RUOCCO v. COMMISSIONER

T.C. Memo. 2002-91

UNITED STATES TAX COURT

HOLLY RUOCCO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5561-01. Filed April 5, 2002.

Holly Ruocco, pro se.

Charles B. Burnett, for respondent.

MEMORANDUM OPINION

COHEN, Judge: Respondent determined deficiencies of $69,576

and $140,594 in petitioner’s Federal income taxes for 1996 and

1997, respectively. Respondent also determined that petitioner

is liable for a penalty of $13,915 under section 6662 for 1996

and an addition to tax of $35,148 under section 6651(a)(1) for

1997. Petitioner declined to present any evidence at trial, and
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respondent filed a Motion to Dismiss for Failure to Properly

Prosecute and for a Penalty Under I.R.C. Section 6673 (motion to

dismiss). Unless otherwise indicated, all section references are

to the Internal Revenue Code in effect for the years in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

Background

Respondent’s determinations at issue in this case are set

forth in two separate statutory notices of deficiency, both dated

January 26, 2001. The notice for 1996 was addressed to Kyle W.

Storks (Storks) and Holly L. Ruocco (petitioner). The deficiency

resulted primarily from an increase in income on Schedule C,

Profit or Loss From Business, for Canyon State Chiropractic that

was explained in the notice for 1996 as follows:

1.B SCH C–CANYON STATE
During the taxable period ended December 31, 1996,
income earned by you was incorrectly reported by Canyon
State Chiropractic and other entities. It is
determined that this income from services performed by
you in connection with Canyon State Chiropractic and
other entities is taxable to you. See enclosed audit
report. Taxable income for the taxable period ended
December 31, 1996 is increased $217,209.00.

The attached audit report showed: (1) The unreported gross

receipts or sales of Canyon State Chiropractic for 1996 were

determined as the deposits into three bank accounts less the

amounts reported on the return as filed and (2) a total of
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$100,195 in deductions claimed on the Canyon State Chiropractic

return was disallowed.

The notice of deficiency for 1997 was addressed only to

petitioner. It explained the primary adjustment as follows:

1A. SCH C–CANYON STATE
It is determined that you received income or other
distributions from your chiropractic business in the
amount of $375,400 for the taxable period ended
December 31, 1997. This amount is taxable to you
because you have not established that the income is
excluded from gross receipts under the provisions of
the Internal Revenue Code. In the absence of adequate
records, this income has been determined on the basis
of available information and by analyzing bank
deposits.

The addition to tax was based on petitioner’s failure to file a

tax return for 1997.

At the time that she filed the petition, petitioner resided

in Salem, New Hampshire. In the petition, petitioner claimed

that the determinations in the notices of deficiency were based

on “Error in attributing income to the petitioner that she did

not receive.” Petitioner also alleged that she “did not receive

any of the income alleged in the Notices of Deficiency from a

taxable source.” Petitioner designated Phoenix, Arizona, as the

place of trial of this case.

By notice served August 24, 2001, the case was set for trial

in Phoenix on January 28, 2002. Attached to the notice of trial

was a Standing Pre-Trial Order that provided, among other things:
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ORDERED that all facts shall be stipulated to the
maximum extent possible. All documentary and written
evidence shall be marked and stipulated in accordance
with Rule 91(b), unless the evidence is to be used to
impeach the credibility of a witness. Objections may
be preserved in the stipulation. If a complete
stipulation of facts is not ready for submission at
trial, and if the Court determines that this is the
result of either party’s failure to fully cooperate in
the preparation thereof, the Court may order sanctions
against the uncooperative party. Any documents or
materials which a party expects to utilize in the event
of trial (except for impeachment), but which are not
stipulated, shall be identified in writing and
exchanged by the parties at least 15 days before the
first day of the trial session. The Court may refuse
to receive in evidence any document or material not so
stipulated or exchanged, unless otherwise agreed by the
parties or allowed by the Court for good cause shown.
* * *

On November 27, 2001, respondent’s counsel sent a letter to

petitioner seeking informal exchange of documents, expressing the

Government’s position, and advising petitioner as follows:

Enclosed are copies of some materials for your
review. Notice 97-24 and the opinion in the case
George v. Commissioner, T.C. Memo. 1999-381, both
describe the government’s position in cases involving
trusts similar to yours. I am also enclosing copies of
the following additional cases: Universal Trust
06-15-90 v. Commissioner, T.C. Memo. 2000-390; Lipari
v. Commissioner, T.C. Memo. 2000-280; and Johnston v.
Commissioner, T.C. Memo. 2000-315. You will note that
the Tax Court has taken a very dim view of Mr. Chisum
and his clients for the positions they have taken.

