T.C. Memo. 1997-387
UNITED STATES TAX COURT
KENNETH A. WEINER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 663-93. Filed August 25, 1997.
Kenneth A. Weiner, pro se.
William G. Bissell, for respondent.
MEMORANDUM OPINION
LARO, Judge: Respondent moves pursuant to Rule 1211 for an
order granting summary judgment in respondent's favor.
Respondent's motion for summary judgment is based on matters
1
Rule references are to the Tax Court Rules of Practice
and Procedure, and section references are to the Internal Revenue
Code in effect for the years in issue.
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deemed admitted by reason of petitioner's failure to respond to
requests for admission served by respondent under Rule 90.
Respondent determined deficiencies for 1984 and 1985 based on
petitioner's failure to report gross income received from his
participation in an investment scheme. The resulting
deficiencies in income tax and additions to tax are as follows:
Additions to Tax1
Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2)
1984 $547,778 $273,889 50% of the
interest due
on $547,778
2
1985 953,134 476,567 50% of the
interest due
on $953,134
1
In the event that the fraud addition to tax is not
sustained, respondent asserted in the alternative the negligence
addition to tax pursuant to sec. 6653(a).
2
The face of the notice of deficiency incorrectly lists the
deficiency for 1985 as $975,113. The summary contained therein,
however, correctly lists the deficiency as $953,134.
Based on matters deemed admitted, respondent claims that
there is no genuine issue of material fact as to either
petitioner's liability for deficiencies in his 1984 and 1985
income tax or petitioner's liability for the fraud additions
under section 6653(b)(1) and (2). The Court ordered petitioner
to respond to respondent's motion on or before June 20, 1997.
Petitioner failed to do so. Petitioner was incarcerated in the
Federal Penitentiary in Bastrop, Texas, when he petitioned the
Court.
We hold for respondent on all issues.
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Background
Petitioner petitioned the Court on January 11, 1993, to
redetermine respondent's determination of deficiencies and
additions. On August 18, 1993, this case was calendared for
trial at the trial session commencing on January 24, 1994.
Beginning in November 1993, petitioner filed with the Court seven
separate motions for continuance. The Court granted the seventh
motion on July 18, 1996, and this case was calendared for trial
at the trial session commencing on April 14, 1997.
On January 29, 1997, respondent served petitioner with
requests for admission. The admissions requested were, in
pertinent part, as follows:
3. The petitioner filed an individual income tax
return, Form 1040, for each of the years 1984 and 1985.
He reported gross income of $46,825.00 for 1984 and
$73,762.00 for 1985, and reported tax liabilities of
$7,783.00 and $21,979.00 for 1984 and 1985,
respectively. * * *
4. The petitioner * * * was charged with multiple
counts of wire fraud under 18 U.S.C. §1343, mail fraud
under 18 U.S.C. §1343, interstate transportation of
property taken by fraud under 18 U.S.C. §2314,
conspiracy to defraud the United States under 18 U.S.C.
§371, and filing false income tax returns under 26
U.S.C. §7206(1) for the years 1984 and 1985 * * *.
* * * * * * *
6. The petitioner's objective [in conducting the
investment scheme] was to defraud the United States by
conducting the financial and banking activities of the
investment scheme in a manner which was not readily
traceable, by failing to maintain records of the
financial activities of the investment scheme, and by
failing to report to appropriate government agencies
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the financial activities of the investment scheme as
required by law. * * *
* * * * * * *
7. The unlawful combination, conspiracy,
confederation, and agreement was to be accomplished by
the following means and methods:
a. The petitioner * * * used numerous
bank accounts, maintained in various names,
including COMSEC Corporation * * * to conduct
the financial activities of the investment
scheme, for the purpose of concealing the
financial activities of the investment
scheme.
b. The petitioner * * * conducted much
of the business of the investment scheme in
currency and cashier's check, for the purpose
of hindering and preventing the tracing of
the financial activities of the investment
scheme.
c. The petitioner * * * failed to
maintain accurate books and records of the
financial activities of the investment scheme
as required by law * * *.
* * * * * * *
8. In furtherance of the conspiracy and to
effect the objects thereof, the following acts were
done and performed by or on behalf of the petitioner
* * *:
a. On or about May 17, 1982, the
petitioner caused the incorporation of COMSEC
Corporation under Michigan law.
b. On or about April 18, 1993, the
petitioner * * * opened a savings account
* * * at the American Federal Savings and Loan,
Detroit, Michigan.
