T.C. Memo. 2000-280
UNITED STATES TAX COURT
JOSEPH J. AND EILEEN H. LIPARI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18650-97. Filed August 30, 2000.
Joseph J. Lipari and Eileen H. Lipari, pro sese.
Richard A. Rappazzo, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$44,011 in petitioners’ 1993 Federal income tax and a $8,802
accuracy-related penalty under section 6662(a).1 After
petitioners failed to appear when their case was called for
trial, the Court orally granted respondent’s motion to dismiss
1
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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for lack of prosecution. The sole matter for decision is
respondent’s motion for imposition of a section 6673 penalty.
Background
At the time the petition was filed, Joseph J. Lipari and
Eileen H. Lipari resided in Cottonwood, Arizona.
Petitioners have admitted that, during 1993, Mr. Lipari
performed services as a chiropractor. Nonetheless, petitioners
failed to report a large percentage of the income from such
activity on their 1993 income tax return. Petitioners claimed
that such income was earned by and taxable to an entity called
D.D. Trust (the Trust).2 Respondent determined that the income
reported by the Trust is properly taxable to Mr. Lipari
individually on the grounds that the Trust is a sham (i.e., lacks
economic substance) that should be disregarded for tax purposes.
Respondent alleged alternatively that, if the Trust were
respected for tax purposes, the Trust constitutes a grantor trust
whose income is taxable to petitioners.
Discovery for October 1998 Trial
This case was originally calendared for the Court’s trial
session in Phoenix, Arizona on October 19, 1998. In preparation
for trial and as required by Rule 70(a), respondent first
2
Although petitioners alleged that they enjoyed no
interest in property which was transferred to the Trust,
petitioners admitted to receiving a life tenancy to all property
owned by the Trust and further to having use of the real and
personal property owned by the Trust.
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attempted to obtain information regarding the Trust through
informal discovery requests. This attempt was unsuccessful. On
July 7, 1998, respondent proceeded with formal discovery, serving
on petitioners Respondent’s Request for Production of Documents
and Respondent’s Interrogatories to Petitioners.
Petitioners produced none of the documents requested by
respondent. Instead, petitioners submitted a response in which
they claimed to be unable to produce the requested documents on
the grounds that the documents were in the “exclusive possession
and control of Jimmy C. Chisum, Managing Agent for D & E Sword
Trustee Co., Trustee for D.D. Trust.”3 On August 17, 1998,
respondent filed with the Court a Motion to Compel Production of
Documents. On August 19, 1998, the Court ordered petitioners to
produce the requested documents by September 9, 1998.
Petitioners failed to respond to this order. On September 15,
1998, the Court granted respondent’s motion to compel and ordered
that petitioners would not be allowed to offer into evidence any
3
Petitioners contended that Mr. Chisum refused to provide
them with records of the Trust. This assertion, however, is
difficult to reconcile with petitioners’ admission that Mr.
Chisum had become a “good friend” in the years since inception of
the Trust and that the parties met “quite regularly.”
In addition, petitioners’ difficulty in obtaining documents
from the trustee appears to have been selective. As an exhibit
to Petitioners’ Response to Motion for Date and Time Certain for
Trial filed with the Court on October 5, 1998, petitioners
attached a copy of a notice of deficiency issued to the Trust for
the taxable year at issue.
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documents not produced to respondent by October 2, 1998. Once
again, petitioners failed to produce any documents in response to
this order.
In addition to not producing the documents requested by
respondent, petitioners also failed to answer respondent’s
interrogatories. On September 3, 1998, respondent filed a Motion
to Compel Responses to Respondent’s Interrogatories. On
September 8, 1998, the Court ordered petitioners to respond to
the interrogatories by September 25, 1998, and further ordered
respondent to file a status report as to petitioners’ response by
September 29, 1998. On September 21, 1998, petitioners provided
their answers to respondent’s interrogatories. After receiving
respondent’s status report, the Court reviewed petitioners’
answers. By order of October 7, 1998, the Court determined that
answers to 15 of the interrogatories were inadequate and ordered
that petitioners would not be allowed to offer into evidence
answers to such interrogatories.
Petitioners’ Bankruptcy
On October 19, 1998, at the calendar call for the trial
session in which this case was originally to be heard,
petitioners appeared with a Notice of Proceeding in Bankruptcy
reflecting that petitioners had filed a bankruptcy petition
earlier that day. In accordance with relevant provisions of the
Bankruptcy Code, all proceedings were ordered automatically
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stayed.
