T.C. Memo. 2009-83
UNITED STATES TAX COURT
THOMAS E. & IRIS M. TILLEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4097-08. Filed April 27, 2009.
Thomas E. Tilley and Iris M. Tilley, pro sese.
J. Craig Young, for respondent.
MEMORANDUM OPINION
COHEN, Judge: In separate notices, respondent determined
deficiencies, penalties, and additions to tax as follows:
Thomas E. Tilley
Additions to Tax/Penalties
Year Deficiency Sec. 6651(f) Sec. 6651(a)(2) Sec. 6654
2000 $338,491 $245,406 $84,623 $18,080
2001 1,608,566 1,165,198 401,792 64,222
- 2 -
Iris M. Tilley
Additions to Tax/Penalties
Year Deficiency Sec. 6651(f) Sec. 6651(a)(2) Sec. 6654
2000 $327,015 $237,066 $81,747 $17,466
2001 1,596,563 1,157,508 399,141 63,805
Unless otherwise indicated, all section references are to the
Internal Revenue Code for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Petitioners sent to the Court various frivolous documents
and willfully failed and refused to appear for trial. The issues
for decision are whether the deficiencies should be sustained by
reason of petitioners’ default and whether respondent has
established the prerequisites for the penalties and additions to
tax.
Background
Petitioners resided in North Carolina at the time that they
filed their petition. Because they refused to participate in
preparation of this case for trial, there is no stipulation. The
background stated here is based on the pleadings, on respondent’s
records, and on the testimony of the examiner who reconstructed
petitioners’ income for purposes of the statutory notices of
deficiency.
Petitioners failed to file Federal income tax returns for
2000 or 2001 or for many years before and after those years.
Because petitioners failed to produce books and records or to
- 3 -
cooperate in the determination of their taxable income, the
examiner caused summonses to be served on banks with which
petitioners did business. Petitioners filed frivolous challenges
to the summonses, which caused delays in obtaining the records.
The summonses were ultimately enforced by the District Court.
After reviewing the bank records and third party reports of
specific items of income, the examiner reconstructed petitioners’
income using the source and application of funds method.
The specific items of income identified by the examiner with
respect to Thomas E. Tilley (Mr. Tilley) included a retirement
account distribution, nonemployee compensation, Social Security
benefits, and patronage dividends. The known sources of funds
received by Mr. Tilley totaled $12,457 during 2000 and $14,117
during 2001. Additional unreported income was determined from
loan payments totaling $820,505.30 in 2000 and $3,906,732.31 in
2001 applied to loans showing Mr. Tilley as a joint borrower.
Additional applications of funds were determined on the basis of
personal living expenses shown in the bank records secured
pursuant to the summonses.
The specific items of income identified by the examiner with
respect to Iris M. Tilley (Mrs. Tilley) included wage income,
Social Security benefits, and interest income. The known sources
of funds received by Mrs. Tilley totaled $6,033 during 2000 and
$6,491 during 2001. Additional unreported income was determined
- 4 -
from loan payments totaling $797,389.88 in 2000 and $3,884,518.31
in 2001 applied to loans showing Mrs. Tilley as a joint borrower.
Additional applications of funds were determined on the basis of
personal living expenses shown in the bank records secured
pursuant to the summonses.
Among the records received as a result of the summonses to
banks were financial statements signed by petitioners
representing that they owned a mobile home park and other real
estate and that they received substantial income from their
properties. In a 1994 loan application, Mr. Tilley was described
as “self-employed - mobile home rentals”. In a financial
statement dated August 8, 1995, petitioners represented that they
owned real estate valued at $9,433,000 with mortgages payable
totaling $3,787,867. The statement represented that petitioners
had a net worth of $7,772,683. A warranty deed, which showed
“The Tilley Trust” as the grantor, and a Wake County real estate
record reflected sale of a mobile home park in October 2001 for
$3,000,000.