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c. On or about July 23, 1982, the
petitioner * * * opened a checking account in
the name of COMSEC Corporation at the
Michigan National Bank, Detroit, Michigan.
d. On or about July 23, 1982, the
petitioner * * * opened a savings account in
the name of COMSEC Corporation at the
Michigan National Bank, Detroit, Michigan.
e. On or about May 14, 1984, the
petitioner * * * opened a checking account
* * * at the Manufacturers Bank, Detroit,
Michigan.
f. On or about October 25, 1984, the
petitioner * * * opened a checking account in
the name of COMSEC Corporation at the
Michigan National [B]ank, Detroit, Michigan.
g. On or about April 8, 1985, the
petitioner * * * opened an account in the
name[] of COMSEC Corporation at the Comerica
Bank, Detroit, Michigan.
* * * * * * *
i. On or about April 8, 1985, the
petitioner * * * opened a savings account in
the name of COMSEC Corporation at the
Comerica Bank, Detroit Michigan.
j. On or about May 28, 1985, the
petitioner * * * opened a checking account in
the name of COMSEC Corporation at the
Manufacturers Bank, Detroit, Michigan.
k. On or about January 7, 1985, the
petitioner was added as an authorized signer
for an existing checking account in the name
of Associated Medical Research at the
Manufacturers Bank, Detroit, Michigan.
l. On or about January 7, 1985, * * *
petitioner opened a checking account in the
name of Associated Medical Research at the
Manufacturers Bank, Detroit, Michigan.
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m. During the calendar years 1984 and
1985, the petitioner * * * used accounts
described above for the receipt and
disbursement of funds relating to the
investment scheme.
n. During the calendar years 1984 and
1985, the petitioner received approximately
$100,000 in currency from banking
transactions relating to the investment
scheme * * *.
o. During the calendar years 1984 and
1985, the petitioner used over $800,000 in
investment scheme funds to purchase cashiers
checks payable to himself * * *.
* * * * * * *
10. On or about April 15, 1985, the petitioner
filed his federal individual income tax return for the
calendar year 1984, which income tax return was not
true and correct in that he did not report his income
from his involvement in the investment scheme.
11. On or about October 17, 1986, the petitioner
filed his federal individual income tax return for the
calendar year 1985, which income tax return was not
true and correct in that he did not report his income
from his involvement in the investment scheme.
12. In a jury verdict dated January 14, 1991, the
aforementioned Michigan district court found petitioner
guilty on all counts pertaining to him of the
superseding indictment. * * *
* * * * * * *
16. The petitioner omitted all of his income in
the amounts of $1,100,411.00 received in 1984 and
$1,905,387.00 received in 1985 from the investment
scheme, from his 1984 and 1985 income tax returns,
respectively, and filed these returns with the
fraudulent intent to evade the tax due on that income.
17. As a result of not reporting the
aforementioned amounts of income, the petitioner
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understated his income and his tax liability for the
years 1984 and 1985.
[18]. The deficiencies in income tax for the
taxable years 1984 and 1985 are due, in whole or in
part, to the petitioner's fraudulent intent to evade
income tax.
[19]. A part of the underpayment of the tax
required to be shown on the petitioner's income tax
returns for each of the years 1984 and 1985 is due to
fraud.
Petitioner failed to respond to respondent's requests for
admission as required by Rule 90(c). Thereafter, on April 8,
1997, the Court granted petitioner's eighth motion for
continuance to allow petitioner time to recover from an
operation. This case was calendared for trial at the trial
session commencing on September 15, 1997.
On May 13, 1997, respondent filed with the Court a motion
for summary judgment asking that, on the basis of matters deemed
admitted by petitioner as set forth in respondent's requests for
admission, we find petitioner liable for deficiencies and
additions to tax. The Court on May 14, 1997, ordered a response
from petitioner to respondent's motion for summary judgment to be
received or on before June 20, 1997. The order was returned as
unclaimed; petitioner had vacated his last known address without
informing the Court of a change in address as required by Rule
21(b)(4). In addition to failing to respond to the Court's
order, petitioner has not filed any motion to withdraw the deemed
admissions pursuant to Rule 90(f).
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Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials of phantom factual issues.
Kroh v. Commissioner, 98 T.C. 383, 390 (1992); Shiosaki v.
