T.C. Memo. 1999-232
UNITED STATES TAX COURT
STEPHEN MARTIN BEDDOW, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22932-93. Filed July 13, 1999.
Stephen Martin Beddow, pro se.
Trevor T. Wetherington and Armand G. Begun, for respondent.
MEMORANDUM OPINION
LARO, Judge: Petitioner petitioned the Court on October 25,
1993, to redetermine respondent's determination of deficiencies
in petitioner's Federal income tax for 1986 and 1987. By notice
of deficiency dated August 9, 1993, respondent determined
petitioner had unreported income generated from the sale of
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illegal drugs. The resulting deficiencies in income tax and
additions to tax are as follows:
Additions to Tax
Year Deficiency 6653(b)(1)(A) 6653(b)(1)(B) 6654
1986 $5,511 $4,133 * $267
1987 4,198 3,149 * 227
*Fifty percent of the interest due on the deficiency.
We decide the following issues:
1. Whether petitioner's case should be dismissed in part
for failure to prosecute properly. We hold it should.
2. Whether petitioner is liable for the addition to tax for
fraud under section 6653(b)(1)(A) and (B) for 1986 and 1987. We
hold he is.
Unless otherwise stated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Background
Petitioner resided in Milan, Michigan, when he filed his
petition.1 Petitioner operated a restaurant during 1986 but shut
down operations by 1987. During 1986 and 1987, petitioner
engaged in several illegal drug transactions involving the
purchase and sale of cocaine. Petitioner conducted the illegal
1
Petitioner was incarcerated in a Federal correctional
institution when he filed his petition but was released at the
time this case was set for trial.
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transactions in cash and did not maintain books and records
memorializing the transactions. Petitioner received $38,528 and
$34,976 in cash from cocaine sales during 1986 and 1987,
respectively, but he failed to file Federal income tax returns
for those years.
Douglas Louzon (Louzon)2 was petitioner's longtime
acquaintance and confidante. Louzon agreed to cooperate with
Federal law enforcement officers in their investigation of
petitioner's drug activities, including their investigation that
centered around petitioner's conduct in 1986 and 1987. Louzon
wore a secret wire and engaged petitioner in several
conversations wherein petitioner openly discussed his drug sales,
boasted about his income from the sales and about extravagant
purchases, and expressed his dislike for the Internal Revenue
Service and taxes. On October 10, 1990, petitioner was convicted
of the following offenses in the United States District Court for
the Western District of Michigan: (1) Conspiracy to possess with
intent to distribute controlled substances; (2) monetary
transaction in property derived from illegal activity; (3)
laundering of monetary instruments; and (4) income tax evasion.
Among the issues of fact determined in the criminal case were
2
By 1987, Douglas Louzon had been convicted of several
felonies including malicious destruction of property, carrying a
concealed weapon, bank robbery, and possession of stolen
property.
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that petitioner willfully failed to file his 1987 Federal income
tax return and attempted to evade or defeat his 1987 income taxes
in violation of section 7201.
Petitioner filed a 1984 Federal income tax return, and he
was aware of his obligation to file returns for 1986 and 1987.
Respondent determined petitioner had unreported income from drug
sales in 1986 and 1987 in the amounts of $38,528 and $34,976,
respectively.
Petitioner's case was originally calendared for trial in
1995. After we granted three continuances, the Court instructed
petitioner to appear for trial on March 15, 1999, in Detroit,
Michigan. Petitioner failed to do so. Petitioner also failed to
comply with the Court's order to file a trial memorandum and to
participate in the stipulation process. Respondent moved under
Rule 123(b) to dismiss the case as to those issues on which
petitioner bore the burden of proof; to wit, the deficiencies and
additions to tax under section 6654. Respondent proceeded to
trial on the fraud issue.
Discussion
We first decide whether petitioner's inaction in this case
warrants dismissal and entry of decision against him for all
issues upon which petitioner has the burden of proof. We hold it
does. Rule 123(b) provides:
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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. The Court
may, for similar reasons, decide against any party any
issue as to which such party has the burden of proof,
and such decision shall be treated as a dismissal for
purposes of paragraphs (c) and (d) of this Rule.
Sanction by dismissal is exercised at the discretion of the trial
court. See Levy v. Commissioner, 87 T.C. 794, 803 (1986).
Dismissal may properly be granted where the party’s failure to
comply is due to willfulness, bad faith, or fault. See Dusha v.
Commissioner, 82 T.C. 592, 599 (1984). A case may be dismissed
for failure properly to prosecute when petitioner fails to appear
at trial and does not otherwise proceed with the litigation of
his claim. See Basic Bible Church v. Commissioner, 86 T.C. 110,
114 (1986); Ritchie v. Commissioner, 72 T.C. 126, 128-129 (1979);
Ulery v. Commissioner, T.C. Memo. 1990-409.
Petitioner ignored most of respondent's communications and
failed to meet with respondent. Petitioner disobeyed the letter
and spirit of the standing pretrial order and the Court's Rules,
failing to either participate in the stipulation process or file
a trial memorandum. The only contact petitioner had with
respondent was a phone call wherein he stated he was unsure
whether he would proceed to trial. Petitioner never submitted to
respondent any documentation in support of his position in this
case and took no meaningful steps towards resolving this case.
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We find petitioner has failed properly to prosecute his
case. He did not appear for his trial, he has disobeyed this
Court's order, and he has failed to cooperate with respondent.
We find that these failures were due to petitioner’s willfulness,
bad faith, or fault. We shall grant respondent’s motion and
dismiss in part this case for failure properly to prosecute.