* * * * * * *

As you have not met with Service during the
examination and consideration by the Appeals Office,
this matter has not been developed and your position on
the issues in this case is not known. It is not
possible for either of us to prepare adequately for
trial. This wastes our time and the court’s time and
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resources. As I mentioned to you on the telephone, if
your claims prove to be frivolous, you should be aware
of I.R.C. section 6673, which provides:

(a)(1) Procedures instituted primarily for
delay, etc.--Whenever it appears to the Tax Court
that–-

(1)(A) proceedings before it have been
instituted or maintained by the taxpayer primarily
for delay,

(1)(B) the taxpayer’s position in such
proceeding is frivolous or groundless, or

(1)(C) the taxpayer unreasonably failed
to pursue available administrative remedies,

the Tax Court, in its decision, may require the
taxpayer to pay to the United States a penalty not
in excess of $25,000.

(Emphasis added.) We routinely pursue sanctions under
this section in cases of non-cooperation, and we may do
so in your case as well.

(A copy of that letter was attached to respondent’s pending

motion to dismiss.)

On December 17, 2001, respondent filed a Motion to Show

Cause Why Proposed Facts in Evidence Should not be Accepted as

Established (motion to show cause). Attached to respondent’s

motion to show cause was a proposed stipulation that, among other

things, set forth facts for 1996 and 1997 that included the

following: Petitioner was married to Storks; petitioner and

Storks resided in Arizona; and petitioner was licensed as a

chiropractor by the State of Arizona. Prior to 1996, petitioner

practiced her profession at Canyon State Chiropractic. Prior to
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1996, Canyon State Chiropractic was operated as a sole

proprietorship. Canyon State Chiropractic LLC was created on or

about August 14, 1996. Canyon State Chiropractic LLC had three

named members: Storks, petitioner, and Taurus Enterprises.

Storks and petitioner continued to control the business

operations of Canyon State Chiropractic after the creation of the

LLC.

The proposed stipulation stated that petitioner filed a

joint Form 1040, U.S. Individual Income Tax Return, with Storks

for 1996 but did not file an income tax return for 1997. A copy

of a Form 1065, U.S. Partnership Return of Income, filed by

Canyon State Chiropractic LLC for 1996 and a Notice of Final

Partnership Administrative Adjustment (FPAA) sent to the

partnership for 1996 were attached to the proposed stipulation.

The proposed stipulation also stated that there was no petition

filed with the Tax Court in response to the FPAA, Canyon State

Chiropractic LLC did not file a return for 1997, and Taurus

Enterprises did not file any tax returns for 1996 or 1997.

Finally, copies of various records of the bank accounts that were

used by respondent in determining petitioner’s gross receipts for

1996 and 1997 were attached to the proposed stipulation. Among

the records were bank statements, addressed to Canyon State

Chiropractic Clinic, petitioner, and Storks, and signature cards

for two of the three bank accounts. One of the signature cards
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bore the signature of petitioner and another bore the signature

of J.C. Chisum.

On December 18, 2001, the Court’s Order to Show Cause Under

Rule 91(f) was issued, and petitioner was directed to show cause,

on or before January 10, 2002, why the facts set forth in

respondent’s motion paper should not be accepted as established

for purposes of the pending case. The Order further stated:

If no response is filed within the period specified
above with respect to any matter or portion thereof, or
if the response is evasive or not fairly directed to
the proposed stipulation or portion thereof, that
matter or portion thereof will be deemed stipulated for
purposes of the pending case, and an order will be
entered accordingly, pursuant to Rule 91(f)(3).

On January 14, 2002, the Court received from petitioner a

Motion for a Date and Time Set Certain for Trial, dated

January 10, 2002. On January 15, 2002, the Court instituted a

conference telephone call with the parties. The Court explained

that petitioner’s motion for a date and time certain for trial

could not be granted because it conflicted with a trial

previously set. The Court also advised petitioner that her

response to the order to show cause had not been received. The

nature of petitioner’s response, which apparently had been mailed

but not delivered to the Court, was described. Petitioner’s

response (a copy of which was attached to respondent’s motion to

dismiss) was not fairly directed to the proposed stipulation or

any portion thereof but raised frivolous legal objections and
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asserted that the Tax Court rule regarding stipulation “runs

