T.C. Memo. 2003-156
UNITED STATES TAX COURT
MICHAEL W. DUNCAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10284-02. Filed May 28, 2003.
Michael W. Duncan, pro se.
Jason W. Anderson and Kathleen C. Schlenzig, for respondent.
MEMORANDUM OPINION
CHIECHI, Judge: This case is before the Court on respon-
dent’s motion for summary judgment (respondent’s motion).
Petitioner filed a response to respondent’s motion (petitioner’s
response). We shall grant respondent’s motion.
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Background
Pursuant to the Court’s Order issued under Rule 37(c)1 on
January 23, 2003, all of the affirmative allegations in paragraph
6 of the answer, and consequently all of the facts on which
respondent relies in respondent’s motion, are deemed admitted.
Petitioner had a mailing address in Glenview, Illinois, at
the time he filed the petition in this case.
During 1990 and 1991, petitioner operated and was the
president, corporate secretary, and sole shareholder of Duncan &
Associates, Inc. (Duncan & Associates), a subchapter C corpora-
tion. During those years, Duncan & Associates engaged in the
insurance brokerage business.
As of December 31, 1989, petitioner had an outstanding loan
balance of $86,562 with respect to amounts that Duncan & Associ-
ates had lent petitioner for which that company did not charge
petitioner any interest. (We shall refer to the interest that
Duncan & Associates did not charge petitioner on his outstanding
loan from that company as forgone interest.) During 1990 and
1991, petitioner did not pay Duncan & Associates any interest on
petitioner’s outstanding loan balance with that company.
During 1990, when petitioner was approximately 42 years old,
he withdrew $10,000 from Duncan & Associates’ Money Purchase
1
All Rule references are to the Tax Court Rules of Practice
and Procedure. All section references are to the Internal
Revenue Code (Code) in effect for the years at issue.
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Pension Plan & Trust and $17,000 from Duncan & Associates’ Profit
Sharing Plan & Trust. (We shall refer collectively to those
withdrawals as petitioner’s 1990 retirement plan withdrawals.)
At all relevant times, petitioner knew that petitioner’s 1990
retirement plan withdrawals constitute income to him for 1990.
On or about April 13 and July 18, 1991, Duncan & Associates
received checks totaling $49,500, which petitioner retained
and/or deposited in his bank account. At all relevant times,
petitioner knew that $40,000 of the total $49,500 in such checks
constitutes income to him for 1991. (We shall refer to such
$40,000 of such checks as petitioner’s 1991 check amount.)
During 1990 and 1991, respectively, after taking into
account Mr. Duncan’s payments or other transfers to or on behalf
of Duncan & Associates of amounts totaling $100,900 and
$128,779.98, Duncan & Associates made payments or transfers to or
for the benefit of petitioner of amounts totaling at least
$187,8132 and $331,484. (We shall refer to those respective
amounts paid or used for petitioner’s behalf during 1990 and 1991
as petitioner’s 1990 and 1991 personal-benefit amounts.) At all
relevant times, petitioner knew that petitioner’s 1990 and 1991
2
The amounts deemed established under Rule 37(c) with re-
spect to the amounts that Duncan & Associates paid to or expended
for the benefit of petitioner during 1990 exceed the amounts for
such purposes determined in the notice of deficiency for that
year. Respondent does not claim an increased deficiency for 1990
with respect to that excess. We accept respondent’s position.
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personal-benefit amounts constitute income to him for 1990 and
1991, respectively.
At a time not disclosed by the record before September 1992,
respondent commenced examinations of petitioner and of Duncan &
Associates with respect to their respective taxable years 1990
and 1991.
On October 8, 1992, petitioner filed Federal income tax
(tax) returns for his taxable years 1990 (1990 return) and 1991
(1991 return) after the respective due dates for such returns had
passed. Petitioner did not file returns for his taxable years
1990 and 1991 until after respondent commenced an examination of
those returns because he did not want to pay the respective tax
due for such years. When petitioner filed his 1990 return and
1991 return on October 8, 1992, petitioner knew and understood
that each such return understated his income for each such year.
