Palmer v. Commissioner

LINDA RUTH PALMER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Palmer v. Commissioner

No. 9338-97

United States Tax Court

T.C. Memo 1999-89; 1999 Tax Ct. Memo LEXIS 104; 77 T.C.M. 1583; T.C.M. (RIA) 99089;

March 23, 1999, Filed

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An appropriate order and decision will be entered.

Kirk S. Chaberski, for respondent.

WELLS, JUDGE.

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WELLS

MEMORANDUM OPINION

[1] WELLS, JUDGE: This case is before the Court on respondent's motion for summary judgment pursuant to Rule 121. Unless otherwise indicated all 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.

[2] Respondent determined the following deficiencies in and additions to petitioner's Federal income taxes:

		Additions to Tax and Penalties
Year	Deficiency	Sec. 6653(b)(1) 1	Sec. 6654	Sec. 6661
1982	$ 6,918	$ 3,459	$ 656	$ 1,730
1983	53,455	26,728	3,271	13,364
1984	41,584	20,792	2,614	10,396

[3] Petitioner resided in East Dublin, Georgia, at the time she filed the petition in the instant case. In the answer, respondent denied all substantive allegations of fact and error contained in the petition and affirmatively alleged the following facts:

      6. FURTHER ANSWERING the petition and in support of

   respondent's determination that the underpayment of tax required

   to be shown on the petitioner's federal ">*105 income tax returns for

   each of the taxable years 1982, 1983, and 1984 is due to fraud,

   the respondent alleges:

     (a) From at least January of 1981 through October of 1985,

   the petitioner operated, as a sole proprietorship, a retail

   store in Las Vegas, Nevada known variously as "Linda Palmer

   Designs," "Mill Direct Carpets," and "Mill Direct Carpet and

   Furniture."

     (b) The business referred to in subparagraph 6.(a) above

   was primarily engaged in the retail sale of carpeting and other

   floor coverings, though the business also sold draperies and

   wall coverings.

     (c) During all relevant periods, the petitioner was solely

   responsible for maintaining all books and records of the

   business referred to in subparagraph 6.(a) above.

     (d) On or about April 15, 1983, the petitioner, with her

   husband Wayne E. Palmer (since deceased), filed a joint federal

   income tax return (Form 1040) for the 1982 taxable year with the

    Director, Ogden Service Center in Ogden, Utah.

     (e) The petitioner signed the joint 1982 federal income tax

   return referred to in subparagraph 6.(d) above on her own behalf

   and on behalf of Wayne E. Palmer as "his attorney in fact."

     (f) ">*106 The petitioner's 1982 joint federal income tax return

   reflected total income of $ 0 and total tax liability in the

   amount of $ 0. Said return made no mention of any business income

   or expenses or of any other income received by either the

   petitioner and/or Wayne E. Palmer during that taxable year.

     (g) On her joint 1982 federal income tax return, the

   petitioner listed her occupation as "disabled."

     (h) On or about May 17, 1984, the petitioner filed a joint

   federal income tax return (Form 1040) with Wayne E. Palmer for

   the 1983 taxable year with the Director, Ogden Service Center in

   Ogden, Utah. The sole income listed on said return is a loss in

   the amount of $ 10,524 which is reflected on a Schedule C (Profit

   (or Loss) From Business or Profession) from a business known as

   "Mill Direct Carpets." That Schedule C lists the petitioner as

   the sole proprietor of that business.

     (i) On the Schedule C referred to in subparagraph 6.(h)

   above, the petitioner listed gross receipts or sales in the

   amount of $ 343,607. After subtracting the claimed cost of goods

   sold, returns and allowances, the petitioner listed gross income

   from Mill Direct Carpets of ">*107 $ 103,504, total deductions in the

   amount of $ 114,028, and a net loss from the business of $ 10,524.

     (j) The petitioner listed total income tax liability of $ 0

   on her 1983 joint federal income tax return.

     (k) On or about April 15, 1985, the petitioner filed a

   joint federal income tax return (Form 1040) with Wayne E. Palmer

   for the 1984 taxable year with the Director, Ogden Service

   Center in Ogden, Utah. The sole income listed on said return is

   on an attached Schedule C which reflects a net loss in the

   amount of $ 4,519 from the operation of Mill Direct Carpets by

   the petitioner.

     (l) The 1994 Schedule C referred to in subparagraph 6.(k)

   above reflects gross receipts or sales of $ 493,956 less claimed

   cost of goods sold in the amount of $ 333,930 for gross income of

   $ 160,026. Said Schedule C also lists total deductions in the

   amount of $ 164,545 for a net loss from the operation of the

   business in the amount of $ 4,519.

