T.C. Memo. 2016-208
UNITED STATES TAX COURT
JOSE R. PENA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12694-15. Filed November 16, 2016.
Jose R. Pena, pro se.
Michael E. D’Anello and R. Jeffrey Knight, for respondent.
MEMORANDUM OPINION
NEGA, Judge: This matter is before the Court on respondent’s motion for
summary judgment under Rule 121.1
1
All Rule references are to the Tax Court Rules of Practice and Procedure.
All section references are to the Internal Revenue Code in effect for the years in
issue.
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[*2] In a notice of deficiency respondent determined that petitioner had
underreported his business income and overstated his business expenses, resulting
in deficiencies in income tax of $20,561 and $20,149 for tax years 2012 and 2013
(years in issue), respectively. The notice also determined that petitioner is liable
for section 6663 fraud penalties of $15,420.75 and $15,111.75 for the years in
issue. The issues for our consideration are: (1) whether petitioner underreported
his income and overstated his business expenses for the years in issue and (2)
whether he is liable for the section 6663 fraud penalties for those years.
Background
On February 18, 2015, respondent sent petitioner a notice of deficiency for
the years in issue. Petitioner timely filed a petition with this Court on May 14,
2015, requesting redetermination of the deficiencies and fraud penalties.
Petitioner resided in Massachusetts when his petition was filed.
On July 14, 2015, respondent filed an answer to the petition which
contained 72 affirmative allegations of fact in support of respondent’s
determinations of the deficiencies and the fraud penalties. Petitioner did not file a
reply to respondent’s answer.
On September 28, 2015, pursuant to Rule 37(c), respondent moved for an
order that the undenied allegations in the answer be deemed admitted by
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[*3] petitioner. The Court ordered petitioner to file a reply on or before October
26, 2015, but he never did so. Accordingly, on December 14, 2015, the Court
granted respondent’s Rule 37(c) motion and deemed admitted the allegations set
forth in paragraph 8(a) through (ttt) of respondent’s answer.
On January 20, 2016, respondent filed a motion for summary judgment
asserting that the case can be decided in respondent’s favor because no genuine
issues of material fact are in dispute. By order dated January 22, 2016, the Court
ordered petitioner to file a response to the motion for summary judgment on or
before February 19, 2016. Petitioner has failed to do so.
Respondent’s motion for summary judgment requests that we sustain the
deficiencies and fraud penalties determined in the notice of deficiency.
Respondent contends that facts deemed admitted under Rule 37(c) are sufficient to
satisfy his burden of proof as to the deficiencies and penalties.
The deemed admissions under Rule 37(c) establish the following facts.
a. In 2012 and 2013 petitioner operated two businesses for which he
reported income and expenses on Schedules C, Profit or Loss From Business.
b. In the first business petitioner provided tax return preparation and
immigration services (tax prep and immigration business), doing business as “J
Pena & Associates”.
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[*4] c. In the second business petitioner provided justice of the peace services
under his own name.
d. Petitioner is a native of El Salvador. He is a U.S. citizen and has been in
this country for approximately 30 years. Petitioner frequently travels to El
Salvador.
e. Petitioner has a bachelor’s degree in business administration and
accounting from a university in the United States.
f. Petitioner has provided tax return preparation services for the last 20
years.
g. Petitioner used his bank account balance to determine his gross receipts
from his tax prep and immigration business.
h. Petitioner took only cash from clients for the services he provided them.
i. When asked why he dealt exclusively in cash, petitioner explained that he
did so because checks bounce.
j. Petitioner did not always deposit the cash he received from clients and
would pay himself a salary from the cash that he did not deposit.
k. Petitioner timely filed his 2012 and 2013 income tax returns.
l. On his 2012 return petitioner reported $9,781 in net income from his tax
prep and immigration business and $9,983 in adjusted gross income.