To illustrate, in his 1990 return and/or his 1991 return, peti-
tioner did not report as income the following: (1) The forgone
interest on petitioner’s outstanding loan balance with Duncan &
Associates for 1990 and 1991; (2) petitioner’s 1990 retirement
plan withdrawals; and (3) petitioner’s 1990 and 1991 personal-
benefit amounts, including petitioner’s 1991 check amount.
Moreover, in his 1990 return, petitioner did not report the 10-
percent additional tax imposed by section 72(t) on petitioner’s
1990 retirement plan withdrawals. In addition, although peti-
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tioner was married at the end of his taxable years 1990 and 1991,
petitioner claimed a filing status of single in his respective
returns for those years.
During respondent’s examinations of petitioner and of Duncan
& Associates with respect to their respective taxable years 1990
and 1991, petitioner fraudulently and corruptly obstructed and
impeded, and endeavored to obstruct and impede, the due adminis-
tration of the Code by knowingly creating and causing the cre-
ation of false and fraudulent documents for the purpose of
obstructing and impeding respondent’s examinations of petitioner
and of Duncan & Associates with respect to their respective
taxable years 1990 and 1991 and for the purpose of concealing
from respondent the falsity of petitioner’s return for each of
his taxable years 1990 and 1991 and of Duncan & Associates’
return for each such year.
On March 31, 1998, petitioner entered into a plea agreement
with the United States Attorney for the Northern District of
Illinois, in which petitioner pleaded guilty to one count of
obstructing and impeding the due administration of the Code in
violation of section 7212(a).3
3
Sec. 7212(a) provides:
SEC. 7212. ATTEMPTS TO INTERFERE WITH
ADMINISTRATION OF INTERNAL REVENUE LAWS.
(a) Corrupt or Forcible Interference.–-Whoever
(continued...)
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On March 20, 2002, respondent issued to petitioner a notice
of deficiency (notice) with respect to his taxable years 1990 and
1991. In that notice, respondent determined deficiencies in,
additions under section 6651(a)(1) to, and fraud penalties under
section 6663(a) on petitioner’s tax, as follows:
Addition to Tax Fraud Penalty
Year Deficiency Under Sec. 6651(a)(1) Under Sec. 6663(a)
1990 $69,655 $17,642.85 $52,241.25
1991 109,700 10,973.21 82,275.00
Respondent further determined in the notice that petitioner
has imputed dividend income for 1990 and 1991 under section 7872
of $7,089 and $7,670, respectively, as a result of the forgone
interest on petitioner’s outstanding loan balances with Duncan &
Associates during those respective years.
Respondent also determined in the notice that petitioner has
3
(...continued)
corruptly or by force or threats of force (including
any threatening letter or communication) endeavors to
intimidate or impede any officer or employee of the
United States acting in an official capacity under this
title, or in any other way corruptly or by force or
threats of force (including any threatening letter or
communication) obstructs or impedes, or endeavors to
obstruct or impede, the due administration of this
title, shall upon conviction thereof, be fined not more
than $5,000, or imprisoned not more than 3 years, or
both, except that if the offense is committed only by
threats of force, the person convicted thereof shall be
fined not more than $3,000, or imprisoned not more than
1 year, or both. The term “threats of force”, as used
in this subsection, means threats of bodily harm to the
officer or employee of the United States or to a member
of his family.
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constructive dividend income for 1990 and 1991 of $187,8134 and
$331,484, respectively, as a result of petitioner’s 1990 and 1991
personal-benefit amounts during those respective years.
Respondent further determined in the notice that petitioner
has income for 1990 of $27,000 as a result of petitioner’s 1990
retirement plan withdrawals.
Respondent also determined in the notice that petitioner is
liable for the 10-percent additional tax under section 72(t) of
$2,700 as a result of petitioner’s 1990 retirement plan withdraw-
als.
Respondent further determined in the notice that peti-
tioner’s filing status for each of his taxable years 1990 and
1991 was married filing separate.
Discussion
The Court may grant summary judgment where there is no
genuine issue of material fact and a decision may be rendered as
a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner,
98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).
