T.C. Memo. 1999-137
UNITED STATES TAX COURT
CARL C. POSTON III and SHEREA A. POSTON, Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14172-98. Filed April 26, 1999.
John L. Green, for petitioners.1
Deborah Swann and Derek B. Matta, for respondent.
MEMORANDUM OPINION
DAWSON, Judge: This case was assigned to Chief Special
Trial Judge Peter J. Panuthos pursuant to the provisions of
1
John L. Green filed an entry of appearance for petitioners
after respondent filed the pending motion but before the hearing
in this matter. Mr. Green did not respond to the pending motion
or otherwise participate in the hearing on this matter.
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section 7443A(b)(4) and Rules 180, 181, and 183.2 The Court
agrees with and adopts the opinion of the Special Trial Judge,
which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
PANUTHOS, Chief Special Trial Judge: This case is before
the Court on respondent's Motion for Partial Summary Judgment
filed pursuant to Rule 121. As discussed in greater detail
below, we will grant respondent's motion.
Background
Respondent determined deficiencies in and additions to
petitioners' Federal income taxes for the years and in the
amounts as follows:
Additions and Penalties
Sec. Sec. Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6653(b)(1)(A) 6653(b)(1)(B) 6653(b)(1) 6663
1987 $9,921 --- $7,441 50% of interest --- ---
on underpayment
due to fraud
1988 36,492 --- --- --- $27,369 ---
1989 13,488 $3,364 --- --- --- $10,116
1990 28,619 7,083 --- --- --- 21,464
1991 55,391 13,749 --- --- --- 41,543
1992 40,029 7,951 --- --- --- 30,022
1993 87,539 --- --- --- --- 65,654
Petitioners invoked the Court's jurisdiction by filing a
timely petition for redetermination. At the time the petition
was filed, petitioners resided in Houston, Texas.
2
All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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Respondent filed an answer to the petition denying all
substantive allegations of fact and error contained in the
petition. In addition, respondent made affirmative allegations
of fact in support of respondent's determination that petitioners
are liable for additions to tax for fraud. Specifically,
respondent alleged that petitioners: (1) Failed to file timely
income tax returns for the years 1987 through 1992; (2) failed to
cooperate with the revenue agent conducting the audit of their
tax liability for 1987 through 1993; (3) failed to maintain
and/or provide respondent with complete and accurate records
concerning their income and expenses; (4) failed to provide the
account numbers or bank names for all accounts that they
maintained during tax years 1987 through 1993; (5) fraudulently
and with the intent to evade the payment of tax understated gross
receipts in the amounts of $84,245.08, $166,894.49, $230,670.52,
$248,756.27, $359,718.81, $292,114.15, and $453,071.47 for tax
years 1987 through 1993, respectively; (6) fraudulently and with
the intent to evade the payment of tax failed to report $3,035
and $1,000 of other income received during tax years 1987 and
1992, respectively; (7) fraudulently and with intent to evade the
payment of tax claimed false net operating loss carry forwards in
the amounts of $19,455, $29,091, $36,439, $38,680, and $99,818 on
their income tax returns for 1988 through 1993, respectively;3
3
The correct tax years with respect to this allegation are 1988
through 1992.
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(8) fraudulently and with intent to evade tax understated their
taxable income in the amounts of $54,565, $137,811, $96,049,
$135,050, $284,935, $301,132, and $241,608 for the tax years 1987
through 1993, respectively; and (9) fraudulently understated and
failed to pay their income tax liabilities in the amounts of
$9,921, $36,492, $13,488, $28,619, $55,391, $40,029, and $87,539
for the tax years 1987 through 1993, respectively.
Petitioners failed to file a reply to respondent's answer
within the time permitted by Rule 37(a). Respondent moved,
pursuant to Rule 37(c), for entry of an order that the undenied
allegations in the answer be deemed admitted. The Court gave
petitioners notice of respondent's motion and instructed
petitioners to file a reply as required by Rule 37(a) and (b).
The Court's notice was returned to the Court marked "Unclaimed".
Petitioners did not respond to respondent's motion.
Accordingly, the Court granted respondent's motion and deemed
admitted the undenied affirmative allegations of fact set forth
in respondent's answer.
Respondent subsequently filed a Motion for Partial Summary
Judgment. Respondent contends that the allegations in the answer
that petitioners are deemed to have admitted provide a basis for
entry of partial summary judgment sustaining respondent's
determination that petitioners are liable for additions to tax
for fraud for the years in issue.
