T.C. Summary Opinion 2009-47
UNITED STATES TAX COURT
MARK LAVERN AND SHERYL L. SQUIER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2896-07S. Filed March 30, 2009.
Mark Lavern and Sheryl L. Squier, pro sese.
H. Elizabeth Downs, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. This case is before the Court on respondent’s motion for
summary judgment pursuant to Rule 121. Unless otherwise
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indicated, subsequent 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.
After a concession, respondent’s motion for summary judgment
raises the following issues: (1) Whether petitioners
underreported income and overstated deductions for 2000, 2001,
and 2002 with respect to their nail kit business; and (2) whether
petitioner husband is liable for the fraud penalty under section
6663 for the 3 years at issue.
Background
Petitioners resided in Oklahoma when they filed their
petition. Petitioners are deemed to have admitted under Rule
37(c) the following facts.
Mark Lavern Squier (petitioner) is a former Internal Revenue
Service (IRS) employee and was employed in Oklahoma City,
Oklahoma, during the years in issue and until April 8, 2005.
During 2000, 2001, and 2002 petitioners operated a business under
the name of “Nails by Ruby Crystal.” The business sold nail kits
consisting of various applications for fingernails and a carpet
cleaning solution. They made their sales generally from booths
they set up at public events and at shopping malls.
Both petitioners participated in selling the products.
However, petitioner was responsible for all other aspects of
conducting the business, including purchasing inventory,
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recordkeeping, and banking. Petitioner prepared their joint
Federal income tax returns for 2000, 2001, and 2002. Petitioner
prepared the returns by hand at home and brought them to the
Oklahoma City IRS office where he electronically filed the
returns.
Respondent selected petitioners’ 2000, 2001, and 2002 joint
Federal income tax returns for review. With respect to the nail
kit business, petitioner failed to report income accurately on
Schedule C, Profit or Loss From Business, as follows.
Petitioner reported Schedule C income of $62,935, $36,492,
and $28,476 for 2000, 2001, and 2002, respectively. Using a bank
deposits analysis, the IRS determined the correct income was
$73,619, $68,011, and $55,651 for 2000, 2001, and 2002.
Petitioner fraudulently with an intent to evade tax omitted
income of $10,684, $31,519, and $27,175 for 2000, 2001, and 2002,
respectively.
Regarding Schedule C cost of goods sold, petitioner reported
$30,615, $19,072, and $27,220, for 2000, 2001, and 2002, when the
correct amounts were $25,693, $15,841, and $14,285, respectively.
Petitioner overstated cost of goods sold by $4,922, $3,231, and
$12,935 for the 3 years at issue.
Additionally, petitioner fraudulently with an intent to
evade tax claimed false Schedule C deductions for the 3 years, as
follows.
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Petitioner overstated car and truck expenses by $2,861,
$3,601, and $2,947, by claiming deductions of $7,904, $7,355, and
$7,139 when the correct amounts were $5,043, $3,754, and $4,192
for 2000, 2001, and 2002, respectively.
Petitioner overstated travel expenses by $2,582, $2,488, and
$1,979, by claiming deductions of $3,393, $2,488, and $2,640 when
the correct amounts were $811, $0, and $661 for 2000, 2001, and
2002, respectively.
Petitioner overstated other expenses by $4,735, $367, and
$1,491 by claiming deductions of $15,913, $9,593 and $11,334 when
the correct amounts were $11,178, $9,226, and $9,843 for 2000,
2001, and 2002, respectively.
Respondent determined petitioners are entitled to meals and
entertainment deductions of $900 for each year at issue and a
commissions and fees deduction of $13,592 for 2000.
As a result of petitioner’s understatements of income and
overstatements of deductions, petitioner substantially
underreported the business’s profits by $36,768, $38,064, and
$42,955 for 2000, 2001, and 2002, respectively.
In an attempt to hide the true income from the IRS,
petitioner used his home copier to alter the business’s bank
account statements for February, March, April, September,
October, November, and December 2002. Petitioner submitted the
fraudulent, altered documents to the IRS examiner during the
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audit. Moreover, petitioner failed to keep adequate books and
records for the business for the years at issue. Petitioner
later admitted to other IRS agents that he altered the bank
documents.
Respondent’s adjustments caused mathematical increases to
petitioners’ self-employment tax for each year, which in turn
increased petitioners’ self-employment adjustments on page 1 of
their joint Forms 1040, U.S. Individual Income Tax Return.
Additionally, respondent increased petitioners’ total income for
2001 by $197 to include a State income tax refund that petitioner
had omitted.