     (m) The petitioner listed total income tax liability of $ 0

   on her 1984 joint federal income tax return.

     (n) The petitioner's 1982, 1983, and 1984 federal income

   tax returns were prepared by the "Nevada Tax Professionals"

   ">*108 based upon information provided to them by the petitioner.

     (o) The petitioner did not supply the "Nevada Tax

   Professionals" with access to books and records relating to

   income and expenses of her business for any of the taxable years

   here at issue.

     (p) The petitioner failed to maintain, or submit for

   examination by the respondent, any books of account and/or

   records of her business relating to gross and net receipts for

   each of the taxable years 1982 through 1984, as is required by

   applicable provisions of the Internal Revenue [C]ode and the

   regulations promulgated thereunder.

     (q) Any records maintained by the petitioner for the 1982

   through 1984 taxable years are incomplete, inadequate, fail to

   disclose all receipts and disbursements, and do not properly

   reflect the petitioner's correct taxable income for any of those

   years.

     (r) The petitioner's failure to keep adequate records

   regarding the income and expenses of her business and/or her

   failure to turn any such records over to the respondent

   constitutes indicia of the petitioner's fraudulent intent to

   evade the assessment and payment of federal income tax due

   following the receipt ">*109 of that income.

     (s) The respondent has determined the petitioner's correct

   gross receipts and resultant taxable income for each of taxable

   years 1982 through 1984 on the basis of the bank deposits

   analysis method of income reconstruction. In making said

   analysis, the respondent has utilized all available records.

     (t) Attached as Exhibits 1A and 1B to the Notice of

   Deficiency (which is itself attached hereto as Exhibit A) is a

   bank deposits analysis statement of income reconstruction for

   the petitioner's 1982 through 1984 taxable years. Such analysis

   is incorporated herein in its entirety by reference. The

   petitioner did in fact make all deposits to bank accounts as are

   reflected on those exhibits.

     (u) The petitioner's understatement of gross receipts as

   determined by the bank deposits analysis method of income

   reconstruction is in the amount of $ 95,445 for 1982, $ 138,160

   for 1983 and $ 103,125 for [the] 1984.

     (v) During 1982, 1983, and 1984, neither the petitioner nor

   Wayne E. Palmer received any gifts, inheritances, legacies or

   other devises.

     (w) At the beginning of the 1982 taxable year and at all

   times during 1982, 1983, and ">*110 1984, neither the petitioner nor

   Wayne E. Palmer received any non-taxable or excludable income,

   receipts, cash, or other assets other than as reflected in the

   bank deposits analysis attached hereto and incorporated herein

   by reference.

     (x) The petitioner realized gross receipts from her

   business during 1982 in the amount of $ 95,445 which she

   fraudulently omitted from her 1982 joint federal income tax

   return with the intent to evade income tax.

     (y) The petitioner realized gross receipts from her

   business during 1983 in the amount of $ 138,160 which she

   fraudulently omitted from her joint 1983 federal income tax

   return with the intent to evade income tax.

     (z) The petitioner realized gross receipts from her

   business during 1984 in the amount of $ 103,125 which she

   fraudulently omitted from her joint 1984 federal income tax

   return with the intent to evade income tax.

     (aa) In addition to the unreported gross receipts from her

   business which the respondent was forced to determine through

   use of the bank deposits analysis, the petitioner received

   interest income during 1982, 1983, and 1984 in the respective

   amounts of $ 7,541, $ 6,619 and ">*111 $ 610.

     (ab) The petitioner reported none of the interest income

   reflected in subparagraph 6.(aa) above on her respective 1982,

   1983, and 1984 federal income tax returns.

     (ac) In addition to the interest and business income

   reflected above, the petitioner realized income from the sale of

   a tractor during the 1984 taxable year in the amount of $ 4,478,

   which income the petitioner failed to report on her joint 1984

   federal income tax return.

      (ad) The petitioner also received taxable social security

   income during 1984 in the amounts of $ 4,478 which she failed to

   report on her joint 1984 federal income tax return.

     (ae) The petitioner's failure to report income as reflected

   above on her 1982, 1983, and 1984 joint federal income tax

   returns was fraudulent with the intent to evade income tax.

     (af) The petitioner represented to third-parties that her

   gross, net, and taxable income from her business and from other

   sources was significantly higher than the income which she

   reported on her joint 1982, 1983, and 1984 federal income tax

   returns. These willful misrepresentations included the

   petitioner's sworn written statements which she submitted ">*112 with

   applications for loans.

