T.C. Memo. 2005-51
UNITED STATES TAX COURT
PAUL F. AND BARBARA J. BASILE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
BASILE HEALTH CENTER, DC, PC, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 2900-02, 2901-02. Filed March 17, 2005.
Paul F. Basile and Barbara J. Basile, pro sese.
James N. Beyer, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: These consolidated cases are before the
Court on respondent’s motion for judgment by default pursuant to
Rule 123.1 By separate notices of deficiency, respondent
1
Unless otherwise indicated, all section references are to
(continued...)
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determined the following deficiencies, additions to tax, and
penalties with respect to petitioners’ Federal income taxes:
Paul F. and Barbara J. Basile
Addition to tax Accuracy-related
delinquency penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1996 $255,805 $25,581 $51,161
1997 203,462 -- 40,692
Basile Health Center, DC, PC
Addition to tax Accuracy-related
delinquency penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1997 $154,126 $38,532 $30,825
Respondent conceded in his motion for judgment by default,
however, that the deficiencies, additions to tax, and penalties
with respect to petitioners’ Federal income taxes are less than
those originally determined and are as follows:
Paul F. and Barbara J. Basile
Addition to tax Accuracy-related
delinquency penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1996 $110,901 $11,090 $22,180
1997 82,583 -- 16,517
1
(...continued)
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. Monetary amounts are rounded to the nearest dollar.
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Basile Health Center, DC, PC
Addition to tax Accuracy-related
delinquency penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1997 $55,971 $13,994 $11,194
Petitioners filed separate petitions to redetermine the
deficiencies and related penalties. We consolidated these cases
(hereinafter this case) for trial, briefing, and opinion,
pursuant to Rule 141(a), because they present common issues of
fact and law.
Background
Paul and Barbara Basile (the Basiles) are licensed
chiropractors. Basile Health Center, DC, PC (BHC), is one of
several business entities the Basiles have used to conduct their
chiropractic practice.
On January 10, 2002, respondent issued a notice of
deficiency to the Basiles in which he determined that certain
entities the Basiles used in running their chiropractic practice
were shams, and that the Basiles had used those entities to
underreport their income. Respondent also determined that the
Basiles had not established that they qualified for the disabled
access credit, that certain computational adjustments were
necessary, and that the Basiles were liable for deficiencies in
their income taxes, penalties, and an addition to tax.
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On January 10, 2002, respondent also issued a notice of
deficiency to BHC in which he determined that BHC had not
established that it was qualified to deduct certain claimed
expenses. Respondent also determined that BHC was liable for a
deficiency in its income tax, a penalty, and an addition to tax.
The Basiles and BHC invoked the jurisdiction of this Court
on February 5, 2002, by the timely filing of their petitions.
The Basiles resided in Orefield, Pennsylvania, when their
petition was filed. BHC’s mailing address was the same as the
Basiles’ Orefield, Pennsylvania, address when its petition was
filed. Petitioners’ representative at the time of the filings,
Robert N. Bedford (Mr. Bedford), designated Tampa, Florida, as
the place of trial.
The Basiles’ only allegations of error in their petition are
as follows:
The service based their assessment upon a denial
of legitimate business structures such as corporations
designed to provide legal protections as provided by
the law. The service also denied legitimate business
deductions that are available under Code Section 162.
There is also a question of any assessment at this time
for 1996 because the statute of limitations has expired
for that year.
BHC’s only allegation of error in its petition is that “The
service based their assessment upon a disallowance of certain
expenses.”
On April 5, 2002, respondent’s answers to the petitions were
filed. Respondent denied that he erred as alleged. Respondent’s
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answer to the Basiles’ petition also included the following
allegations in support of the timeliness of the Basiles’ notice
of deficiency for 1996:
(a) The petitioners’ joint income tax return for
the taxable year 1996 was filed on October 14, 1997.
(b) The amount of gross income stated in the
income tax return filed by the petitioners for the
taxable year 1996 was $115,600.
(c) During the taxable year 1996, the petitioners
received additional income of $602,514 from their
chiropractic practice through corporations or trusts
which should be disregarded as sham entities * * *.
Said amount of additional income was not included in
the gross income stated in the return filed by
petitioners for the taxable year 1996, and there was
not disclosed on the return or in a statement attached
thereto the fact that such amount was received during
said year.
(d) Petitioners did not borrow or receive from
nontaxable sources any funds, or other assets, not
properly taken into account by the respondent which
would cause or account for the additional income as set
forth above.