In summary, the adjustments caused increases to petitioners’
joint Federal income tax liabilities by $10,706, $14,698, and
$17,111 for 2000, 2001, and 2002, respectively. Petitioner had
reported $1,156, $4,057, and $3,896 when the correct tax
liabilities were $11,862, $18,755, and $21,007, respectively, for
2000, 2001, and 2002.
Respondent issued separate notices of deficiency dated
November 8, 2006, to each petitioner, but confusingly addressed
each separate notice in petitioners’ joint names. The difference
between the two notices was that with respect to petitioner,
respondent determined fraud penalties under section 6663, while
with respect to petitioner wife respondent determined accuracy-
related penalties under section 6662(a), as follows:
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Accuracy-
Joint Fraud Penalty Related Pen.
Year Deficiency Sec. 6663 Sec. 6662(a)
2000 $10,706 $8,029.50 $2,141.20
2001 14,698 11,023.50 2,939.60
2002 17,111 12,833.25 3,422.20
Petitioners timely petitioned the Court and attached the
notice of deficiency addressed jointly to petitioners but which
respondent intended separately for each petitioner. In paragraph
4 of the petition, petitioner set forth the following reasons he
believes they are entitled to relief:
I WAS NOT ALLOWED SUFFICIENT BUSINESS DEDUCTIONS. I
BELIEVE I SHOULD RECEIVE A DEDUCTION IN DEFICIENCY. I
CAN PROVIDE PROOF [SIC] THAT THE AMOUNT OF BUSINESS
EXPENSES I WAS ALLOWED WAS FAR LESS THAN WAS ACTUALLY
INCURRED. ALSO, I WAS ASSESSED A FRAUD PENALTY OF ALL
THREE YEARS BUT SHOULD ONLY HAVE FRAUD PENALTY FOR ONE
YEAR.
Respondent filed an answer on April 6, 2007, setting forth
affirmative allegations in subparagraphs a. through ee.,
inclusive of paragraph 6 of the answer.
Petitioners failed to file a reply to respondent’s answer.
In a letter dated June 11, 2007, respondent informed petitioners
that Rule 37(a) required a response from petitioners to the
affirmative allegations before July 5, 2007, or respondent would
file a motion for entry of an order that the undenied allegations
in the answer be deemed admitted if petitioners made no response.
Petitioners did not file a response.
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In accordance with Rule 37(a), on June 28, 2007, respondent
filed a motion for entry of order that undenied allegations in
the answer be deemed admitted pursuant to Rule 37(c).
Additionally, on June 28, 2007, the Clerk of the Court served
petitioners with a notice of filing of the motion for order under
Rule 37. In the second paragraph of the notice the Clerk
informed petitioners that if they filed a reply as required by
Rule 37(a) and (b) on or before July 19, 2007, respondent’s
motion would be denied, but if not, the Court would grant
respondent’s motion and deem admitted the affirmative
allegations. Petitioners failed to file a reply, and on August
20, 2007, the Court granted the motion.
In a notice dated January 9, 2008, the Clerk served the
parties with a “Notice Setting Case for Trial” at a session
beginning on June 9, 2008, in Oklahoma City, Oklahoma.
Subsequently on April 4, 2008, respondent filed the motion for
summary judgment. In the motion, because of the confusion
respondent caused by the joint names on the notices, respondent
conceded the section 6662(a) accuracy-related penalties as to
petitioner wife.
The Court ordered that petitioners file a written response
on or before April 30, 2008. Because petitioners failed to file
a written response, the Court set respondent’s motion for summary
judgment for hearing at the Oklahoma City, Oklahoma, trial
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session beginning on June 9, 2008, thus affording petitioners an
opportunity to be heard. When the case was called from the
calendar on June 9, 2008, there was no appearance by or on behalf
of petitioners. Respondent’s counsel appeared and was heard.
The Court took respondent’s motion for summary judgment under
advisement.
Discussion
The first issue for decision is whether we should grant
respondent’s motion for summary judgment as to the deficiencies
for the years in issue.