     (ag) The misrepresentations reflected in subparagraph

   6.(af) above indicate the petitioner's contemporaneous knowledge

   that her income was significantly greater than that which she

   reported on the tax returns which she filed with the respondent,

   that those returns were false, and that at all relevant times

   she possessed a fraudulent intent to evade the assessment and

   payment of income tax.

     (ah) The petitioner affirmatively attempted to mislead

   agents of the Internal Revenue Service as to her gross income

   for each of the years here at issue, and failed to cooperate

   during the respondent's examination of her true income with

   respect to those years. This behavior and lack of cooperation

   provide evidence of petitioner's intent to defraud.

     (ai) The petitioner also failed to report substantial

   income from her business on her 1985 federal income tax return,

   which year is not before the Court in this case.

     (aj) The petitioner's four-year pattern of substantially

   underreporting income from her business evidences her intent to

   evade or defeat the assessment and payment of income taxes for

   each of those years.

     (ak) ">*113 The petitioner's failure to reflect her operation of

   any business interest whatsoever on her 1982 federal income tax

   return, while in reality realizing net income in excess of

   $ 95,000 from the operation of that business during that year

   provides further evidence of her intent to defraud.

     (al) The petitioner's act of reporting net losses from the

   operation of her business on her joint federal income tax

   returns for each of the taxable years 1983 and 1984 while in

   reality realizing net income in excess of $ 138,000 and $ 103,000

   during those years, respectively, provides additional evidence

   of the petitioner's intent to defraud.

     (am) The petitioner and Wayne E. Palmer enjoyed a

   tremendous increase in their net worth during the years here at

   issue while reporting negative net income on the joint tax

   returns which they filed with the respondent and while paying $ 0

   in federal income tax during that same 3-year period.

     (an) During 1995, the petitioner entered a plea of guilty

   before the United States District Court for the District of Utah

   to wilfully [sic] filing a false federal income tax return for

   the 1984 taxable year in violation of 26 U.S.C. 7206(1).

     (ao) ">*114 The material falsity to which the petitioner entered a

   plea of guilty was her willful failure to accurately report the

   true income received from her business during the 1984 taxable

   year.

     (ap) The petitioner is collaterally estopped in the instant

   proceeding from denying that she willfully failed to report a

   material amount of income from her business on her 1984 joint

   federal income tax return.

     (aq) All of the deficiency in income tax due from the

   petitioner for each of the taxable year 1982, 1983, and 1984 is

   due to fraud with the intent to evade income tax.

[4] Petitioner failed to reply to respondent's answer within the time permitted by Rule 37(a). Respondent moved, pursuant to Rule 37(c), for entry of an order that the undenied allegations in the answer be deemed admitted. The Court gave petitioner notice of respondent's motion and instructed petitioner that "if petitioner files a reply as required by Rule 37(a) and (b) of this Court's Rules * * *, respondent's motion will be denied." The Court's notice also advised petitioner that "if petitioner does not file a reply as directed herein, the Court will grant respondent's motion and deem admitted for purposes ">*115 of this case the affirmative allegations in the answer."

[5] Petitioner did not respond to respondent's motion. The Court granted respondent's motion and deemed admitted the undenied affirmative allegations of fact set forth in respondent's answer.

[6] Pursuant to notice to the parties, the instant case was set for trial during the Court's trial session in Atlanta, Georgia. Respondent filed a motion for summary judgment. Petitioner moved for a continuance which was denied. Petitioner never filed a response to respondent's motion for summary judgment. Petitioner did not appear before the Court when the instant case was called for trial, and respondent's motion for summary judgment was taken under advisement.

[7] We must now decide, based on the record in the instant case, including the facts deemed admitted, whether petitioner is liable for the deficiencies and additions to tax determined by respondent.

SUMMARY JUDGMENT

[8] We grant summary judgment "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered ">*116 as a matter of law." Rule 121(b). The party opposing the motion cannot rest upon the allegations or denials in the pleadings, but must "set forth specific facts showing that there is a genuine issue for trial." Rule 121(d). "The moving party, however, bears the burden of proving that 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." Marshall v. Commissioner, 85 T.C. 267">85 T.C. 267, 85 T.C. 267">271 (1985).

PERIOD OF LIMITATIONS

[9] In general, section 6501(a) requires the Commissioner to assess income tax deficiencies within three years from the date the tax return was filed. However, section 6501(c)(1) provides:

   SEC. 6501(c). Exceptions. --

     (1) False Return. -- In the case of a false or fraudulent

   return with the intent to evade tax, the tax may be assessed, or

   a proceeding in court for collection of such tax may be begun

   without assessment, at any time.