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[*5] m. Petitioner overstated his utilities expense on his Schedule C for his tax
prep and immigration business by $3,246 on his 2012 income tax return.
n. Petitioner overstated his taxes and licenses expense on his Schedule C
for his tax prep and immigration business by $3,662 on his 2012 income tax
return.
o. Petitioner overstated his rent or lease expenses for vehicles, machinery,
and equipment on his Schedule C for his tax prep and immigration business by
$3,600 on his 2012 income tax return.
p. Petitioner overstated his rent or lease expenses for other business
property on his Schedule C for his tax prep and immigration business by $3,570
on his 2012 income tax return.
q. Petitioner overstated his commissions and fees expenses on his Schedule
C for his tax prep and immigration business by $6,800 on his 2012 income tax
return.
r. Petitioner overstated his car and truck expenses on his Schedule C for his
tax prep and immigration business by $755 on his 2012 income tax return.
s. Petitioner overstated his other expenses on his Schedule C for his tax
prep and immigration business by $5,624 on his 2012 tax return.
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[*6] t. Petitioner overstated his other expenses on his Schedule C for his justice
of the peace business by $515 on his 2012 tax return.
u. On his 2012 return petitioner overstated his utilities expense on his
Schedule C for his justice of the peace business by $650.
v. On his 2013 return petitioner reported $22,749 in net profit from his tax
prep and immigration business and $21,255 in adjusted gross income.
w. Petitioner overstated his utilities expenses on his Schedule C for his tax
prep and immigration business by $132 on his 2013 income tax return.
x. Petitioner overstated his taxes and licenses expenses on his Schedule C
for his tax prep and immigration business by $1,471 on his 2013 income tax
return.
y. Petitioner overstated his rent or lease expenses for vehicles, machinery,
and equipment on his Schedule C for his tax prep and immigration business by
$2,500 on his 2013 income tax return.
z. Petitioner overstated his rent or lease expenses for other business
property on his Schedule C for his tax prep and immigration business by $367 on
his 2013 income tax return.
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[*7] aa. Petitioner overstated his commissions and fees expenses on his
Schedule C for his tax prep and immigration business by $4,800 on his 2013
income tax return.
bb. Petitioner overstated his car and truck expenses on his Schedule C for
his tax prep and immigration business by $1,514 on his 2013 income tax return.
cc. Petitioner overstated his other expenses on his Schedule C for his tax
prep and immigration business by $7,691 on his 2013 income tax return.
dd. Petitioner overstated his other expenses on his Schedule C for his
justice of the peace business by $1,710 on his 2013 tax return.
ee. In 2012 and 2013 petitioner maintained a business bank account at TD
Bank, account number XX-XXX7207.
ff. In 2012 and 2013 petitioner maintained a personal bank account a TD
Bank, account number XXX-XXX5054.
gg. In 2012 and 2013 petitioner maintained a bank account at Metro Credit
Union, account number XXXXXXXXXXXX7105.
hh. In 2012 and 2013 petitioner maintained inadequate business records for
his tax prep and immigration business and his justice of the peace business.
ii. Petitioner provided respondent with a report and summary prepared
using Quicken software which petitioner claimed documented his income and
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[*8] expenses for his tax prep and immigration business. However, the gross
receipts reported on the report and summary were higher than the amounts
reported on petitioner’s Schedules C filed with his 2012 and 2013 tax returns.
Petitioner could not explain this discrepancy.
jj. Petitioner charged clients set amounts for specific tax return preparation
and immigration services.
kk. For tax return preparation petitioner charged clients $100 to prepare a
return with a Schedule A, Itemized Deductions, $50 for a return with a filing status
of single, $75 for a return with a Schedule C, and $75 for a return with a joint or
head of household filing status.
ll. For immigration petitioner’s services included obtaining work permits,
residency documents, and fingerprints for clients. Petitioner would electronically
pay the cost of the immigration transaction through his bank account, and then his
clients would reimburse him for the cost of the transaction and pay an additional
$75 on top of the transaction’s cost for each service. The transaction costs for
obtaining work permits, residency documents, and fingerprints were $380, $450,
and $85, respectively.