afoul of the Fifth Amendment.” During the conference telephone

call with the parties, the Court advised petitioner that she

faced several problems in this case, including the necessity of

showing that the bank deposits in issue were not payment for her

services and that income received by the chiropractic clinic

should be treated as community property. The Court further

advised her that business deductions to which she might be

entitled had not been allowed and that penalties were likely to

be imposed because this case appeared to be similar to other

recent cases involving similar facts. Petitioner insisted that

respondent had the burden of proof. The Court indicated that

respondent could satisfy his burden by introducing the bank

records into evidence. Petitioner stated that the records

relating to the deductions were in storage. The Court suggested

that, if petitioner made a good faith attempt to secure the

records and to abandon the meritless arguments previously made by

her, then, and only then, the Court would consider a continuance

of the case. Petitioner stated that she would contact

respondent’s counsel concerning the matters discussed.

After the conference telephone call, the Court’s order to

show cause was made absolute. On January 18, 2002, the Court

received from petitioner a Motion to Continue, in which

petitioner repeated her erroneous legal arguments. In addition,
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petitioner asserted that the Court had incorrectly concluded who

has the burden of proof in this case and complained that the

Court’s comments during the conference telephone call were

indicative of bias and incompetence.1 The Motion to Continue was

denied. (There is no explanation in the record why the documents

that petitioner wishes the Court to have, such as the Motion for

a Date and Time Set Certain for Trial and the Motion to Continue,

are timely delivered to the Court, while other documents, such as

petitioner’s trial memorandum and her response to the order to

show cause, are delayed due to problems with receipt of the

Court’s mail.)

On January 25, 2002, petitioner’s Motion to Recuse was

filed. Petitioner also filed a Motion in Limine seeking to

preclude respondent’s attributing income to petitioner either

from the limited liability company or from a trust that

respondent characterized as sham or as a grantor trust.

1
Substantially identical motions to recuse based on this
conference telephone call were filed in other cases on the
Phoenix calendar; in the same cases, other substantially
identical documents had repeatedly been filed. Those cases
include Broderick v. Commissioner, docket Nos. 432-00 and
2070-01; Burke v. Commissioner, docket No. 13410-00; Cahill v.
Commissioner, docket No. 303-01; Frentheway v. Commissioner,
docket No. 8041-00; Lehmann v. Commissioner, docket No. 1008-01.
All of these cases appear to involve trusts of the sort that have
been consistently held ineffective to avoid tax on services
rendered by taxpayers. See, e.g., Johnston v. Commissioner, T.C.
Memo. 2000-315 n.2; Lipari v. Commissioner, T.C. Memo. 2000-280;
George v. Commissioner, T.C. Memo. 1999-381.
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Petitioner also filed a Motion to Dismiss and a motion to

reconsider the Court’s order to show cause. In her various

motions and in her trial memorandum, petitioner contends that

respondent has the burden of proving unreported income, that

certain issues are not properly before the Court, and that the

Court’s stated position on burden of proof is so erroneous as to

show bias and prejudice. Petitioner’s motions were denied.

When the case was called for trial, respondent’s counsel

acknowledged that, after the conference telephone call, he had

received a list of checks for 1996 that purportedly supported

deductions claimed by petitioner. The list, a copy of which is

attached to respondent’s motion to dismiss, includes payments for

things such as student loans, a wedding present, and aquarium

supplies that are patently personal and not deductible. Because

petitioner was not prepared to proceed to trial, the Court stated

that she would be held in default but that she could move to set

aside the default in 30 days upon making an offer of proof.

Repeating her position that the Government has the burden of

proof, petitioner requested that the trial proceed. The case was

set for trial on January 30, 2002.

At the time of trial, respondent’s motion to dismiss was

filed, and respondent reported that no progress had been made

with respect to potential deductions. Petitioner restated her

position that “the Government has the burden of proof
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notwithstanding the Court’s previous statement.” Respondent’s

counsel stated that he was not relying on any alternative

theories and would proceed on the assignment of income theory

reflected in the notices of deficiency. In response to the

Court’s inquiry, respondent declined to make any concession based

on community property income because “it’s not uncommon in this

state for professionals to have some arrangement with respect to

community property.” Petitioner declined to present evidence,

after being advised again by the Court that the stipulated bank

records satisfied the Government’s burden. Petitioner declined

to testify or to identify the person advising her on the

erroneous legalistic arguments set forth in her filings, citing

the Fifth Amendment. Petitioner did, however, identify her 1996

and 1997 renewal applications for her license with the Arizona

State Board of Chiropractic Examiners, which reflected her office

address as Canyon State Chiropractic.