Commissioner, 61 T.C. 861, 862 (1974). 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). Because summary
adjudication decides an issue against a party before trial, we
grant such a remedy cautiously and sparingly and only after
carefully ascertaining that the moving party has met all the
requirements for summary adjudication. Associated Press v.
United States, 326 U.S. 1, 6 (1945); Espinoza v. Commissioner,
78 T.C. 412, 416 (1982).
The Court will not resolve disagreements over material
factual issues through summary adjudication. Espinoza v.
Commissioner, supra at 416. The moving party bears the burden
of proving that there is no genuine issue of material fact, and
factual inferences are viewed in a light most favorable to the
nonmoving party. United States v. Diebold, Inc., 369 U.S. 654,
655 (1962); Kroh v. Commissioner, supra at 390. A fact is
material if it "tends to resolve any issues that have been
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properly raised by the parties". 10A Wright & Miller, Federal
Practice and Procedure: Civil, sec. 2725, at 93 (2d ed. 1983).
A. Deficiencies for 1984 and 1985
The first issue is whether petitioner is liable for the
deficiencies. Respondent moves the Court to hold as a matter of
law that petitioner owes deficiencies of $547,778 and $953,134
for 1984 and 1985, respectively. Under Rule 90(c), matters set
forth in requests for admission 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 has failed
to respond to respondent's requests, the facts as set forth
therein are deemed admitted and are a sufficient basis on which
to grant respondent's motion for summary judgment as to the
deficiencies. Coninck v. Commissioner, 100 T.C. 495, 496 (1993);
Marshall v. Commissioner, 85 T.C. 267, 271-272 (1985); Freedson
v. Commissioner, 65 T.C. 333, 334-336 (1975), affd. on another
issue 565 F.2d 954 (5th Cir. 1978).
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
recognition of an obligation to repay, there is income to the
taxpayer. James v. United States, 366 U.S. 213, 219 (1961).
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In James, the Court stated that "This standard brings wrongful
appropriations within the broad sweep of 'gross income'". Id.
Petitioner is deemed to have admitted facts which establish
substantial, intentional omissions of taxable income for 1984 and
1985. The deemed admissions establish that petitioner was a
participant in an investment scheme from which he received over
$1 million from investors in 1984 and nearly $2 million from
investors in 1985. Specifically, petitioner is deemed to have
admitted under Rule 90(c) that:
10. [he] filed his federal individual income tax
return for the calendar year 1984, which income tax
return was not true and correct in that he did not
report his income from his involvement in the
investment scheme.
11. [he] filed his Federal income tax return for
the calendar year 1985, which income tax return was not
true and correct in that he did not report his income
from his involvement in the investment scheme.
* * * * * * *
16. [he] omitted all of his income in the amounts
of $1,100,411.00 received in 1984 and $1,905,387.00
received in 1985 from the investment scheme, from his
1984 and 1985 income tax returns, respectively * * *.
17. [he] understated his income and his tax
liability for the years 1984 and 1985.
The deemed admissions establish that there is no genuine issue of
material fact with respect to the deficiencies in issue.
Marshall v. Commissioner, supra at 271-272; Freedson v.
Commissioner, supra at 334-336. We grant summary judgment to
respondent with respect to those deficiencies.
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B. Section 6653(b)(1) and (2) Additions to Tax for Fraud
The second issue is whether petitioner is liable for the
additions to tax for fraud under section 6653(b)(1) and (2).
The additions to tax for 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 the loss resulting from the taxpayer's fraud." Helvering v.
Mitchell, 303 U.S. 391, 401 (1938).
Fraud is defined as intentional wrongdoing on the part of
the taxpayer with the specific purpose of evading a tax believed
to be owing. Mitchell v. Commissioner, 118 F.2d 308, 310 (5th
Cir. 1941), revg. 40 B.T.A. 424 (1939); Petzoldt v. Commissioner,
92 T.C. 661, 698 (1989). Section 7454 provides in pertinent part
that "In any proceeding involving the issue whether the
petitioner has been guilty of fraud with intent to evade tax, the
burden of proof in respect of such issue shall be upon the
Secretary." Rule 142(b) requires that this burden be carried by
clear and convincing evidence. Castillo v. Commissioner, 84 T.C.
405, 408 (1985).
For the fraud additions to be imposed, there must be an
underpayment of tax required to be shown on the return that is
due to fraud. Fraud is shown by proof that the taxpayer intended
to conceal, mislead, or otherwise prevent the collection of his
or her taxes, and that there is an underpayment of tax. Spies v.