On October 4, 1999, petitioners’ bankruptcy case was
dismissed with prejudice. The stay of proceedings in this case
was thereafter lifted, and the case was rescheduled for trial
during the Court’s June 5, 2000, trial session.
Discovery for June 2000 Trial
Confronted with petitioners’ refusal to work toward a
stipulation of facts, respondent filed a Motion to Show Cause Why
Proposed Facts in Evidence Should Not Be Accepted as Established
on February 7, 2000. On February 8, 2000, the Court issued an
Order to Show Cause Under Rule 91(f), requiring petitioners to
respond as to why matters set forth in respondent’s motion should
not be deemed admitted. Petitioners filed a response on February
19, 2000, but such response failed to address the proposed
stipulations.
On March 3, 2000, respondent proceeded with a second attempt
at formal discovery, serving on petitioners Respondent’s Second
Set of Interrogatories, Respondent’s Second Request for
Production of Documents, and Respondent’s Requests for Admission.
Petitioners addressed these discovery requests in much the same
manner as previous ones, prompting respondent again to seek the
assistance of this Court in obtaining discovery. On
April 14, 2000, respondent filed a Motion to Compel Responses to
Respondent’s Second Request for Production of Documents. On
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April 20, 2000, respondent filed a Motion to Compel Responses to
Respondent’s Second Set of Interrogatories. On the same date,
respondent filed a Motion to Review the Sufficiency of
Petitioners’ Response to Respondent’s Requests for Admission.4
The Court granted each of respondent’s above-described
motions. On April 20 and 21, 2000, the Court ordered
petitioners, on or before May 1, 2000, to (1) produce to
respondent each and every document requested in respondent’s
second request for production of documents, (2) provide
respondent with full, complete, and responsive answers to each
and every interrogatory in respondent’s second set of
interrogatories, and (3) provide respondent with complete answers
to the requested admissions. At that time, the Court also made
absolute its Order to Show Cause Under Rule 91(f), providing that
the facts and evidence set forth in respondent’s proposed
stipulation of facts were deemed established.
On May 8, 2000, following petitioners’ failure to comply
with the above-described orders,5 respondent filed a Motion to
4
The requested admissions at issue (those for which
respondent sought Court review of petitioners’ responses)
consisted of certain statements made by Mr. Lipari under oath
during a hearing in the course of petitioners’ bankruptcy case.
Mr. Lipari objected to the requested admissions on the grounds
that he was unable to recall the detail of his prior testimony.
5
Petitioners’ only correspondence with the Court during
this time period consisted of a Motion for Enlargement of Time
filed on May 8, 2000, and a Motion to Dismiss filed on May 9,
2000. Both motions were denied.
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Impose Sanctions. By order of May 16, 2000, the Court granted
the motion and prohibited petitioners from offering into evidence
(1) any facts which petitioners should have provided in response
to respondent’s second set of interrogatories, and (2) any
documents covered by respondent’s second request for production
of documents which petitioners had failed to produce. This order
further provided that the admissions for which respondent sought
review of petitioners’ responses were deemed admitted.
June 2000 Trial Session
The trial in this case was rescheduled for a date and time
certain of June 5, 2000, at 2 p.m. At the calendar call for the
trial session held on the morning of June 5, respondent filed a
Motion to Dismiss for Lack of Prosecution and a Motion for
Penalty Under I.R.C. Section 6673(a)(1). Not only were
petitioners absent at the trial session calendar call,
petitioners also failed to appear when their case was called for
trial later that day. After noting petitioners’ absence when
their case was called for trial, the Court orally granted
respondent’s motion to dismiss for lack of prosecution. The
Court then took respondent’s motion for imposition of a section
6673 penalty under advisement.
Discussion
Section 6673(a)(1) authorizes this Court to penalize a
taxpayer who institutes or maintains a proceeding primarily for
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delay. Petitioners’ conduct in this case has convinced us that
delay was in fact the primary purpose behind this proceeding.
Petitioners’ repeated failure to comply with respondent’s
discovery requests, even in the face of orders from the Court
directing them to do so, has resulted in a waste of limited
judicial and administrative resources that could have been
devoted to resolving bona fide claims of other taxpayers. See
Cook v. Spillman, 806 F.2d 948 (9th Cir. 1986). Accordingly, we
shall grant respondent’s motion and require petitioners to pay a
penalty to the United States pursuant to section 6673 in the
amount of $12,500.
To reflect the foregoing,
An appropriate order and order
of dismissal and decision shall be
entered.