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[*9] mm. Because petitioner failed to maintain adequate records, respondent’s
examiner reconstructed petitioner’s income for his tax prep and immigration
business using the unit and volume method.
nn. For the immigration services, respondent’s examiner reviewed
petitioner’s bank records to see how often he paid the transaction costs for the
various services and multiplied that number by the $75 fee petitioner charged per
service to arrive at petitioner’s gross receipts for the immigration services portion
of his business for 2012 and 2013.
oo. Part of the other expenses petitioner reported on his Schedule C for
2012 and 2013 for his tax prep and immigration business included the transaction
costs that petitioner paid for the immigration service he provided for which he was
later reimbursed by his clients. Petitioner also included these transaction costs
that he paid on behalf of his clients in his gross receipts for his tax prep and
immigration business. To remain consistent with how petitioner calculated his
gross receipts and expenses, respondent’s examiner allowed these transaction
costs as an expense and included them in her gross receipts calculation.
pp. To calculate petitioner’s gross receipts from the tax return preparation
portion of his business, respondent’s examiner used respondent’s database to
determine how often petitioner prepared each type of return. The examiner then
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[*10] multiplied the number of each type of return prepared by the amount that
petitioner charged for that type of return to determine his gross receipts from tax
return preparation for 2012 and 2013.
qq. After reconstructing petitioner’s income for his tax prep and
immigration business, respondent’s examiner determined that petitioner had
significantly underreported his gross receipts for each year.
rr. Petitioner underreported his gross receipts from his tax prep and
immigration business by $38,280 for 2012.
ss. Petitioner underreported his gross receipts from his tax prep and
immigration business by $37,555 for 2013.
tt. In 2012 petitioner paid approximately $9,600 to rent a personal
apartment. He reported $9,983 in adjusted gross income for that same year.
Petitioner did not report enough income on his 2012 return to meet even his basic
living expenses for that year.
uu. Among the expenses that petitioner claimed as other expenses on his
Schedule C for his tax prep and immigration business for 2012 were those for
clothing, laundry, credit card payments, tolls, car washes, and parking.
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[*11] vv. For 2013 petitioner claimed the same types of expenses as other
expenses on his Schedule C for his tax prep and immigration business and also
included amounts for gifts, auto repairs, and a special loan.
ww. Petitioner met with his clients in his office and did not travel as part of
his business. Petitioner did not maintain a mileage log as part of his business and
cannot reconstruct one.
xx. Petitioner cannot deduct as a business expense on his 2012 and 2013
income tax returns any auto-related expenses such as tolls, car washes, parking, or
auto repairs.
yy. Petitioner’s business did not require him to wear a uniform which he
could not wear elsewhere outside of his business. Petitioner is not entitled to
deduct as a business expense for 2012 or 2013 expenses for clothing or laundry.
zz. Petitioner’s expenses for credit card payments for 2012 and 2013, as
well as those expenses for gifts and a special loan for 2013, were all personal and
not deductible on his Schedules C for his tax prep and immigration business for
those years.
aaa. Petitioner conducts his business out of a business condo which he
purchased approximately 12 years ago.
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[*12] bbb. The amounts that petitioner claimed as rent expenses for other
business property on his Schedules C for his tax prep and immigration business for
2012 and 2013 were for quarterly condo fees he paid. Petitioner paid $1,185 and
$1,220.73 as quarterly condo fees in 2012 and 2013, respectively. Petitioner’s
rent expenses for other business property were $4,740 and $4,883 in 2012 and
2013, respectively.
ccc. In 2012 and 2013 petitioner had a bank account with Citibank in his
native El Salvador. Petitioner earned $1,989 in interest on this account in 2012
and $4,304 in 2013. Petitioner failed to report these amounts on his income tax
returns for 2012 and 2013.
ddd. When questioned regarding his foreign bank account, petitioner first
denied having it; but when confronted with the Forms 1099 that Citibank had
issued him petitioner claimed that he did not know what the account could be. He
finally claimed that the account could be related to a house that he had sold in El
Salvador years ago.
eee. Petitioner stated that in 2012 and 2013, he occasionally had family
members assist him in his office and paid them cash for their services.