(e) The additional gross income that petitioners
received and that was omitted from the income tax
return they filed for the taxable year 1996 is in
excess of 25 percent of the gross income reported in
such return.
(f) The notice of deficiency setting forth the
respondent’s determination of the deficiencies for the
taxable year 1996 was timely sent to the petitioners by
certified mail on October 12, 2001, which date was
prior to the expiration of the six-year period for
assessment applicable under I.R.C. § 6501(e)(1)(A).
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In the answer to BHC’s petition, respondent included specific
allegations that BHC’s 1997 tax return was due on September 15,
1998, but that BHC did not file the return until May 28, 1999.
Petitioners did not file replies to respondent’s answers.
By notice dated May 23, 2002, we set this case for trial at
the Tampa, Florida, trial session beginning on October 28, 2002.
The notice specifically stated that “YOUR FAILURE TO APPEAR MAY
RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST
YOU.” Our standing pretrial order, which requires that all facts
be stipulated to the maximum extent possible, all documentary and
written evidence be stipulated in accordance with Rule 91(b), and
each party prepare a trial memorandum not less that 15 days
before the first day of the trial session, was attached to the
notice. The standing pretrial order also warned that “If any
unexcused failure to comply with this Order adversely affects the
timing or conduct of the trial, the Court may impose appropriate
sanctions, including dismissal”.
On June 26, 2002, counsel for respondent telephoned Mr.
Bedford in order to introduce himself and arrange for a
conference to discuss this case. Respondent’s counsel was unable
to reach Mr. Bedford, so he left him an answering machine message
and sent letters informally requesting that petitioners answer
questions and produce certain documents. Mr. Bedford provided
cursory responses to some but not all of the questions, and he
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produced no documents. Due to the inadequacy of petitioners’
informal responses, on August 8, 2002, respondent served
interrogatories on Mr. Bedford. Petitioners failed to respond to
the interrogatories.
On August 9, 2002, respondent’s requests for admission in
regard to both the Basiles and BHC were filed. Petitioners never
replied to respondent’s requests, so they are deemed admitted.
Rule 90(c).
On September 13, 2002, respondent’s motions to compel
responses to respondent’s interrogatories were filed. On
September 16, 2002, we granted respondent’s motions in that
petitioners were to serve upon respondent’s counsel “full,
complete, and responsive responses made under oath and in good
faith” to the interrogatories. We warned petitioners that if
they did not fully comply with the order, we would be inclined to
impose sanctions. Petitioners failed to comply with the
September 16, 2002, order.
On October 27, 2002, Mr. Bedford telephoned respondent’s
counsel to inform him that he was experiencing car trouble and
that he did not anticipate making it to the calendar call the
next day. On October 28, 2002, this case was called at the
Court’s Tampa, Florida, trial session. Although counsel for
respondent appeared and was heard, no appearance was made by or
on behalf of petitioners. We continued this case.
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By notice dated April 22, 2003, we set this case for trial
at the Tampa, Florida, trial session beginning on September 22,
2003. The notice contained the same warnings of sanctions as the
previous notice setting this case for trial and the standing
pretrial order.
On July 25, 2003, respondent’s motions for continuance of
trial regarding both the Basiles and BHC were filed. In support
of his motions, respondent stated that a criminal indictment had
been filed against Mr. Bedford charging him with tax crimes,
including aiding, assisting, or advising the preparation of false
and fraudulent returns, and he provided us with a copy of the
indictment. Respondent further asserted that Mr. Bedford either
prepared or was otherwise linked to the preparation of the
returns at issue in this case and that certain of the disallowed
expenses and unreported income at issue were related to entities
that petitioners, with Mr. Bedford’s assistance, allegedly used
to facilitate the diversion of unreported taxable income.
Respondent also expressed his concern that any settlement offer
previously made by Mr. Bedford would be subject to attack because
of Mr. Bedford’s potential conflicts of interest. Mr. Bedford
did not object to the granting of respondent’s motions.
On July 28, 2003, we ordered petitioners and Mr. Bedford to
file written responses to respondent’s motions for continuance
and to show cause why Mr. Bedford should not be withdrawn as
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counsel. We also granted the motions for continuance, but this
case remained calendared on the September 22, 2003, trial session
for a status report. Petitioners did not respond as ordered and
did not appear at the September calendar call. Respondent
appeared and stated that he had had no communication from any of
the petitioners. We ordered that Mr. Bedford be withdrawn as
petitioners’ counsel and that this case be restored to the
general docket.
