T.C. Memo. 1997-310
UNITED STATES TAX COURT
WILLIAM J. TULLY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21041-96. Filed July 3, 1997.
William J. Tully, pro se.
Linas N. Udrys, for respondent.
MEMORANDUM OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Larry L. Nameroff pursuant to section 7443A(b)and Rules 181
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and 183.1 The Court agrees with and adopts the opinion of the
Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
NAMEROFF, Special Trial Judge: This matter is before the
Court on respondent's Motion for Summary Judgment.
Background
On June 27, 1996, respondent mailed a notice of deficiency
to petitioner determining a deficiency in the amount of $176,399
in petitioner's Federal income tax for 1992. In addition,
respondent determined that petitioner is liable for the penalty
for fraud under section 6663(a) in the amount of $132,299.
Petitioner filed a timely petition for redetermination with the
Court on September 27, 1996, at which time he was a resident of
Ontario, CA.
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 year 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 pursuant
to Rule 37(c) requesting that the Court issue an order that
undenied allegations in the answer be deemed admitted. By notice
1
All section references are to the Internal Revenue Code in
effect for the year in issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
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dated January 14, 1997, petitioner was notified of the filing of
respondent's Rule 37(c) motion and was ordered to file a reply to
respondent's answer.2 Petitioner failed to file a reply to
respondent's answer or otherwise respond to the Court's notice.
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 deficiency and penalty
set forth in the notice of deficiency. On April 7, 1997, the
Court issued an order directing petitioner to file a written
response to respondent's motion on or before May 15, 1997.
Petitioner did not respond to the Court's order.
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
2
The Court’s notice dated Jan. 14, 1997, expressly advised
petitioner of the potential consequences that would result from a
failure to file a reply.
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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);
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 during the taxable year 1992, petitioner was
engaged in the business of establishing exempt organizations.
Petitioner conducted seminars at which he encouraged people to
establish exempt organizations, and he informed people that they
could avoid income tax by conducting all their financial
transactions through exempt organizations.3 Petitioner did not
receive fees from people attending his seminars, but he used his
seminars to recruit clients for his business of establishing
exempt organizations. Petitioner also solicited clients for his
business of establishing exempt organizations through direct
mailings to accountants and certified public accountants.
3
Petitioner is apparently the same person who filed the
petition as an officer in the case of Oliver Family Foundation,
docket No. 8346-96X. See Oliver Family Found. v. Commissioner,
T.C. Memo. 1997-220.
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In establishing an exempt organization for a client,
petitioner submitted the required filings to the State of Nevada,
and obtained exempt status from the Internal Revenue Service.
Records maintained by the State of Nevada indicate that
petitioner established at least 224 exempt organizations during
the 1992 taxable year. Eleven exempt organizations were
established by petitioner for his personal use, which used the
address of petitioner’s residence, at 634 East Yale Street in
Ontario, California, or petitioner’s office, at P.O. Box 2030 in
Upland, California, as a business address. The other 213 exempt
organizations established by petitioner during 1992 were
established for petitioner’s clients. Petitioner was named as a
vice president of all of these exempt organizations.
During the year 1992, petitioner charged his clients $3,000
for each exempt organization he established. Accordingly,
petitioner derived at least $639,000 of income from his business
of establishing exempt organizations during 1992.
For the taxable year 1992, petitioner, fraudulently and with
intent to evade income tax, filed a false Federal income tax
return which omitted income. Petitioner and his wife, Luetta M.
Tully, (Mrs. Tully) filed a joint U.S. Individual Income Tax
Return, Form 1040 (hereinafter “1992 return”).4 On their 1992
4
Based upon the same notice of deficiency, Mrs. Tully filed
a separate petition, and is a petitioner in a related case docket
No. 21035-96, also currently before this Court.
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return, petitioner and Mrs. Tully reported Mrs. Tully’s net wages
received from the State Teacher’s Retirement System and the
Ontario-Montclair School District in the amount of $24,527.39.
On their 1992 return, petitioner and Mrs. Tully reported Mrs.
Tully’s interest income, received from the Ontario School
Employee Credit Union, in the amount of $124.
With the 1992 return, petitioner filed a Schedule C,
Statement of Profit and Loss from Business, for All American
Financial Services (All American). On his Schedule C, petitioner
stated that All American was a sole proprietorship in the
business of financial consulting and marketing. On his Schedule
C, petitioner reported gross receipts derived from All American
in the amount of $18,500. During the taxable year 1992,
petitioner received at least $639,000 of income, derived from his
business of establishing exempt organizations. Thus, petitioner
earned and intentionally failed to report Schedule C income in
the amount of $620,500.
Petitioner fraudulently and with the intent to evade income
tax understated taxable income for the 1992 taxable year in the
amount of $620,500. Petitioner fraudulently and with the intent
to evade income tax understated his tax liability for the taxable
year 1992 in the amount of $176,399.
In the notice of deficiency, respondent determined, inter
alia, that petitioners omitted $620,500 of income. Consistent
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with these deemed admissions, it follows that respondent is
entitled to summary judgment that petitioner is liable for the
deficiency in tax for 1992 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. 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. Edelson v. Commissioner, 829
F.2d 829, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223;
Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir. 1986),
affg. T.C. Memo. 1984-601. Respondent has the burden to prove
fraud 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).
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In the instant case petitioner is deemed to have admitted,
pursuant to Rule 37(c), that he fraudulently and with the intent
to evade taxes filed an income tax return for 1992 in which he
omitted $620,500 in income and that the underpayment of tax
required to be shown on his income tax return for 1992 is 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, omitted more than 90
percent of his income earned during 1992 and that the
underpayment of tax required to be shown on his 1992 income tax
return 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 year 1992.
In order to reflect our conclusions herein,
An order and decision granting
respondent's motion for summary
judgment will be entered.