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[*13] fff. He stated that he did not issue these family members any Forms 1099
for the services they provided because to do so would complicate their receipt of
welfare benefits.
ggg. Petitioner intentionally concealed income by dealing exclusively in
cash, not depositing all cash receipts, and failing to maintain adequate records that
accounted for his cash receipts.
hhh. Petitioner intentionally overstated business expenses by exaggerating
the amounts of business expenses he could actually substantiate and/or by
deducting personal expenses as business expenses.
iii. Petitioner’s unreported income and overstated expenses are substantial
and resulted in large underpayments of tax.
jjj. For 2012 the unreported income is $40,269 and the overstated expenses
are $28,422.
kkk. For 2013 the unreported income is $41,859 and the overstated
expenses are $20,185.
lll. The substantial amounts of unreported income and overstated expenses
for at least two consecutive years establish a pattern of conduct.
mmm. By dealing exclusively in cash, not depositing all cash receipts, not
maintaining adequate records of cash receipts, overstating business expenses,
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[*14] claiming patently personal expenses as business expenses, and deliberately
failing to file required tax forms petitioner engaged in a deliberate pattern of
conduct which resulted in the underreporting of his net profits from his businesses
on his 2012 and 2013 tax returns.
nnn. Petitioner intended to mislead respondent.
ooo. Petitioner fraudulently, and with intent to evade tax, filed a false Form
1040, U.S. Individual Income Tax Return, for the taxable year 2012 that
underreported his income by $68,691.
ppp. Petitioner fraudulently, and with intent to evade tax, filed a false Form
1040 for the taxable year 2013 that underreported his income by $62,044.
qqq. All or part of petitioner’s deficiency in income tax for the taxable year
2012 is due to fraud with intent to evade tax.
rrr. If it is found that all or part of petitioner’s deficiency in income tax for
the taxable year 2012 is not due to fraud with intent to evade tax, then respondent
alleges that the deficiency is due to negligence or disregard of rules and
regulations and/or a substantial understatement of income tax and petitioner is
liable for a penalty under section 6662(a).
sss. All or part of petitioner’s deficiency in income tax for the taxable year
2013 is due to fraud with intent to evade tax.
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[*15] ttt. If it is found that all or part of petitioner’s deficiency in income tax for
the taxable year 2013 is not due to fraud with intent to evade tax, then respondent
alleges that the deficiency is due to negligence or disregard of rules and
regulations and/or a substantial understatement of income tax and petitioner is
liable for a penalty under section 6662(a).
Discussion
Summary judgment may be granted with respect to all or any part of the
legal issues in controversy “if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable materials, together with the
affidavits or declarations, if any, show that there is no genuine dispute as to any
material fact and that a decision may be rendered as a matter of law.” Rule 121(a)
and (b). Summary judgment is intended to expedite litigation and avoid
unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678,
681 (1988). The opposing party cannot rest upon mere allegations or denials in
his pleadings and must “set forth specific facts showing that there is a genuine
dispute for trial.” Rule 121(d). The moving party bears the burden of proving
there is no genuine issue of material fact, and factual inferences will be read in a
manner most favorable to the party opposing summary judgment. Dahlstrom v.
Commissioner, 85 T.C. 812, 821 (1985). Deemed admissions pursuant to Rule
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[*16] 37(c) have long been held to be sufficient to sustain a motion for summary
judgment. See, e.g., Green v. Commissioner, T.C. Memo. 2007-217; Evanko v.
Commissioner, T.C. Memo. 1984-168.
Income Tax Deficiencies
The first issue for decision is whether we should grant respondent summary
judgment as to the deficiencies for the years in issue.
Respondent’s motion is supported by petitioner’s failure to reply to the
affirmative allegations in the answer. Where a reply is not filed, the affirmative
allegations in the answer will be deemed denied unless the Commissioner, within
45 days after expiration of the time for filing the reply, files a motion that
specified allegations in the answer be deemed admitted. Rule 37(c). Facts
deemed admitted under Rule 37(c) are considered conclusively established and
may be relied on by the Commissioner even when he bears the burden of proof.
Baptiste v. Commissioner, 29 F.3d 1533, 1537 (11th Cir. 1994), aff’g T.C. Memo.