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United States, 317 U.S. 492, 499 (1943); Stoltzfus v. United
States, 398 F.2d 1002, 1005 (3d Cir. 1968); Webb v. Commissioner,
394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81;
Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).
Because matters deemed admitted pursuant to Rule 90 are
conclusively established and may be sufficient to support the
granting of a motion for summary judgment, respondent may
establish fraud by relying on petitioner's deemed admissions.
Marshall v. Commissioner, supra at 272-273; Morrison v.
Commissioner, 81 T.C. 644, 651 (1983); Doncaster v. Commissioner,
77 T.C. 334, 336 (1981). Petitioner is deemed to have admitted
under Rule 90(c) that:
16. [he] omitted all of his income in the amounts
of $1,100,411.00 received in 1984 and $1,905,387.00
received in 1985 from the investment scheme, from his
1984 and 1985 income tax returns, respectively, and
filed these returns with the fraudulent intent to evade
the tax due on that income.
* * * * * * *
[18]. [t]he deficiencies in income tax for the
taxable years 1984 and 1985 are due, in whole or in
part, to the petitioner's fraudulent intent to evade
income tax.
[19]. [a] part of the underpayment of the tax
required to be shown on the petitioner's income tax
returns for each of the years 1984 and 1985 is due to
fraud.
Courts have relied on a number of indicia of fraud in
deciding section 6653(b) cases. Indicia of fraud include:
(1) A pattern of understatement of income, (2) maintaining
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inadequate books and records, (3) failing to file tax returns,
(4) giving implausible or inconsistent explanations of behavior,
(5) concealing assets, (6) failing to cooperate with taxing
authorities, (7) engaging in illegal activities, (8) attempting
to conceal illegal activities, (9) dealing in cash, and (10)
failing to make estimated tax payments. Recklitis v.
Commissioner, 91 T.C. 874, 910 (1988). Although no single factor
is necessarily dispositive on the issue of fraud, the existence
of several indicia is persuasive circumstantial evidence.
Petzoldt v. Commissioner, supra at 700. We proceed by addressing
the indicia of fraud that are relevant to the case at hand.
Respondent has affirmatively shown various indicia of fraud
committed by petitioner. First, petitioner's understatement of
income in 1984 and 1985 indicates fraud. Through the deemed
admitted facts, respondent has established that over a 2-year
period petitioner engaged in a pattern of concealing substantial
amounts of income. Petitioner received substantial income from
his involvement in the investment scheme in 1984 and 1985 which
he failed to report on his 1984 and 1985 Federal income tax
returns. This is strong evidence of an intent to evade tax.
Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), affg.
T.C. Memo. 1959-172.
Second, the handling of one's affairs in such a way as to
avoid making records usual in transactions, the concealment of
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assets, and extensive dealings in cash support an inference of
fraud. Spies v. United States, supra at 499; Parks v.
Commissioner, 94 T.C. 654, 664-665 (1990) (purchase of cashier's
checks to avoid filing of Currency Transaction Reports).
Beginning in 1982, petitioner opened 10 separate checking and
savings accounts. Then, in a series of transactions, petitioner,
among other things, converted over $800,000 in investor funds
into cashier's checks made payable to himself in order to avoid
creating a transactional record in the corporate accounts.
Respondent has established, through petitioner's deemed
admissions, that petitioner's objective was to defraud the United
States by conducting the financial and banking activities of the
investment scheme in a manner that was not readily traceable.
And finally, in addition to the various indicia of fraud
that are present, we consider as evidence of fraud petitioner's
conviction under section 7206(1) for filing a false income tax
return. In Wright v. Commissioner, 84 T.C. 636, 643 (1985), this
Court concluded that a prior conviction under section 7206(1)
does not collaterally estop a petitioner from contesting a fraud
determination under section 6653(b). However, a conviction for
willful falsification, while not dispositive, is evidence of
fraud. Id. at 643-644. On January 14, 1991, petitioner was
found guilty under section 7206(1) on two counts of filing false
income tax returns for 1984 and 1985.
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In conclusion, the deemed admissions by petitioner that he
understated income, concealed assets, dealt extensively in cash,
and was convicted for filing a false income tax return establish
by clear and convincing evidence that the underpayments of income
tax on his 1984 and 1985 income tax returns were due in their
entirety to fraud.
Respondent's motion for summary judgment will be granted.
To reflect the foregoing,
An appropriate order
will be issued, and decision will
be entered.