T.C. Memo. 2000-279
UNITED STATES TAX COURT
DERECO, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 893-98. Filed August 30, 2000.
Herbert W. Linder, for respondent.
MEMORANDUM OPINION
PARR, Judge: This case is before us on respondent's motion
to dismiss for lack of prosecution. Because of the relief sought
therein, we treat the motion as a motion to dismiss for lack of
prosecution as to the deficiencies and a motion for default as to
the additions to tax for fraud.
Respondent determined the following deficiencies in
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petitioner's Federal income taxes, and additions to tax for
fraud, for petitioner's tax years ended September 30:
Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(b)(1)(A) 6653(b)(1)(B) 6653(b)
1
1988 $247,112 $185,334 --
1989 195,154 -- -- $139,746
1
50 percent of the interest due on $247,112.
All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
At the time the petition in this case was filed by D.J.
Marino, an officer of petitioner, petitioner's office was located
in Cleveland, Ohio.
Background
The petition filed in this case generally disputed
respondent's adjustments to petitioner's income. Respondent's
answer denied the material allegations of the petition and
further alleged:
6. FURTHER ANSWERING the petition, and in support
of the determination that the underpayments of tax
required to be shown on petitioner's tax returns for
the tax years ending September 30, 1988, and September
30, 1989, are due to fraud, the respondent alleges:
(a) Donald J. Marino was the president and major
shareholder of, and had direct control over, petitioner
during the years at issue.
(b) Petitioner paid certain personal expenses of
Donald J. Marino and his family.
(c) On December 22, 1987, petitioner's president
Donald J. Marino purchased a diamond necklace, diamond
tennis bracelet, and two sets of diamond earrings from
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a company known as Merka Jewelry and Trophies, Inc.,
for $29,550.00.
(d) On December 22, 1987, petitioner's president
Donald J. Marino paid $25,000.00 of the purchase price
described in subparagraph (c), above, with petitioner's
corporate check.
(e) When questioned by respondent's agent
regarding the payment described in subparagraph (d),
above, petitioner's president Donald J. Marino stated
that the purchase was for trophies.
(f) The $25,000.00 payment described in
subparagraph (d), above, was included in petitioner's
cost of goods sold on its tax return for the year ended
September 30, 1988.
(g) Petitioner provided funds to its president
Donald J. Marino to pay his and his family members'
personal expenses during the tax year ended September
30, 1988, in the amount of $253,602.00.
(h) Petitioner deducted $148,282.00 of the amount
described in subparagraph (g), above, as travel and
entertainment expenses on its tax return for the year
ended September 30, 1988.
(i) Petitioner deducted $105,320.00 of the amount
described in subparagraph (g), above, as research and
development expense on its tax return for the year
ended September 30, 1988.
(j) Petitioner directly paid and provided funds
to its president Donald J. Marino to pay his and his
family members' personal expenses during the tax year
ended September 30, 1989, in the amount of $152,706.00.
(k) Petitioner deducted the $152,706.00 amount
described in subparagraph (j), above, as travel and
entertainment expenses on its tax return for the year
ended September 30, 1989.
(l) Petitioner's president Donald J. Marino
endorsed and deposited a check in the amount of
$27,716.00 payable to petitioner from J&L Steel into
his personal bank account.
(m) The $27,716.00 described in subparagraph (l),
above, constitutes taxable income to petitioner for the
tax year ended September 30, 1988, which income was not
reported on its tax return.
(n) Petitioner deducted on its tax return for the
year ended September 30, 1988, subcontractor expenses
in the amount of $651,871.00.
(o) Petitioner only paid or incurred $294,801.00
of the subcontractor expenses described in subparagraph
(n), above.
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(p) The remaining $357,070.00 of the
subcontractor expenses described in subparagraph (n),
above, were never paid or incurred by petitioner.
(q) Petitioner deducted a depreciation expense in
the amount of $93,208.00 on its tax return for the year
ended September 30, 1989.
(r) Of the depreciation expense described in
subparagraph (q), above, $37,058.00 was taken on
equipment not owned by petitioner and/or not in
existence.
(s) Petitioner deducted repairs and maintenance
expenses in the amount of $254,708.00 on its tax return
for the year ended September 30, 1989.
(t) Of the repairs and maintenance expense
described in subparagraph (s), above, $37,780.00 was
neither paid nor incurred.
(u) Petitioner deducted a telephone expense in
the amount of $8,128.00 on its return for the year
ended September 30, 1989.
(v) Of the telephone expense described in
subparagraph (u), above, $4,860.00 was neither paid nor
incurred.
(w) Petitioner deducted an advertising expense in
the amount of $88,102.00 on its tax return for the year
ended September 30, 1989.
(x) Of the advertising expense described in
subparagraph (w), above, $20,307.00 was neither paid
nor incurred.
(y) Petitioner deducted a dues and education
expense in the amount of $7,913.00 on its tax return
for the year ended September 30, 1989.
(z) Of the dues and education expense described
in subparagraph (y), above, $3,130.00 was neither paid
nor incurred.
(aa) Petitioner deducted as other costs equipment
rental in the amount of $48,438.00 on its tax return
for the year ended September 30, 1989.