On November 4, 2003, petitioners moved to change the place
of trial from Tampa, Florida, to Philadelphia, Pennsylvania. On
November 13, 2003, we granted the motion. By notice dated April
1, 2004, we set this case for trial at the Philadelphia,
Pennsylvania, trial session beginning on September 7, 2004. The
notice again contained sanction warnings and referred to our
standing pretrial order, which was enclosed.
On June 7, 2004, respondent’s second requests for admission
in regard to both the Basiles and BHC were filed. Petitioners
failed to respond to these requests, so they are deemed admitted.
Rule 90(c).
On April 19, 2004, respondent sent petitioners a letter
inviting them to request a conference to discuss this case and
informally asking that they answer certain questions and produce
certain documents. Petitioners failed to request a conference,
however, and did not provide respondent with the requested
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answers, documents, or any other information. On June 4, 2004,
respondent served on both the Basiles and BHC a second set of
interrogatories and a second request for production of documents.
Again, petitioners failed to respond.
On July 21, 2004, respondent’s motions to compel responses
to the second set of interrogatories and second set of motions to
compel production of documents were filed. On July 22, 2004, we
ordered petitioners to file a response to these motions.
Petitioners did not comply with the order. Consequently, on
August 17, 2004, we ordered that petitioners, on or before August
25, 2004, provide respondent with answers to the interrogatories
and produce the requested documents. We warned petitioners that
failure to comply with our order could result in sanctions.
Petitioners continued to disregard our orders.
On July 30, 2004, respondent’s motion to consolidate the
Basiles’ case with BHC’s case for trial, briefing, and opinion
was filed. On August 3, 2004, we ordered petitioners to file a
response to the motion for consolidation on or before August 17,
2004, but petitioners failed to do so. On August 25, 2004, we
granted the motion.
On September 7, 2004, respondent appeared at the calendar
call of the Philadelphia, Pennsylvania, trial session, and his
motion for judgment by default was filed. Petitioners did not
appear. Petitioners also failed to provide respondent or the
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Court with a pretrial memorandum as required by the Court’s
standing pretrial order. Respondent asserted, however, that he
had received several pieces of frivolous correspondence from Paul
Basile (Mr. Basile) before the trial session and that Mr. Basile
stated in much of the correspondence that he was not disputing
the existence or amount of the tax liabilities.
Respondent requested in his motion that we enter a judgment
by default against petitioners and find reduced deficiencies in
income tax, penalties, and additions to tax for each petitioner.
In support of the motion for judgment by default, respondent
argues that “petitioners have completely failed to comply with
the Court’s Orders and have ignored the Tax Court’s Rules of
Practice and Procedure”.
Discussion
In general, the Commissioner’s determination of underlying
tax deficiencies is presumed correct, and the taxpayer bears the
burden of proving otherwise. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Unless otherwise indicated,
petitioners bear the burden of proof in this case.2 Petitioners
2
When a case involves unreported income and is appealable to
the Court of Appeals for the Third Circuit, the Commissioner’s
determination of unreported income is entitled to the presumption
of correctness only if the determination is supported by some
evidence linking the taxpayer to the tax-generating activity.
Anastasato v. Commissioner, 794 F.2d 884, 887 (3d Cir. 1986),
vacating T.C. Memo. 1985-101. As this case is appealable to the
Court of Appeals for the Third Circuit, barring a stipulation to
the contrary, the Court is bound to apply the law of the Court of
(continued...)
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have not only failed to carry their burden, but they have
defaulted within the meaning of Rule 123(a).
Pursuant to Rule 123(a), we may hold any party in default
when that “party has failed to plead or otherwise proceed as
provided by these Rules or as required by the Court”, and
“Thereafter the Court may enter a decision against the defaulting
party”. The action or inaction of a taxpayer that constitutes
sufficient grounds to apply Rule 123(a) is a matter within our
discretion, and we have consistently given Rule 123 broad
applicability. See, e.g., Smith v. Commissioner, 91 T.C. 1049,
1056 (1988) (default where taxpayer failed to communicate with
the Court, to appear at trial, to participate in preparation of
case for trial, and to comply with the requirements of Rule 91(a)
with regard to preparation of a stipulation of facts), affd. 926
F.2d 1470 (6th Cir. 1991); Stringer v. Commissioner, 84 T.C. 693,
2
(...continued)
Appeals for the Third Circuit in regard to respondent’s
determination that the Basiles failed to report income. Golsen
v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th
Cir. 1971). Because the facts alleged by respondent in his
answer to the Basiles’ petition and the deemed admissions provide
sufficient evidence linking the Basiles to the unreported income,
the presumption of correctness applies to respondent’s
determination, and petitioners bear the burden of proof that
respondent’s determination is erroneous. See Bosurgi v.