Petitioners never produced trust documents or other evidence
of the separate existence of a Tilley Trust during the
examination of their liabilities for 2000 and 2001 or during the
course of this case in Court. They did not mention a trust in
their petition. The petition claimed, but did not identify,
various exemptions, deductions, and credits. Many of the
- 5 -
allegations are similar or identical to allegations in petitions
filed by tax protesters. Also among the allegations is the
following:
Due to lack of records, Petitioners need to
reconstitute records and provide reasonable estimations
of business expenses as provided for in the Cohen [sic]
case, below. This case shows that the tax court can
use reasonable figures when records do not exist. The
taxpayer can also reconstruct lost paperwork to
substantiate deductions and business expenses.
Further the taxpayer can claim a percentage of
business expenses and profit for a business enterprise,
even if he has no records to substantiate his business
expenses.
This allegation is relevant in view of petitioners’ later claim,
described below, that they had no income-producing activities
during 2000 and 2001.
This case was set for trial in Winston-Salem, North
Carolina, on January 26, 2009. The Notice Setting Case For Trial
included a warning as follows: YOUR FAILURE TO APPEAR MAY RESULT
IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU.
Attached to the Notice Setting Case For Trial was the Court’s
Standing Pretrial Order. Both the notice and the pretrial order
advised petitioners of the obligation to cooperate and to
stipulate to facts and documents about which there should be no
disagreement.
Respondent served requests for admission on petitioners,
attaching documents, setting out the specific items of income
received by petitioners, and setting out the conclusions that had
- 6 -
been reached by the examiner on the basis of the bank records
obtained as a result of the summonses. Petitioners responded to
the requests for admission with a document that they titled
“Affidavit of Truth”. They did not deny receipt of the specific
items of income but instead claimed that they believed them to be
“an un-taxable event”. Among other things, petitioners alleged
that they were not required to file a tax return because they had
no taxable income and that “wages are not income as defined in
the IRS law”.
Shortly before trial, petitioners sent to the Court a
package of documents including a copy of the Handbook for Special
Agents portion of the Internal Revenue Manual. The documents
contained various spurious accusations against respondent, long
refuted tax-protester theories, and other unintelligible and
irrelevant arguments. In one signed document, Mrs. Tilley denied
that she was a “person” or a “taxpayer” under the Internal
Revenue Code. The package of documents was filed as petitioners’
pretrial memorandum. Before the trial date, petitioners mailed
to the Court a document entitled “Notice of Fraud and R.I.C.O.
Violations”, which was received after the trial date and was
filed as a supplement to pretrial memorandum. Petitioners’
documents made clear that their actions were willful in that
their failure to appear for trial was consistent with their prior
course of refusing to cooperate in the determination of their
- 7 -
correct tax liabilities. None of petitioners’ documents alleged
that the unexplained sources of loan payments used in
respondent’s determination of unreported income were attributable
to a trust.
Petitioners failed to appear at the calendar call on January
26, 2009. The case was set for trial on January 27, 2009.
Respondent presented evidence that petitioners had failed to file
returns for 2000 and 2001 and that substitutes for returns had
been filed pursuant to section 6020(b) for 2000, 2001, and
subsequent years.
Respondent also presented evidence with respect to the
penalty for fraudulent failure to file returns. This evidence
included the pattern of nonfiling for multiple years before and
after 2000 and 2001, implausible explanations, concealment of
income and assets, failure to cooperate, and conduct actively
obstructing the determination of petitioners’ correct tax
liability. Respondent’s witness, the revenue agent who had
conducted the examination, and respondent’s counsel both
acknowledged the duplication of income items without a known
source in the separate notices of deficiency but explained that
the available records, without any input from petitioners, did
not support allocation and that the separate determinations were
necessary to prevent whipsaw in case either petitioner later
claimed that the income belonged to the other.
- 8 -
After trial, the Court issued an Order to Show Cause that
included the following:
Petitioners have refused to participate in
determination of their actual taxable income, and they
have actively obstructed lawful processes by which
information necessary to that determination could be
obtained. As a result, neither respondent nor the
Court can effect a reliable reduction of any of the
liabilities in dispute. Reduction of the deficiencies
would, of course, result in proportionate reduction of
the penalties and additions to tax.