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The Court issued an order directing petitioners to file a
response to respondent's Motion for Partial Summary Judgment and
setting the motion for hearing at the Court's motions session in
Washington, D.C. Petitioners did not file a response to
respondent's motion. Shortly before the scheduled hearing, John
L. Green filed an entry of appearance for petitioners.
Counsel for respondent appeared at the hearing and offered
argument in support of respondent's motion. No appearance was
entered at the hearing by or on petitioners' behalf.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. See 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
genuine issue as to any material fact and that a decision may be
rendered as a matter of law." Rule 121(b). The party opposing
the motion cannot rest upon the allegations or denials in the
pleadings, but must "set forth specific facts showing that there
is a genuine issue for trial." Rule 121(d). "The moving party,
however, bears the burden of proving that there is no genuine
issue of material fact, and factual inferences will be read in a
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manner most favorable to the party opposing summary judgment."
Marshall v. Commissioner, 85 T.C. 267, 271 (1985).
Respondent determined that petitioners are liable for the
additions to tax for fraud, which requires respondent to
establish, by clear and convincing evidence, that there is an
underpayment of tax and that some portion of that underpayment is
due to fraud. See sec. 7454(a); Rule 142(b); DiLeo v.
Commissioner, 96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir.
1992).
"Facts deemed admitted pursuant to Rule 37(c) are considered
conclusively established and may be relied upon by the government
even in relation to issues where the government bears the burden
of proof." Baptiste v. Commissioner, 29 F.3d 1533, 1537 (11th
Cir. 1994), affg. T.C. Memo. 1992-198; see also Doncaster v.
Commissioner, 77 T.C. 334, 336-338 (1981) (holding that deemed
admissions under Rule 37(c) are sufficient to satisfy the
government's burden of proof with respect to the issue of fraud).
"Fraud is defined as an intentional wrongdoing designed to
evade tax believed to be owing." Petzoldt v. Commissioner, 92
T.C. 661, 698 (1989). Fraud will never be presumed. See Beaver
v. Commissioner, 55 T.C. 85, 92 (1970). It may, however, be
proved by circumstantial evidence. See Otsuki v. Commissioner,
53 T.C. 96, 106 (1969). Courts have relied on a number of
indicia or badges of fraud in deciding whether to sustain the
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Commissioner's determinations with respect to the additions to
tax for fraud including: (1) Understating income, (2) maintaining
inadequate records, (3) failing to cooperate with tax
authorities, and (4) failing to make estimated tax payments. See
Recklitis v. Commissioner, 91 T.C. 874, 910 (1988).
In the instant case, the deemed admissions pursuant to Rule
37(c) include petitioners' admission to a number of indicia of
fraud. Specifically, petitioners are deemed to have admitted
that they: (1) Failed to file timely income tax returns for the
years 1987 through 1992; (2) failed to cooperate with the revenue
agent conducting the audit of their tax liability for 1987
through 1993; (3) failed to maintain and/or provide respondent
with complete and accurate records concerning their income and
expenses; (4) failed to provide the account numbers or bank names
for all accounts that they maintained during tax years 1987
through 1993; (5) fraudulently and with the intent to evade the
payment of tax understated gross receipts in the amounts of
$84,245.08, $166,894.49, $230,670.52, $248,756.27, $359,718.81,
$292,114.15, and $453,071.47 for tax years 1987 through 1993,
respectively; (6) fraudulently and with the intent to evade the
payment of tax failed to report $3,035 and $1,000 of other income
received during tax years 1987 and 1992, respectively; (7)
fraudulently and with intent to evade the payment of tax claimed
false net operating loss carry forwards in the amounts of
$19,455, $29,091, $36,439, $38,680, and $99,818 on their income
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tax returns for 1988 through 1992, respectively; (8) fraudulently
and with the intent to evade tax understated their taxable income
in the amounts of $54,565, $137,811, $96,049, $135,050, $284,935,
$301,132, and $241,608 for the tax years 1987 through 1993,
respectively; and (9) fraudulently understated and failed to pay
their income tax liabilities in the amounts of $9,921, $36,492,
$13,488, $28,619, $55,391, $40,029, and $87,539 for the tax years
1987 through 1993, respectively.
Based on the foregoing, we conclude that respondent has
satisfied the burden of proving, by clear and convincing
evidence, that the entire underpayment of tax for each of the
years in issue was due to fraud. Accordingly, we sustain
respondent's determination that petitioners are liable for
additions to tax for fraud for the years in issue.
To reflect the foregoing,
An order granting Respondent's
Motion for Partial Summary Judgment
will be issued.