As discussed in detail below, we have found that the facts deemed

admitted under Rule 37(c) establish that petitioner's income tax

returns for 1982, 1983, and 1984, were filed fraudulently with the

intent to evade tax. Consequently, the three-year period ">*117 of

limitations in section 6501(a) does not apply.

DEFICIENCIES AND ADDITIONS TO TAX UNDER SECTIONS 6654 AND 6661

[10] As to the deficiencies determined by respondent and the additions to tax under sections 6654 and 6661, respondent's determinations are presumptively correct, and petitioner bears the burden of proving otherwise. See Rule 142(a). Based on the facts deemed admitted, petitioner has failed to meet her burden of proof. See 85 T.C. 267">Marshall v. Commissioner, supra at 272. Accordingly, we shall grant summary judgment for respondent with respect to such deficiencies and additions.

ADDITIONS TO TAX UNDER SECTION 6653(b)

[11] Respondent determined that petitioner is liable for the additions to tax for fraud pursuant to section 6653(b), which requires respondent to establish, by clear and convincing evidence, that there is an underpayment of tax and that some portion of that underpayment is due to fraud. See sec. 7454(a); Rule 142(b); DiLeo v. Commissioner, 96 T.C. 858">96 T.C. 858, 96 T.C. 858">873 (1991), affd. 959 F.2d 16">959 F.2d 16 (2d Cir. 1992).

[12] "Facts deemed admitted pursuant to Rule 37(c) are considered conclusively established and may be relied upon by the government even in relation to issues where the government ">*118 bears the burden of proof." Baptiste v. Commissioner, 29 F.3d 1533">29 F.3d 1533, 29 F.3d 1533">1537 (11th Cir. 1994), affg. T.C. Memo 1992-198; see also, Doncaster v. Commissioner, 77 T.C. 334">77 T.C. 334, 77 T.C. 334">336-338 (1981) (holding that deemed admissions under Rule 37(c) are sufficient to satisfy the government's burden of proof with respect to the issue of fraud).

[13] "Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing." Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 92 T.C. 661">698 (1989). Whether fraud exists is a question of fact to be resolved upon review of the entire record. See Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181, 67 T.C. 181">199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud will never be presumed. See Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 55 T.C. 85">92 (1970). It may, however, be proved by circumstantial evidence. See Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 53 T.C. 96">106 (1969). Courts have relied on a number of indicia or badges of fraud in deciding whether to sustain the Commissioner's determinations with respect to the additions to tax for fraud including: (1) understating income, (2) maintaining inadequate records, (3) failing to cooperate with tax authorities, and (4) failing to make estimated tax ">*119 payments. See Recklitis v. Commissioner, 91 T.C. 874">91 T.C. 874, 91 T.C. 874">910 (1988).

[14] In the instant case, the deemed admissions pursuant to Rule 37(c) include petitioner's admission to a number of indicia of fraud including: (1) understating her income taxes in the amounts of $ 6,918, $ 53,455, and $ 41,584 for the 1982, 1983, and 1984, taxable years, respectively; (2) maintaining inadequate records; and (3) failing to cooperate with tax authorities. Additionally, petitioner has failed to make estimated tax payments, another indicia of fraud. Furthermore, petitioner failed to appear for trial which is another indicia of fraud. See Smith v. Commissioner, 91 T.C. 1049">91 T.C. 1049, 91 T.C. 1049">1059-1060 (1988), affd. 926 F.2d 1470">926 F.2d 1470 (6th Cir. 1991). Finally, with regard to the 1984 taxable year, petitioner pleaded guilty to willfully filing a false Federal income tax return in violation of 26 U.S.C. sec. 7206(1). Although petitioner's conviction does not collaterally estop her from denying fraud, such conviction is one of the facts to be considered. See Wright v. Commissioner, 84 T.C. 636">84 T.C. 636, 84 T.C. 636">643-644 (1985). Based on the foregoing, we conclude that respondent has satisfied the burden of proving, by clear and convincing evidence, ">*120 that the entire underpayment of tax for each of the years in issue was due to fraud. Accordingly, we sustain respondent's determination regarding the additions to tax for fraud under section 6653(b).

[15] We have considered the parties remaining arguments ¹ and find them irrelevant or unnecessary to reach.

[16] To reflect the foregoing,

[17] An appropriate order and decision will be entered.

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Footnotes

• 1. Plus 50 percent of the interest on the deficiency under section 6653(b)(2).↩

• 1. In the petition, petitioner contends that her husband was responsible for filing the income tax returns during the years in issue and that she had no knowledge of any understatement of tax when she signed those returns. Because the deemed admissions clearly contradict petitioner's contention, we find that there is no genuine issue of fact and, accordingly, we shall grant respondent's motion for summary judgment.↩