The obfuscation and tax protestor gibberish
engaged in by petitioners in this case is inexplicable
foolishness. They are risking loss of whatever assets
they possess, because collection efforts will
undoubtedly proceed once a decision is entered in this
case. An adverse decision for the full amounts
determined against each petitioner is inevitable on the
existing record, and such decision will be entered by
the Court without undue delay. In order to provide
petitioners with one last opportunity to abandon their
tactics, to secure competent counsel, and to
participate in determination of their correct, and
presumably reduced, liabilities, it is hereby
ORDERED that on or before March 2, 2009,
petitioners shall show cause in writing served on
respondent and filed with the Court why a decision
should not be entered in this case determining that
they are liable for the full amount of deficiencies,
penalties and additions to tax set out in the statutory
notices of deficiency that are the subject of their
petition. Such showing shall:
Explain the source of funds used to pay off loans
and to engage in other transactions identified in
respondent’s reconstruction of petitioners’ income for
2000 and 2001;
Explain the business or other income producing
activities engaged in by petitioners during 2000 and
2001 in which they incurred the business expenses
referred to in their petition;
- 9 -
Identify any witnesses that petitioners would call
at any further trial of this case, with a brief summary
of the expected testimony of each witness;
Include a list specifying by nature and amount
each deduction, exemption, or credit claimed by
petitioners as reducing their taxable income; and
Attach copies of any records corroborating their
positions.
The above deadline will not be extended unless,
prior to March 2, 2009, petitioners have met with
respondent’s counsel or a designated representative of
respondent’s counsel, arranged to cooperate in curing
their prior defaults, and filed with the Court a motion
with respondent’s agreement to extend the date.
Petitioners submitted a response that repeated their
spurious accusations, frivolous arguments, and denials that they
had income during 2000 and 2001. They allege that a trust is a
separate entity for tax purposes, but they have not provided any
of the information specified in the Order To Show Cause. There
are no trust agreements in the record, and there is no reason to
believe that any trust involving petitioners is not a grantor
trust or a sham trust or that petitioners did not receive taxable
distributions from any trust. There is no indication that tax
returns were filed by a Tilley Trust. During the course of the
examination and the pendency of the case, petitioners have failed
to identify any nontaxable source of the funds used to pay off
loans in 2000 and 2001.
- 10 -
Discussion
At the time of trial, respondent’s counsel described
numerous efforts to reach petitioners and to secure their
cooperation in resolving the issues. Left with no alternative,
counsel stated that “[regarding] this whipsaw issue,
it’s unfortunate, but it’s the taxpayers own creation. I would
ask the Court to simply hold them in default as to all the issues
and all the additions to tax.” Because it appears that the
probable source of petitioners’ unreported income was sales or
rentals of real property, there is no way to allocate that income
without knowing more about the ownership of the property than
appears in the record. Petitioners have been given every
opportunity to provide that information and have been repeatedly
warned about the consequences of failure to provide it.
The record reflects petitioners’ longtime delinquencies and
frivolous positions with respect to their Federal tax
obligations. Their tax liabilities for 1991 and 1992 were the
subject of Tilley v. Commissioner, T.C. Memo. 1997-222, and
collection actions for 1991, 1992, 1994, and 1995 were the
subject of Tilley v. Commissioner, T.C. Memo. 2002-161. In
letters dated September 12, 1996, to the Secretary of the
Treasury, petitioners admitted that they had not filed Federal
tax returns for 1994 or 1995, with the following explanation:
The reason for not doing so is that I do not
believe that I have received any gross income for that
- 11 -
year. This is based upon an examination of all records
which I have concerning my affairs. These records do
not show:
(a) Any evidence upon which I can make a
determination that I am a citizen or resident of the
United States, as that term is used in the 14th
Amendment to the Constitution, and at 26 CFR §1.1-1(a)-
(c).
(b) Any evidence of gross income from a source
within, or from a trade or business which is
effectively connected with the United States.
