T.C. Memo. 2004-60
UNITED STATES TAX COURT
EDWARD D. TONITIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14225-01. Filed March 10, 2004.
William Randolph Klein, for petitioner.
Lorianne D. Masano, for respondent.
MEMORANDUM OPINION
COHEN, Judge: Respondent determined deficiencies and
additions to tax as follows:
Additions to Tax, I.R.C.
Year Deficiency Sec. 6651(f) Sec. 6654
1996 $9,058 $5,844.75 --
1997 13,485 10,053.75 $716.70
1998 20,731 14,001.75 843.80
1999 5,844 4,287.75 275.97
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After concessions, the issue for decision is whether petitioner’s
failure to file tax returns was due to fraud. 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
Petitioner resided in Sarasota, Florida, at the time that he
filed his petition in this case. The petition was filed by
petitioner, pro se, and set forth various frivolous tax protester
arguments. It was followed by frivolous motions. After the case
was set for trial, petitioner employed counsel and filed
delinquent Federal income tax returns for the years in issue.
Petitioner, through counsel, also entered into a Stipulation of
Settlement in which the parties agreed to reduced deficiencies
and additions to tax under section 6654.
In the answer to the petition, respondent alleged various
facts in support of the determination that petitioner’s failure
to file tax returns and underpayment of tax for the years in
issue was due to fraud. Petitioner failed to file a reply
notwithstanding a motion by respondent under Rule 37(c), and the
matters set forth in respondent’s answer are deemed admitted for
purposes of this case. Respondent then filed a motion for
summary judgment, which was set for hearing at the time of trial.
Petitioner was permitted to testify with respect to the claim of
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fraud and was, at his counsel’s request, provided an opportunity
to file a brief. He failed to file a brief. The facts set forth
below are based on the matters deemed admitted and petitioner’s
testimony at trial.
Petitioner received a degree in finance in 1994 from the
University of South Florida. After receiving his degree, he
worked as a loan officer or mortgage banker at various companies.
Eventually, he started his own mortgage brokerage business known
as Colonial Mortgage Corp.
Prior to 1996, petitioner filed individual Federal income
tax returns prepared by a certified public accountant. In 1995,
petitioner purchased two Unincorporated Business Trust
Organizations (UBTOs) from abusive trust promoter Joseph Nelson
Sweet. The two UBTOs never filed income tax returns.
Petitioner did not maintain a personal checking account
during the years in issue. He deposited his personal income into
a bank account opened in the name of one of the UBTOs.
Petitioner was the sole signatory on the bank account.
During the years in issue, petitioner received unreported
income as follows:
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1996 1997 1998 1999
Wages $16,665.00 $66,697.00 $60,904.00 $35,398
Nonemployee income 22,274.10 6,830.47 15,468.88 --
Dividends 253.00 1.00 2.00 --
“Funder” fee 2,931.00 -- -- --
Rents -- -- 2,400.00 --
S corp. income -- -- 16,867.00 10,349
Petitioner received multiple Forms W-2, Wage and Tax Statement,
and Forms 1099 from various payers for the years in issue.
Petitioner failed to maintain, or to submit to the Internal
Revenue Service (IRS) for examination, complete and adequate
books and accounts of his income-producing activities for each of
the years in issue as required by the applicable provisions of
the Internal Revenue Code and the regulations promulgated
thereunder. When the IRS requested the records and thereafter
issued a summons for them, petitioner sent letters containing
frivolous tax-avoidance arguments and filed a motion in a Florida
State court to quash the summons.
In the absence of adequate records, the IRS computed
petitioner’s taxable income for the years in issue by reference
to bank deposits, information returns, and information obtained
from third-party contacts.
Petitioner was the 100-percent shareholder of Colonial
Mortgage Corp. for 1998 and 1999. Colonial Mortgage Corp. was
formed on November 18, 1998, and made an S election on
February 1, 1999, effective November 18, 1998. Colonial Mortgage
Corp. filed corporate income tax returns and the related
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Schedules K-1, Shareholder’s Share of Income, Credits,
Deductions, etc., for 1998 and 1999.
Petitioner’s failure to report the various items of income
that he received during the years in issue, his use of sham
trusts to conceal income, his failure to cooperate in determining
his tax liability, his submission of correspondence to the IRS
espousing frivolous tax-avoidance arguments, and his 4-year
pattern of failing to file Federal income tax returns were all
done with the intent to evade tax.
Discussion
Petitioner never moved to set aside the matters deemed
admitted as a result of his failure to file a reply even when
reminded to do so under Rule 37. He has not contradicted in any
way the material facts set forth in the answer, upon which
respondent relies in support of the determination that
petitioner’s failure to file was due to fraud. He did not file
an affidavit in opposition to the motion for summary judgment.
However, petitioner was permitted to testify. See Rule 121(b),
(d). He denied that he intended to defraud the United States and
testified:
I relied on the advice of David Simmons, Joseph Sweet,
David Swanson, amongst others, that, you know, as far
as not filing was okay. I’ve seen what they’ve done,
you know, over the years for the last seven, eight
years, promoting and telling people not to do this, and
they’re out there doing it.
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Petitioner did not provide any information about the professional
qualifications of the named individuals.
Section 6651(f) provides a penalty of 75 percent of the
amount required to be shown as tax on unfiled returns if the
failure to file the returns is fraudulent. Under section
6651(f), as in any other case involving the issue of fraud with
intent to evade tax, the burden of proof with respect to that
issue is on the Commissioner, and that burden of proof is to be
carried by clear and convincing evidence. Sec. 7454(a); Rule
142(b); Clayton v. Commissioner, 102 T.C. 632, 646-653 (1994).
Badges of fraud, such as a pattern of unreported income, failing
to file returns, concealment of assets by purporting to convey
them to a trust, failure to maintain or produce records or
otherwise cooperate with the IRS, and submission of frivolous
arguments may be established as matters deemed admitted. See,
e.g., Doncaster v. Commissioner, 77 T.C. 334 (1981); Houser v.
Commissioner, T.C. Memo. 2000-111; Newton v. Commissioner, T.C.
Memo. 1998-422; Campbell v. Commissioner, T.C. Memo. 1997-415;
Collins v. Commissioner, T.C. Memo. 1997-291; Devlin v.
Commissioner, T.C. Memo. 1997-256.
Even if we were to disregard the conclusory allegations of
fraudulent intent to which petitioner admitted by failing to file
a reply, the undisputed facts would constitute clear and
convincing evidence of fraud in this case. We have considered
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petitioner’s testimony and his denial of fraudulent intent.
Petitioner acknowledged that he continued failing to file tax
returns until the eve of trial of this case. The thrust of his
testimony is that petitioner and others pursued their course of
tax protest as long as they could get away with it. See
Niedringhaus v. Commissioner, 99 T.C. 202, 218-219 (1992).
On consideration of the facts deemed admitted and
petitioner’s testimony in opposition to the motion for summary
judgment, we conclude that there is no genuine issue as to any
material fact and that a decision may be rendered as a matter of
law.
Respondent’s motion for summary judgment, as modified in the
stipulation of settled issues, will be granted.
An appropriate order and
decision will be entered.