All of the facts on which respondent relies in respondent’s
motion have been deemed admitted. Those facts include the
material facts on which we may proceed to resolve the issues in
respondent’s motion, including the issue relating to the fraud
penalties under section 6663(a), see, e.g., Doncaster v. Commis-
4
See supra note 2.
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sioner, 77 T.C. 334, 337 (1981). We conclude that there are no
genuine issues of material fact regarding the issues raised in
respondent’s motion.
With respect to respondent’s determinations that petitioner
has a deficiency in tax for each of the years at issue and that
he is liable for each of those years for an addition to tax under
section 6651(a)(1), on the record presented, we sustain those
determinations.5
5
In petitioner’s response, petitioner does not dispute
respondent’s determinations that he has deficiencies in tax for
the years at issue. In fact, petitioner admits in that response
that “There clearly are monies due and owing the IRS which the
petitioner admits to and wants to settle.”
Petitioner’s response, however, does not address the balance
of the issues presented in respondent’s motion. To illustrate,
petitioner’s response states in part:
The respondent has filed a motion for summary judgment
based upon lack of response and stated allegations and
to this end I (we) request that you consider mitigating
circumstances, as follows:
1. Petitioner does not have funds to hire legal
counsel needed to prepare briefs and re-
sponses to motions.
2. Petitioner [sic] records were destroyed in a
flood [sic] August 22, 2002, at a warehouse
facility in Glenview, Illinois.
3. Petitioner sustained a disabling injury re-
sulting in two (2) surgeries to his left foot
with continuing care through Mayo Clinic
Rochester, Minnesota.
4. Petitioner requests the court to consider the
six (6) year delay during which the IRS did
not assess outstanding taxes.
5. In excess of 80% of amounts due and owing IRS
are accrued interest and penalties resulting
(continued...)
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With respect to the fraud penalty under section 6663(a) that
respondent determined against petitioner for each of his taxable
years 1990 and 1991, section 6663(a) imposes a penalty equal to
75 percent of the portion of any underpayment that is attribut-
able to fraud. For purposes of section 6663(a), if the Commis-
sioner of Internal Revenue (Commissioner) establishes that any
portion of an underpayment is attributable to fraud, the entire
underpayment is to be treated as attributable to fraud, except
with respect to any portion of the underpayment that the taxpayer
establishes by a preponderance of the evidence is not attribut-
able to fraud. Sec. 6663(b). In order for the fraud penalty to
apply, the Commissioner must prove by clear and convincing
evidence, sec. 7454(a); Rule 142(b), that an underpayment exists
and that some portion of such underpayment is attributable to
fraud. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992).
To prove the existence of an underpayment, the Commissioner
5
(...continued)
from the IRS admitting to losing/misplacing
Mr. Duncan’s and Duncan & Associates’ files.
6. Petitioner and legal counsel Mr. Fred Fore-
man, former U.S. attorney [sic] for the 7th
District, requested on numerous occasions
amounts due and owing the IRS for tax years
1990 and 1991 only to be told that cases
involving fraud or allegations of fraud could
not be paid until concluded.
We note that the so-called mitigating circumstances quoted above
in paragraph 2 of petitioner’s response is inconsistent with
petitioner’s petition in which he alleges that his records for
the years at issue “were discarded due to their age”.
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may not rely on a taxpayer’s failure to carry his or her burden
of proof with respect to the underlying deficiency. Parks v.
Commissioner, 94 T.C. 654, 660-661 (1990); Petzoldt v. Commis-
sioner, 92 T.C. 661, 700 (1989). The Commissioner must prove
only that an underpayment exists, and not the precise amount of
such underpayment. DiLeo v. Commissioner, 96 T.C. 858, 873
(1991), affd. 959 F.2d 16 (2d Cir. 1992); Petzoldt v. Commis-
sioner, supra at 699-700.
Petitioner did not report as income in his 1990 return
and/or his 1991 return the following: (1) The forgone interest
on petitioner’s outstanding loan balance with Duncan & Associates
for 1990 and 1991; (2) petitioner’s 1990 retirement plan with-
drawals; and (3) petitioner’s 1990 and 1991 personal-benefit
amounts, including petitioner’s 1991 check amount. Nor did
petitioner report in his 1990 return the 10-percent additional
tax imposed by section 72(t) with respect to petitioner’s 1990
retirement plan withdrawals. Moreover, in petitioner’s response,
petitioner admits that “There clearly are monies due and owing
the IRS which the petitioner admits to and wants to settle.”