(c) Any evidence which indicates that I have made
any determination for said year that I am legally
obligated to any tax not mandated upon me by Congress.
Under these circumstances, petitioners’ denials of receipt of
taxable income have no credibility.
Rule 123 provides as follows:
(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.
- 12 -
(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.
Rule 149(a) provides as follows:
(a) Attendance at Trials: The unexcused absence
of a party or a party’s counsel when a case is called
for trial will not be ground for delay. The case may
be dismissed for failure properly to prosecute, or the
trial may proceed and the case be regarded as submitted
on the part of the absent party or parties.
Because the examiner could not determine whether the income
used to pay the loans showing petitioners as joint borrowers was
income of Mr. Tilley or of Mrs. Tilley, and to avoid “whipsaw”
and to protect the interest of the Government, the same loan
payments were determined to be income to each individual in the
separate notices of deficiency. If petitioners had cooperated
and explained the sources of payments of the loans, the income
would have been allocated between them and the duplication
eliminated. Without their cooperation or any other information,
however, there is no reasonable way to allocate the income. We
have considered the entire record in this case and conclude that
we have no basis for reducing the deficiencies, which were
reasonably determined by the examining agent. The deficiencies
will be sustained by reason of petitioners’ failure to appear for
- 13 -
trial, failure to comply with the Court’s orders and Rules, and
failure otherwise properly to prosecute the case.
Respondent acknowledges the burden of production with
respect to additions to tax under sections 6651(a)(2) and 6654.
See sec. 7491(c). The examining agent testified that substitutes
for returns had been filed pursuant to section 6020(b) for 2000,
2001, and subsequent years for which no returns had been filed by
petitioners. Certifications under section 6020(b) were received
in evidence with respect to 2000 and 2001. Thus respondent’s
burden with respect to section 6651(a)(2) has been satisfied.
Despite the probability that petitioners had income from
their real properties during 1999 and that they failed to file a
return for that year or to pay estimated taxes for 2000, no
reliable evidence was presented with respect to petitioners’ tax
liability for 1999. We cannot, therefore, sustain the section
6654 addition to tax for 2000. See Wheeler v. Commissioner, 127
T.C. 200, 210-212 (2006), affd. 521 F.3d 1289 (10th Cir. 2008).
The examining agent testified and presented records to
satisfy respondent’s burden of proving fraudulent failure to file
returns. Secs. 6651(f), 7454(a); Rule 142(b). Long-recognized
badges of fraud that are found in this case include the pattern
of failing to file returns, substantial unreported income,
implausible or inconsistent explanations of behavior, concealment
of assets, and failure to cooperate with tax authorities. In
- 14 -
addition, petitioners admitted in their petition, as quoted
above, that they failed to maintain adequate records. See, e.g.,
Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986),
affg. T.C. Memo. 1984-601; Clayton v. Commissioner, 102 T.C. 632,
647-653 (1994); Grosshandler v. Commissioner, 75 T.C. 1, 19-20
(1980); Gajewski v. Commissioner, 67 T.C. 181, 199-200 (1976),
affd. without published opinion 578 F.2d 1383 (8th Cir. 1978).
The evidence presented by respondent was clear and convincing.
Because respondent has presented evidence of unreported
income, petitioners must come forward with evidence in support of
any claimed defenses; failure to do so allows the inference that
they have no defenses, such as nontaxable sources of funds or
deductible expenses. See Brooks v. Commissioner, 82 T.C. 413,
433 (1984), affd. without published opinion 772 F.2d 910 (9th
Cir. 1985). The penalty under section 6651(f) will be upheld.
Petitioners’ position in this proceeding has been frivolous
and groundless, and they have failed to exhaust administrative
remedies. A penalty under section 6673 in an amount not to
exceed $25,000 would be justified on this record. Under the
circumstances, however, the decision to be entered is a
sufficient sanction.
- 15 -
For the reasons explained above,
Decision will be entered
for respondent except for the
addition to tax under section
6654 for 2000.