(ab) Of the equipment rental cost described in
subparagraph (aa), above, $28,500.00 was neither paid
nor incurred.
(ac) Petitioner deducted on its tax return for
the year ended September 30, 1989, subcontractor
expenses in the amount of $563,402.00.
(ad) Petitioner only paid or incurred $366,822.00
of the subcontractor expenses described in subparagraph
(ac), above.
(ae) The remaining $196,580.00 of the
subcontractor expenses as described in subparagraph
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(ac), above, were never paid or incurred by petitioner.
Finally, in subparagraphs (af) through (am), respondent
asserted that the omission of income and erroneous deductions
were due to fraud, and that petitioner understated its tax
liabilities for its taxable years 1988 and 1989 with the intent
to evade tax.
Petitioner did not file a reply. Respondent filed a motion
under Rule 37(c) asking the Court to deem admitted the
affirmative allegations set forth in paragraph 6 of his answer.
On October 27, 1998, petitioner was served with that motion
together with notice that if petitioner filed its reply as
required by Rule 37(a) and (b) on or before November 20, 1998,
respondent's motion would be denied; however, if petitioner did
not file a reply as directed, the Court would grant respondent's
motion and deem admitted the affirmative allegations in the
answer.
Petitioner did not respond to respondent's motion or the
Court's notice. Petitioner never filed its reply. Accordingly,
on November 27, 1998, the Court granted respondent's Rule 37(c)
motion and deemed admitted the affirmative undenied allegations
of respondent's Answer. On November 30, 1998, a copy of that
order was served upon petitioner.
On October 19, 1999, the Court served its notice setting
this case for trial on March 20, 2000, at a trial session of this
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Court in Cleveland, Ohio. The notice, in pertinent part, states:
"YOUR FAILURE TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE AND
ENTRY OF DECISION AGAINST YOU. * * * YOUR FAILURE TO COOPERATE
MAY ALSO RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION
AGAINST YOU."
Petitioner did not appear when the case was called from the
calendar. When petitioner did not appear at trial, respondent
advised the Court that he would not present any testimony on the
issue of the additions to tax for fraud; instead, respondent
would rely on the deemed admissions to carry his burden of proof
on this issue.
All material allegations in the petition have been denied in
respondent's answer. No issues have been raised as to petitioner
upon which the burden of proof is on respondent except the fraud
issue, and respondent has not conceded any error assigned in the
petition.
Discussion
Deficiency Determination
Respondent's determinations of fact are presumptively
correct, and petitioner bears the burden of proving otherwise.
See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioner has clearly failed to meet its burden and, in any
event, the deemed admitted affirmative allegations in
respondent's answer establish the deficiencies. See Doncaster v.
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Commissioner, 77 T.C. 334, 336 (1981); Gilday v. Commissioner, 62
T.C. 260, 261 (1974). Accordingly, we sustain respondent's
determinations as to the deficiencies.
Determination of Fraud
Respondent also moved for judgment on the fraud issue based
on the affirmative allegations of fact contained in respondent's
answer, which were deemed admitted by the order of this Court
pursuant to Rule 37(c). Respondent has the burden of proving
that some portion of each underpayment is due to fraud by clear
and convincing evidence. See sec. 7454(a); Rule 142(b); Parks v.
Commissioner, 94 T.C. 654, 660 (1990).
The facts deemed admitted establish that during the years at
issue, petitioner regularly deducted expenses that it had not
paid or incurred, including expenses of equipment that petitioner
did not own or that did not exist; that petitioner deducted as
business expenses amounts that were paid to its president for
expenses of his family; that petitioner omitted income; and that
petitioner, through its president, intentionally made false and
misleading statements to respondent's agents during the
examination of petitioner's income tax returns. Finally,
petitioner has failed to comply with the Court's pretrial orders
or the Court's other orders and failed to appear for the
scheduled trial--additional indications of deliberate efforts by
petitioner to conceal the facts concerning its tax liability.
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See Collins v. Commissioner, T.C. Memo. 1997-291.
Rule 123 provides that the failure of a party to appear at
trial or other hearing may result in an entry of decision against
such party.1 We find the facts deemed admitted sufficient to
satisfy respondent's burden of proving fraud. The foregoing
circumstances and above-pleaded admitted facts clearly establish
that petitioner fraudulently underpaid its Federal income taxes
for the years at issue. See Smith v. Commissioner, 91 T.C. 1049,
1058-1059 (1988), affd. 926 F.2d 1470 (6th Cir. 1991); Doncaster
v. Commissioner, supra at 337. Accordingly, we are satisfied
that the additions to tax for fraud should be sustained by entry
of an order pursuant to Rule 123.
To reflect the foregoing,
An appropriate order and decision
will be entered.
1
Rule 123 provides in part:
(a) Default: If any party has failed to plead or
otherwise proceed as provided by these Rules or as
required by the Court, then such party may be held in
default by the Court either on motion of another party
or on the initiative of the Court. Thereafter, the
Court may enter a decision against the defaulting
party, upon such terms and conditions as the Court may
deem proper, or may impose such sanctions * * * as the
Court may deem appropriate. * * *