dissenting:
The majority opinion sets forth an appealing argument for expediency based on the premise that the statutory rationale of Miller-Pocahontas Coal Co. v. Commissioner, 21 B.T.A. 1360 (1931), is obsolete. The holding of that case, in my view, should persist in spite of the ravages of time. The Commissioner there made a pragmatic argument that the taxpayer’s failure to appear put him in the same position as if no petition had been filed. The response was:
As soon as the petition is filed and the * * * [Court] has jurisdiction, the disposition of the issues must be made by the * * * [Court] in accordance with the prescribed rules of procedure and of evidence; and we see no reason to suppose that the Commissioner was intended to be entirely relieved of his burden of proof as to fraud when the taxpayer fails to appear. It may be that the lack of opposition lightens the burden as a practical matter; but respondent is entitled to no more. [21 B.T.A. at 1362.]
Congress long ago placed the burden of proof of fraud on respondent, and there is no indication that Congress would change that burden. Section 7454(a) is derived from a provision in the Revenue Act of 1928 that originated in the Senate and was agreed to by the House of Representatives. H. Rept. 1337, 83d Cong., 2d Sess. A433; S. Rept. 1662, 83d Cong., 2d Sess. 612 (1954); S. Rept. 960, 70th Cong., 1st Sess. 38 (1928), 1939-1 C.B. (Part 2) 409, 436; H. Rept. 1882 (Conf.), 70th Cong., 1st Sess. 21 (1928), 1939-1 C.B. (Part 2) 444, 452. Although there is no extensive discussion in that history as to the rationale of Congress in imposing the burden of proof of fraud on respondent, enactment of the provision followed testimony of the chairman of the committee on federal taxation of the American Bar Association that:
it seems to us thoroughly contrary to the ordinary principles of Anglo-Saxon and American jurisprudence that the taxpayer should have the burden of proof in negating the fact that there was fraud. [Statement of Hugh Satterlee, Esq., Hearings Before Senate Finance Committee, 70th Cong., 1st Sess. 16.]
The Finance Committee announced its decision to add to the law the predecessor of section 7454(a), as follows:
Proceedings before the Board [Board of Tax Appeals] involving that issue [fraud] in some respects resemble penal suits. The committee feels that the Commissioner should be placed in the position of party plaintiff and compelled to carry the burden of proving fraud whenever it is an issue in the case. * * * [S. Rept. 960, supra at 38, 1939-1 C.B. (Part 2) at 435-436. Emphasis supplied.]
I agree with and would defer to the policy adopted by Congress. I believe that the underlying rationale precludes rendering a default judgment against the taxpayer on a fraud issue merely because he or she fails to appear. Some proof of facts supporting the claim of fraud must be presented. The majority opinion here eliminates the burden on respondent to prove fraud, requiring absolutely no evidence to be placed in the record.
Indeed, we have held in prior cases that proof may consist of deemed admissions resulting from application of our rules. Requiring respondent to substantiate allegations of fraud with specific factual statements leading to deemed admissions provides some assurance that the facts support the conclusion. If the attorney for respondent preparing requests for admissions is complying with the intended uses of our Rules, he or she will be reviewing the files, setting forth facts that should be undisputed, and attaching documents substantiating the facts alleged. See Rule 90(a), Tax Court Rules of Practice and Procedure, and Notes to Rule 90(a) (60 T.C. 1069, 1114-1115). These additional steps provide some assurance that the determination made can be justified and that the judgment of the Court is not sanctioning nonmeritorious claims.
Section 7454(a) and Rule 142(b) require clear and convincing evidence. Deemed admissions are the equivalent of evidence establishing material facts. Rules 37(c) and 90(f); see Morrison v. Commissioner,, 81 T.C. 644, 648-649 (1983). Unadmitted allegations are not evidence. Rule 143(b); see Glick v. White Motor Co., 458 F.2d 1287, 1291 (3d Cir. 1972).
Rules 37, 90(f), and 91(f) provide means whereby failure to plead or otherwise respond may lead to admissions that serve the role of evidence. It undermines the existence of those Rules and ignores Rule 143(b) to allow respondent to prevail on the fraud issue without following any of these simple procedures.
The majority opinion (page 1059) finds that respondent’s net worth analysis is correct merely because petitioner did not appear for the trial of this case to dispute respondent’s allegations. The opinion holds that respondent’s net worth analysis “establishes a pattern of underreporting of substantial amounts of income by petitioner” and that the pattern “is evidence that petitioner knew that he substantially had understated his income and substantially underpaid his tax.” These findings are based merely on petitioner’s default and not on any evidence. Respondent has not satisfied his statutory burden of proving fraud and should not prevail on that issue. I respectfully dissent.
Chabot, Shields, Wright, and PARR, JJ., agree with this dissent.