This leaves the issue of whether petitioner is liable for
the additions to tax for fraud determined by respondent.
Respondent must prove fraud by clear and convincing evidence.
See sec. 7454(a); Rule 142(b); Rowlee v. Commissioner, 80 T.C.
1111, 1123 (1983); Drabiuk v. Commissioner, T.C. Memo. 1995-260.
Fraud requires a showing that the taxpayer intended to evade a
tax known or believed to be owing. See Stoltzfus v. United
States, 398 F.2d 1002, 1004 (3d Cir. 1968). In order to carry
his burden as to fraud, respondent must prove that: (1)
Petitioner underpaid his tax in each year, and (2) some part of
each underpayment was due to fraud. See Roots v. Commissioner,
T.C. Memo. 1997-187; Lee v. Commissioner, T.C. Memo. 1995-597;
Merlino v. Commissioner, T.C. Memo. 1993-200. Under section
6653(b)(1)(A) and (B), if respondent establishes that some part
of petitioner’s underpayment was due to fraud, the entire
underpayment is treated as attributable to fraud unless
petitioner proves otherwise. See sec. 6653(b)(2). The mere fact
that we have sustained respondent's deficiency determination does
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not mean that petitioner underpaid his taxes for purposes of the
additions to tax for fraud. See Parks v. Commissioner, 94 T.C.
654, 660-661 (1990); Fields v. Commissioner, T.C. Memo. 1996-425.
Following our careful review of the record, we conclude that
respondent has clearly and convincingly proven that petitioner
underpaid his taxes for each year in issue. See sec. 6653(c)(1)
(an “underpayment” generally is the same as a “deficiency” under
sec. 6211). The record clearly convinces us that petitioner had
gross income in 1986 and 1987, and that he should have filed
returns and reported that income. The first prong is satisfied.
As to the second prong, fraud is defined as an intentional
wrongdoing designed to evade tax believed to be owing. See
Miller v. Commissioner, 94 T.C. 316, 332 (1990). The existence
of fraud is a question of fact. See Gajewski v. Commissioner, 67
T.C. 181, 199 (1976), affd. without published opinion 578 F.2d
1383 (8th Cir. 1978). Fraud is never presumed or imputed; it
must be established by independent evidence that establishes a
fraudulent intent on the taxpayer’s part. See Otsuki v.
Commissioner, 53 T.C. 96, 106 (1969). For respondent to prevail,
he must show that petitioner intended to conceal, mislead, or
otherwise prevent the collection of taxes. See Korecky v.
Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986), affg. per
curiam T.C. Memo. 1985-63; Stoltzfus v. United States, supra at
1004; Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968),
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affg. T.C. Memo. 1966-81; Rowlee v. Commissioner, supra at 1123.
Because direct proof of a taxpayer’s intent is rarely available,
fraud may be proven by circumstantial evidence, and reasonable
inferences may be drawn from the relevant facts. See Spies v.
United States, 317 U.S. 492, 499 (1943); Stephenson v.
Commissioner, 79 T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th
Cir. 1984); Collins v. Commissioner, T.C. Memo. 1994-409.
We often rely on certain indicia of fraud in deciding the
existence of fraud. Although no single factor is necessarily
sufficient to establish fraud, the presence of several indicia is
persuasive circumstantial evidence of fraud. See Beaver v.
Commissioner, 55 T.C. 85, 93 (1970). The “badges of fraud”
include: (1) Understatement of income; (2) inadequate records;
(3) failure to file tax returns; (4) implausible or inconsistent
explanations of behavior; (5) concealing assets; (6) failure to
cooperate with tax authorities; (7) income from illegal
activities; (8) an intent to mislead which may be inferred from a
pattern of conduct; and (9) dealings in cash. See Bradford v.
Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.
1984-601; Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989);
Rowlee v. Commissioner, supra at 1125. These “badges of fraud”
are nonexclusive, and we may consider other facts indicating
fraud. See Niedringhaus v. Commissioner, 99 T.C. 202, 211
(1992).
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Regarding 1987, petitioner was convicted of income tax
evasion pursuant to section 7201. As a result, petitioner is
collaterally estopped from denying liability for civil fraud with
respect to 1987. See Gray v. Commissioner, 708 F.2d 243, 246
(6th Cir. 1983), affg. T.C. Memo. 1981-1; Roots v. Commissioner,
supra. The second prong is met for 1987.
As to 1986, the "badges of fraud" are plentiful, including
that petitioner: (1) Failed to file a Federal income tax return,
(2) engaged in illegal activities, (3) dealt in cash, (4) failed
to keep books and records of his illegal activities, (5)
attempted to conceal activities from law enforcement, and (6)
failed to make estimated tax payments. Perhaps the best evidence
of petitioner's fraudulent intent came straight from his mouth.
Petitioner's deceitful conduct and motives were unknowingly
documented by secret audio tape, the transcript from which was
evidence in this case. Petitioner bragged about the thousands of
dollars in cash he made from dealing in drugs and about
extravagant cash purchases of gems and a boat. He expressed his
desire to get his money offshore to avoid taxes. We are
convinced petitioner knew that he owed taxes on his 1986 income
and that he intended to evade the tax. The second prong is
satisfied for 1986.
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Viewing the record as a whole, we are satisfied respondent
has met his burden of proving fraud in 1986 and 1987, and we
sustain respondent's determination.
To reflect the foregoing,
An appropriate order will
be issued, and decision will be
entered for respondent.