 jeopardy assessment and
immediate collection action against him, petitioner has
still failed to file any 1994 federal income tax return
reflecting his illegal income.

am). Petitioner fraudulently failed to file a
federal income tax return for the taxable year 1994.

an). All of the underpayment of tax required to
be shown on petitioner’s federal income tax return for
the taxable year 1994 is due to fraud.

On November 21, 1996, the Court served its notice setting

this case for trial at the Court's April 28, 1997, Tampa,

Florida, trial session. The notice setting the case for trial,

in pertinent part, states: “YOUR FAILURE TO APPEAR MAY RESULT IN

DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU. * * *

YOUR FAILURE TO COOPERATE MAY ALSO RESULT IN DISMISSAL OF THE

CASE AND ENTRY OF DECISION AGAINST YOU.”

On December 9, 1996, the Court filed respondent's motion for

judgment on the pleadings, in which respondent moved, "pursuant

to the provisions of Tax Court Rule 120", for "an adjudication of

this case in respondent's favor, based upon the respondent's

pleadings as deemed admitted." On December 12, 1996, the Court

ordered petitioner to file, on or before January 10, 1997, a

response to respondent's motion. The Court has never received a

response from petitioner to respondent's motion.
 - 9 -

On February 26, 1997, the Court issued an order converting

respondent’s motion to a motion for partial summary judgment,

ordered respondent, on or before March 21, 1997, to file a

supplement in support of respondent’s motion, and ordered the

motion set down for a hearing on the opening day of the Court’s

April 28, 1997, Tampa trial session. Pursuant to a timely

extension request, which the Court granted, respondent, on

March 28, 1997, filed a memorandum in response to the Court’s

order of February 26, 1997, a copy of which memorandum was served

on petitioner. Respondent’s memorandum specifically addressed

the concerns that had led the Court to convert respondent’s

motion for judgment on the pleadings to a motion for partial

summary judgment, and concluded that, by reason of petitioner’s

deemed admissions, there were no remaining genuine issues of any

material facts, and that summary judgment should be granted in

favor of respondent on all issues in this case.

On April 9, 1997, respondent served petitioner a copy of

respondent’s trial memorandum, which stated in part:

Respondent’s service of this trial memorandum will
constitute further notice to petitioner that respondent
may also move for entry of decision against petitioner
as to the tax and penalties at the April 28, 1997,
trial session based on the presumptive correctness of
the notice of deficiency, on respondent’s motion for
summary judgment and on the continued failure to
participate or cooperate in preparing the case for
trial or to participate in any manner in the trial of
this case. * * *

* * * * * * *
 - 10 -

4. A party may be defaulted for failure to comply
with the Rules of the Court or a failure to properly
prosecute his case. T.C. Rule 123(a). Additionally,
respondent may be entitled to a decision under Rule
123(a) that includes additions to the tax for fraud
when the taxpayer fails to appear at trial, or to
cooperate in preparation of the case for trial, and
respondent’s pleadings allege specific facts sufficient
to sustain a finding of fraud. Smith v. Commissioner,
91 T.C. 1049, 1052 (1988), aff’d, 926 F.2d 1470 (6th
Cir. 1991).

Petitioner did not appear at the hearing on April 28, 1997.

At the call of the case from the calendar, respondent’s counsel

made an oral motion for entry of decision in favor of respondent

because of petitioner’s failure properly to prosecute. Pursuant

to the Court’s request at the calendar call, on May 5, 1997,

respondent filed a written motion for entry of decision in favor

of respondent, asserting that none of respondent’s

correspondence, motions, or other pleadings mailed to petitioner

has been returned to respondent, that petitioner, despite his

petition invoking the jurisdiction of this Court, had made no

attempt to cooperate with respondent, to seek documents from

respondent, to assist in the preparation of this case for trial,

to respond to any of respondent’s motions, to respond to any of

the Court’s orders, to file a trial memorandum, or to move to

continue the case, and that petitioner failed to appear and

prosecute his case at the April 28, 1997, trial calendar for the

hearing on respondent’s motion, despite respondent’s attempted

contacts with and warnings to him, in violation of the Court’s
 - 11 -

Rules and the Court’s express admonishments as contained in its

November 21, 1996, notice setting this case for trial.