On the instant record, we find that respondent has estab-
lished by clear and convincing evidence that there was an under-
payment of petitioner’s tax for each of his taxable years 1990
and 1991.
In order to prove fraudulent intent, the Commissioner must
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prove by clear and convincing evidence that the taxpayer intended
to evade tax, which he or she believed to be owing, by conduct
intended to conceal, mislead, or otherwise prevent the collection
of such tax. Laurins v. Commissioner, 889 F.2d 910, 913 (9th
Cir. 1989), affg. Norman v. Commissioner, T.C. Memo. 1987-265;
Parks v. Commissioner, supra at 661. The existence of fraud is a
question of fact to be resolved upon consideration of the entire
record. DiLeo v. Commissioner, supra at 874; Gajewski v. Commis-
sioner, 67 T.C. 181, 199 (1976), affd. without published opinion
578 F.2d 1383 (8th Cir. 1978). Fraud is never presumed or
imputed and should not be found in circumstances which create at
most only suspicion. Toussaint v. Commissioner, 743 F.2d 309,
312 (5th Cir. 1984), affg. T.C. Memo. 1984-25; Petzoldt v.
Commissioner, supra at 699-700. Direct evidence of the requisite
fraudulent intent is seldom available. Petzoldt v. Commissioner,
supra at 699; Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).
Consequently, the Commissioner may prove fraud by circumstantial
evidence. Toussaint v. Commissioner, supra at 312; Rowlee v.
Commissioner, supra at 1123; see Marsellus v. Commissioner, 544
F.2d 883, 885 (5th Cir. 1977), affg. T.C. Memo. 1975-368.
The courts have identified a number of badges of fraud from
which fraudulent intent may be inferred, including (1) the
understatement of income, (2) the making of false and inconsis-
tent statements to revenue agents, and (3) the failure to cooper-
ate with tax authorities. See Bradford v. Commissioner, 796 F.2d
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303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Parks v.
Commissioner, supra at 664-665. Although no single factor is
necessarily sufficient to establish fraud, the existence of
several indicia constitutes persuasive circumstantial evidence of
fraud. Petzoldt v. Commissioner, supra at 700; see Bradford v.
Commissioner, supra at 307.
The record in this case contains indicia of fraud by
petitioner. When petitioner filed his returns for 1990 and 1991,
he knew and understood that each such return understated his
income for each such year. In addition, petitioner did not file
returns for his taxable years 1990 and 1991 until after respon-
dent commenced an examination of those returns because he did not
want to pay the respective tax due for such years. Moreover,
during respondent’s examinations of petitioner and of Duncan &
Associates with respect to their respective taxable years 1990
and 1991, petitioner fraudulently and corruptly obstructed and
impeded, and endeavored to obstruct and impede, the due adminis-
tration of the Code by knowingly creating and causing the cre-
ation of false and fraudulent documents for the purpose of
obstructing and impeding respondent’s examinations of petitioner
and of Duncan & Associates with respect to their respective
taxable years 1990 and 1991 and for the purpose of concealing
from respondent the falsity of petitioner’s return for each of
his taxable years 1990 and 1991 and of Duncan & Associates’
return for each such year. In addition, although petitioner was
married at the end of his taxable years 1990 and 1991, petitioner
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claimed a filing status of single in his respective returns for
those years.
Based upon our examination of the entire record before us,
we find that respondent has established by clear and convincing
evidence that petitioner intended to evade tax for his taxable
years 1990 and 1991, which he believed to be owing, by conduct
intended to conceal, mislead, or otherwise prevent the collection
of such tax.
We have considered all of petitioner’s contentions, argu-
ments, and requests that are not discussed herein, and we find
them to be without merit and/or irrelevant.
On the record before us, we shall grant respondent’s motion.
To reflect the foregoing,
An order granting respondent’s
motion and decision will be entered
for respondent.