Respondent’s motion to dismiss was taken under advisement,

and petitioner was advised that, while the Court was awaiting the

transcripts to be used in preparing this opinion, she might

respond to the motion, make an offer of proof, and present

records dealing with deductions to respondent’s counsel. Nothing

has been received from petitioner indicating that she has

abandoned her erroneous and frivolous positions in this case.
 - 12 -

Discussion

Petitioner contends that the Court’s statements in the

conference telephone call concerning burden of proof indicate

bias in favor of respondent and prejudice against petitioner.

She apparently draws this inference because the Court’s

statements coincided with statements made by respondent in

letters that were sent to petitioner by respondent during the

course of trial preparation. Those letters were not seen by the

Court until respondent’s motion to dismiss was filed. Both

respondent’s letters and the Court’s statement were based on well

established law and are thus not grounds for recusal. See, e.g.,

Noli v. Commissioner, 860 F.2d 1521 (9th Cir. 1988); United

States v. Cowden, 545 F.2d 257, 265 (1st Cir. 1976); Rowlee v.

Commissioner, 80 T.C. 1111, 1117, and cases cited in n.4 (1983).

Petitioner’s unrelenting view of the burden of proof in this

case has no merit. That contention made in indistinguishable

circumstances was thoroughly discussed in Johnston v.

Commissioner, T.C. Memo. 2000-315, cited in respondent’s November

2001 letter to petitioner, as follows:

it is * * * clear that the Commissioner may satisfy the
predicate evidence requirement in unreported income
cases by introducing evidence linking the taxpayer to
tax-generating acts. See Shriver v. Commissioner, 85
T.C. 1, 4 (1985). Alternatively, respondent may
satisfy the predicate evidence requirement by showing
the taxpayer was connected to unexplained bank deposits
or cash. See Schad v. Commissioner, 87 T.C. 609, 618-
 - 13 -

620 (1986) (discussing Court of Appeals for the Ninth
Circuit authorities); Tokarski v. Commissioner, 87 T.C.
74 (1986). [Fn. ref. omitted.]

The record contains ample evidence linking
petitioner both to tax-generating acts and to bank
deposits of the income generated by those acts. * * *

Once respondent has shown evidence of gross receipts, even in the

criminal or civil fraud context, petitioner has the burden of

showing offsets or deductions reducing the taxable income. See,

e.g., United States v. Shavin, 320 F.2d 308, 310-311 (7th Cir.

1963); Elwert v. United States, 231 F.2d 928, 933-936 (9th Cir.

1956); Brooks v. Commissioner, 82 T.C. 413, 433 (1984), affd.

without published opinion 772 F.2d 910 (9th Cir. 1985).

Petitioner’s obligation with respect to deductions is

indisputable. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); Rockwell v. Commissioner, 512 F.2d 882 (9th Cir. 1975),

affg. T.C. Memo. 1972-133. She presented no credible evidence on

any issue of fact. See sec. 7491(a). The stipulated facts

satisfy respondent’s burden of production with respect to the

penalties. See sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-449 (2001).

Petitioner’s Motion to Recuse, as well as the various other

motions filed shortly before or at the calendar call, were

patently designed to delay and obstruct the determination of

petitioner’s correct tax liability. The thrust of some of
 - 14 -

petitioner’s motions is that the Internal Revenue Service (IRS)

would be required to proceed against either a trust or a limited

liability company rather than proceeding against petitioner

directly. The notices of deficiency, however, determined that

the deposits into specific bank accounts were income for services

performed by petitioner. Petitioner raised the entity theory,

and respondent’s arguments that the entities should be

disregarded as sham or that the trust was, in the alternative, a

grantor trust were raised in defense of petitioner’s arguments.

In any event, the IRS may proceed on alternative theories and

alternative notices in the circumstances indicated by the record

in this case. See Clapp v. Commissioner, 875 F.2d 1396, 1402

(9th Cir. 1989); Criss v. Commissioner, T.C. Memo. 2002-62;

Universal Trust 06-15-90 v. Commissioner, T.C. Memo. 2000-390.

The stipulation proposed by respondent, the motion for order

to show cause under Rule 91, the order to show cause, and the

order deeming facts stipulated for purposes of this case were all

consistent with Rule 91. The statements made in the stipulation

and the documents attached to it were all matters “which fairly

should not be in dispute.” See Rule 91(a). Petitioner did not

raise at any time a dispute as to the factual accuracy of the

stipulation. Her objections related solely to her erroneous
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theory about respondent’s burden of proof and her Fifth Amendment

privilege.