All material allegations in the petition have been denied in

respondent’s answer. No issues have been raised as to petitioner

upon which the burden of proof is on respondent except the fraud

issue, and respondent has not conceded any error assigned in the

petition.

Discussion

The failure of a party to appear at trial or other hearing

may result in an entry of decision against such party. Rule 123

provides, in part:

(a) Default: If any party has failed to plead or
otherwise proceed as provided by these Rules or as
required by the Court, then such party may be held in
default by the Court either on motion of another party
or on the initiative of the Court. Thereafter, the
Court may enter a decision against the defaulting
party, upon such terms and conditions as the Court may
deem proper, or may impose such sanctions (see, e.g.,
Rule 104) as the Court may deem appropriate. * * *

(b) Dismissal: For failure of a petitioner
properly to prosecute or to comply with these Rules
or any order of the Court or for other cause which the
Court deems sufficient, the Court may dismiss a case
at any time and enter a decision against the
petitioner. * * * [Fn. ref. omitted.]

Petitioner made no attempt to contact the Court upon his

failure to appear. Accordingly, we sustain respondent’s

determinations as to the deficiency and the estimated tax penalty

pursuant to section 6654 on the ground that petitioner has
 - 12 -

defaulted. See, e.g., Smith v. Commissioner, 91 T.C. 1049, 1052

(1988), affd. 926 F.2d 1470 (6th Cir. 1991).

Respondent also determined that petitioner is liable for an

addition to tax for fraud for the year in issue. When a taxpayer

fails to appear and prosecute his case, entry of a default

decision “is appropriate upon a determination in our `sound

judicial discretion’ that the pleadings set forth sufficient

facts” to support a finding that the taxpayer fraudulently

underpaid his taxes. Smith v. Commissioner, supra at 1058-1059;

see also Bosurgi v. Commissioner, 87 T.C. 1403, 1408 (1986);

Berkshire v. Commissioner, T.C. Memo. 1997-258.

Petitioner is deemed to have admitted facts sufficient to

establish his underpayment of Federal income tax for 1994. See

respondent’s answer, subparagraphs 7 o) through 7 ac), supra pp.

4-6, establishing that petitioner had unreported taxable income

of $61,750, and subparagraph 7 ad), supra p. 7, establishing

that, as a result of the foregoing, petitioner had a deficiency

in Federal income tax of $24,002 for the taxable year 1994.

Moreover, petitioner is deemed to have admitted that his failure

to file a Federal income tax return, reporting his taxable income

for 1994, was with the fraudulent intent to evade payment of his

Federal income tax for 1994. See the well-pleaded facts

concerning petitioner’s efforts to conceal and evade his tax

liability alleged in respondent’s answer, subparagraphs 7 a)

through t), and 7 ab) through an), supra pp. 3-5, 6-7,
 - 13 -

respectively. Finally, petitioner repeatedly failed to comply

with the Court’s pretrial order or to respond to any of the

Court’s other orders and failed to appear for the scheduled

hearing on respondent’s prior motion--additional indications of

deliberate efforts by petitioner to conceal the facts concerning

his tax liability. See Thornton v. Commissioner, T.C. Memo.

1995-219.

The foregoing circumstances and above-pleaded admitted facts

clearly establish that petitioner fraudulently underpaid his 1994

Federal income tax. We are therefore satisfied that the

fraudulent failure to file penalty under section 6651(f) for 1994

should be sustained by entry of an order granting respondent’s

motion for entry of decision against petitioner pursuant to Rule

123. That order will render moot respondent’s prior motion.

To reflect the foregoing,

An order and decision will

be entered for respondent.