Commissioner, 87 T.C. 1403, 1409 (1986) (“The entry of a default
has the effect of admitting all well-pleaded facts in
respondent’s answer, and a default judgment must be supported by
respondent’s well-pleaded facts.”); Smith v. Commissioner, 91
T.C. 1049, 1057 (1988) (The establishment of respondent's
well-pleaded facts through a default is no different than
establishing such facts through deemed admissions), affd. 926
F.2d 1470 (6th Cir. 1991).
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706 (1985), affd. without published opinion 789 F.2d 917 (4th
Cir. 1986); Rechtzigel v. Commissioner, 79 T.C. 132, 143 (1982)
(default as sanction for taxpayer’s willful flouting of Court-
ordered discovery that hampered Commissioner’s ability to develop
his case), affd. 703 F.2d 1063 (8th Cir. 1983).
Despite repeated warnings, petitioners failed to comply with
the Rules and requirements of this Court by not participating in
the discovery process, by violating numerous Court orders,
including the standing pretrial order, and by not appearing at
any of three calendar calls. Such conduct provides a more than
sufficient basis for granting respondent’s motion with respect to
those issues on which petitioners have the burden of proof.3 We
note, however, that the Basiles asserted in their petition that
respondent’s determination regarding 1996 should not be sustained
because it was made outside the 3-year period of limitations
specified in section 6501(a). Respondent alleged in his answer
3
Although the Commissioner ordinarily has the burden of
production with respect to any penalties and additions to tax,
sec. 7491(c), the petitions did not contain any assignments of
error with respect to the additions to tax under sec. 6651(a)(1)
or the accuracy-related penalty under sec. 6662(a). Because
petitioners did not contest the additions to tax or penalties in
the petitions, they are deemed conceded. Rule 34(b)(4); Swain v.
Commissioner, 118 T.C. 358 (2002). Even if the additions to tax
and penalties were not deemed to be conceded, the facts alleged
in respondent’s answers and the deemed admissions are sufficient
to satisfy respondent’s burden of production for purposes of this
motion.
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that his determination was timely made within the 6-year period
of limitations in section 6501(e)(1)(A) and argues in his motion
that a decision by default is appropriate on this issue.
Section 6501(e)(1)(A) provides:
(A) General rule.–-If the taxpayer omits from
gross income an amount properly includible therein
which is in excess of 25 percent of the amount of gross
income stated in the return, the tax may be assessed,
or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within 6
years after the return was filed. * * *
To invoke the 6-year assessment period, respondent has the burden
of proving that petitioners omitted the requisite amount of gross
income from their return. Id.; Bardwell v. Commissioner, 38 T.C.
84, 92 (1962), affd. 318 F.2d 786 (10th Cir. 1963). In deciding
whether to grant respondent’s motion, we look to respondent’s
affirmative allegations in his answer to the Basiles’ petition
and the Basiles’ deemed admissions to decide whether respondent
has met his burden of proof. See Smith v. Commissioner, supra at
1057; Bosurgi v. Commissioner, 87 T.C. 1403, 1408 (1986).
The Basiles are deemed to have admitted that they did not
file their 1996 joint return until October 14, 1997. Respondent
affirmatively alleged in his answer that although the Basiles
reported their 1996 gross income as $115,600, they received
additional taxable income of $602,514 that they did not disclose
on either their 1996 return or in a statement attached to the
return. Respondent also alleged in his answer that the notice of
deficiency was sent to petitioners by certified mail on October
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12, 2001, well within the 6-year period of limitations. Because
the Basiles are deemed to have admitted the well-pleaded facts of
respondent’s answer and respondent’s requests for admission
stating that they received additional income in excess of 25
percent of what they reported on their 1996 return, respondent
has met his burden of proving that the notice of deficiency for
1996 was timely mailed and the 6-year period of limitations under
section 6501(e) applies.
Conclusion
Petitioners have failed to comply with the Rules and
requirements of this Court, and the record reveals no reason to
excuse petitioners’ inactivity and otherwise noncompliant
behavior. Moreover, we are satisfied that the well-pleaded facts
in respondent’s answer and the deemed admissions provide an
adequate factual basis for concluding that the period of
limitations for assessing the 1996 liability under section 6501
has not expired. Consequently, we shall grant respondent’s
motion for default pursuant to Rule 123(a).
To reflect the foregoing,
An appropriate order and
decision granting respondent’s
motion for judgment by default will
be entered in each docket.