Petitioner’s assertion that the other party has the burden

of proof is not a sufficient objection to a proposed stipulation.

Rule 91(a) specifically states that “The requirement of

stipulation applies under this Rule without regard to where the

burden of proof may lie with respect to the matters involved.”

See, e.g., Console v. Commissioner, T.C. Memo. 2001-232.

Petitioner’s argument that Rule 91(f) could not be applied

without violating her Fifth Amendment privilege must be rejected.

The phrase that comes readily to mind was first used by the U.S.

Supreme Court in United States v. Sullivan, 274 U.S. 259, 264

(1927), to wit, a taxpayer may not “draw a conjurer’s circle

around the whole matter” of his or her tax liability. See also

Steinbrecher v. Commissioner, 712 F.2d 195, 198 (5th Cir. 1983),

affg. T.C. Memo. 1983-12; McCoy v. Commissioner, 696 F.2d 1234

(9th Cir. 1983), affg. 76 T.C. 1027 (1981); Edwards v.

Commissioner, 680 F.2d 1268 (9th Cir. 1982), affg. an unreported

decision of this Court; United States v. Carlson, 617 F.2d 518,

523 (9th Cir. 1980). In a civil tax case, the taxpayer must

accept the consequences of asserting the Fifth Amendment and

cannot avoid the burden of proof by claiming the privilege and

attempting to convert “the shield * * * which it was intended to
 - 16 -

be into a sword”. United States v. Rylander, 460 U.S. 752, 758

(1983); see Steinbrecher v. Commissioner, supra; Traficant v.

Commissioner, 89 T.C. 501 (1987), affd. 884 F.2d 258 (6th Cir.

1989).

The matters deemed stipulated in this case, in addition to

satisfying respondent’s burden of presenting predicate evidence

connecting petitioner to the income determined by respondent,

lead us to conclude that the income in question was community

property, only half of which is taxable to petitioner. The

stipulated facts and exhibits establish that the amounts

deposited went into accounts controlled by petitioner and her

former husband, both of whom were performing services for Canyon

State Chiropractic. Whether the services were performed by

petitioner or by her former husband, payments received for those

services constituted community property. See Ariz. Rev. Stat.

sec. 25-211 (2000). Although respondent’s counsel speculated

that there might be an agreement between the parties with respect

to community income, such agreement would be unlikely to allocate

all of the income to petitioner. We conclude, therefore, that

the decision to be entered in this case should reflect

recomputation of petitioner’s tax liability based on attributing

to her one-half of the bank deposits originally determined to be
 - 17 -

income to her. See United States v. Mitchell, 403 U.S. 190

(1971); Shea v. Commissioner, 112 T.C. 183, 193 (1999).

Rule 123 provides:

(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 (see, e.g., Rule
104) as the Court may deem appropriate. The Court may,
in its discretion, conduct hearings to ascertain
whether a default has been committed, to determine the
decision to be entered or the sanctions to be imposed,
or to ascertain the truth of any matter.

(b) 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.

(c) Setting Aside Default or Dismissal: For
reasons deemed sufficient by the Court and upon motion
expeditiously made, the Court may set aside a default
or dismissal or the decision rendered thereon.

(d) Effect of Decision on Default or Dismissal: A
decision rendered upon a default or in consequence of a
dismissal, other than a dismissal for lack of
jurisdiction, shall operate as an adjudication on the
merits.

See also Rule 149(b). We conclude that respondent’s motion to

dismiss should be granted. However, the decision to be entered
 - 18 -

will reflect recomputation of the deficiencies to reduce the

unreported income attributed to petitioner in accordance with

this opinion.

Even though petitioner’s tax liability will be reduced from

that determined in the notices of deficiency, we conclude that a

penalty under section 6673 should be imposed. The reduction in

petitioner’s tax liability is not based on any evidence produced

or arguments made by petitioner. The arguments made by

petitioner have long been discredited and were asserted only for

purposes of delay. Petitioner was warned in correspondence from

respondent’s counsel and in the conference telephone call with

the Court prior to trial that her arguments lacked merit and had

been the basis for sanctions in prior cases. She nonetheless

persisted in making them and failed to take advantage of

opportunities provided to her to establish her correct tax

liability. Based on the record in this case, a penalty is

appropriate in the amount of $12,500. See Lipari v.

Commissioner, T.C. Memo. 2000-280.

To reflect the foregoing,

An appropriate Order

will be issued.