When the pertinent facts are not in dispute, a party may
move for summary judgment to expedite the litigation and avoid an
unnecessary and potentially expensive trial. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Summary judgment is
appropriate when no genuine issue exists as to any material fact
and when the Court may render a decision 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). The party moving for
summary judgment (in this instance, respondent) bears the burden
of showing that no genuine issue exists as to any material fact
and the Court will draw factual inferences in the manner most
favorable to the party opposing summary judgment (here,
petitioners). New Millennium Trading, L.L.C. v. Commissioner,
131 T.C. __, __ (2008) (slip op. at 6).
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Respondent’s bank deposits analysis presents prima facie
evidence of income. See Tokarski v. Commissioner, 87 T.C. 74, 77
(1986). Respondent further supports his motion for summary
judgment with petitioners’ failure to answer the affirmative
allegations in the answer. Respondent alleged that petitioners
fraudulently understated income and overstated deductions with
respect to the nail kit business. Because petitioners failed to
deny or object to these allegations, and because respondent
timely moved for their admission, the undenied affirmative
allegations are deemed admitted under Rule 37(c). It is well
settled that facts deemed admitted under Rule 37(c) are
considered conclusively established even where the Commissioner
bears the burden of proof. Marshall v. Commissioner, 85 T.C.
267, 272-273 (1985). Therefore, we find the admissions are
adequate to support respondent’s burden of proving no genuine
issue of material fact exists as to the deficiency
determinations. Accordingly, as a matter of law, respondent is
entitled to summary adjudication with regard to the deficiencies
for the years at issue.
The second issue is whether we should grant respondent’s
motion for summary judgment as to the section 6663 civil fraud
penalties.
Section 6663(a) imposes a penalty equal to 75 percent of the
portion of any underpayment attributable to fraud. The
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Commissioner bears the burden of proving by clear and convincing
evidence that an underpayment exists and that some portion of the
underpayment for each year is due to fraud with the intent to
evade tax. Sec. 7454(a); Rule 142(b); Parks v. Commissioner, 94
T.C. 654, 660-661 (1990); see also sec. 7491(c).
Fraud is an actual wrongdoing with an intent to evade a tax
believed to be owing. Marshall v. Commissioner, supra at 272-
273. Fraud is never presumed and must be established by
independent evidence of fraudulent intent. Petzoldt v.
Commissioner, 92 T.C. 661, 699 (1989). Accordingly, the
existence of fraud is a question of facts and circumstances that
a court must consider on the basis of an examination of the
entire record and the taxpayer’s entire course of conduct,
Petzoldt v. Commissioner, supra at 699, including the taxpayer’s
background, education, and experience, Niedringhaus v.
Commissioner, 99 T.C. 202, 211 (1992).
The Commissioner’s burden of proving fraud may be met with
facts deemed admitted pursuant to Rule 37(c). Doncaster v.
Commissioner, 77 T.C. 334, 337 (1981). Because fraud can seldom
be established by direct proof, the requisite intent may be
inferred from any conduct the likely effect of which would be to
conceal, mislead, or otherwise prevent the collection of taxes
the taxpayer knew or believed he owed. Spies v. United States,
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317 U.S. 492, 499 (1943); Rowlee v. Commissioner, 80 T.C. 1111,
1123-1124 (1983).
Courts have developed several objective “badges” of fraud,
including: (1) Understatement of income; (2) inadequate records;
(3) failing to file tax returns; (4) providing implausible or
inconsistent explanations of behavior; (5) concealment of assets;
(6) failing to cooperate with taxing authorities; (7) filing
false Forms W-4, Employee’s Withholding Allowance Certificate;
(8) failing to make estimated tax payments; (9) dealing in cash;
(10) engaging in a pattern of behavior that indicates an intent
to mislead; and (11) filing false documents. Niedringhaus v.
Commissioner, supra at 211. No single factor is necessarily
sufficient to establish fraud; however, a combination of several
of these factors may be persuasive evidence of fraud. Solomon v.
Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per
curiam T.C. Memo. 1982-603.
Petitioners’ deemed admissions of facts evidenced numerous
badges of fraud: (1) Petitioner fraudulently understated income
and overstated deductions for all years at issue with respect to
the nail kit business; (2) he failed to maintain adequate records
for all 3 years; (3) he used his home copier to alter bank
statements which he provided to the IRS in an attempt to evade
tax; (4) he failed to cooperate with respondent and was
nonresponsive throughout the litigation, failing even to appear
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at his own hearing; and (5) he possessed greater than average
knowledge of the requirements of the Internal Revenue Code
because of his years of employment with the IRS.
The facts deemed admitted under Rule 37(c) amply satisfy
respondent’s burden of proof. See Doncaster v. Commissioner,
supra at 337. We are convinced that the totality of the evidence
establishes the existence of fraud under section 6663 for 2000,
2001, and 2002. Accordingly, because there are no material facts
in dispute and because respondent has satisfied the burden of
proof, we grant respondent’s motion for summary judgment with
respect to the fraud penalties for all 3 years at issue.
To reflect our disposition of the issues,
An appropriate order and
decision will be entered for
respondent.