1992-198; Marshall v. Commissioner, 85 T.C. 267, 272-273 (1985).
In his answer respondent alleged that petitioner’s underreporting his income
and falsely overstating his business expenses resulted in underpayments of tax due
for the years in issue. Petitioner was given several opportunities to deny
respondent’s affirmative allegations. Because petitioner did not reply to these
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[*17] allegations and the Court granted respondent’s Rule 37(c) motion, petitioner
is deemed to have admitted these facts. These admissions are adequate to support
respondent’s burden of proving no genuine dispute of material fact exists as to the
deficiency determinations. Accordingly, we will grant respondent’s motion as to
the deficiencies determined for the years in issue.
Fraud Penalties
The second issue for decision is whether we should grant respondent’s
motion for summary judgment as to the section 6663(a) fraud penalties.
Section 6663(a) imposes a penalty equal to 75% of the portion of any
underpayment attributable to fraud. The Commissioner bears the burden of
proving by clear and convincing evidence that: (1) an underpayment of tax exists
and (2) some portion of the underpayment for each year is due to fraud with the
intent to evade tax. Sec. 7454(a); Rule 142(b). Deemed admissions under Rule
37(c) are sufficient to satisfy this burden. Doncaster v. Commissioner, 77 T.C.
334, 336-340 (1981).
Petitioner is deemed to have admitted that he fraudulently underreported
income and overstated business expense deductions. The facts clearly establish
petitioner’s underpayments as determined by respondent for the tax years in issue.
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[*18] Next, we turn to fraud, which is an actual wrongdoing with an intent to
evade a tax believed to be owing. See Marshall v. Commissioner, 85 T.C. 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). Because
direct proof of a taxpayer’s fraudulent intent is rarely available, fraud may be
proved by circumstantial evidence. 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, including the taxpayer’s
background, education, and experience. Niedringhaus v. Commissioner, 99 T.C.
202, 211 (1992); Stone v. Commissioner, 56 T.C. 213, 223-224 (1971).
Fraudulent intent may be inferred from various kinds of circumstantial
evidence, or “badges of fraud”, including consistent underreporting of income,
inadequate records, concealment of assets, dealing in cash, implausible or
inconsistent explanations of behavior, the filing of false returns, and a failure to
cooperate with tax authorities. Bradford v. Commissioner, 796 F.2d 303, 307 (9th
Cir. 1986), aff’g T.C. Memo. 1984-601; see also Kosinski v. Commissioner, 541
F.3d 671, 679 (6th Cir. 2008), aff’g T.C. Memo. 2007-173; McGraw v.
Commissioner, 384 F.3d 965, 971 (8th Cir. 2004), aff’g T.C. Memo. 2002-314;
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[*19] Pittman v. Commissioner, 100 F.3d 1308, 1319 (7th Cir. 1996), aff’g T.C.
Memo. 1995-243.
Petitioner’s deemed admissions of fact establish numerous badges of fraud
including: (1) underreporting his income and overstating deductions; (2) dealing
exclusively in cash; (3) maintaining inadequate records and concealing assets; (4)
giving implausible or inconsistent explanations; and (5) filing false income tax
returns. We note that petitioner possessed greater than average knowledge of the
requirements of the Internal Revenue Code because of his 20 years of experience
as an income tax return preparer. In addition, our finding of fraudulent intent is
supported by petitioner’s deemed admissions that he fraudulently and with intent
to evade tax filed false Federal income tax returns for the years in issue.
In sum, petitioner’s deemed admissions clearly satisfy respondent’s burden
of proving fraud for purposes of the section 6663(a) penalties. See Doncaster v.
Commissioner, 77 T.C. at 337. We are convinced that the totality of the evidence
establishes petitioner’s fraud for the years in issue. Accordingly, because there are
no material facts in dispute and because respondent has satisfied his burden of
proof by clear and convincing evidence, we will grant respondent’s motion for
summary judgment with respect to the section 6663(a) penalties.
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[*20] To reflect the foregoing,
An appropriate order and decision
will be entered.