Voccola v. Comm'r

T.C. Memo. 2009-11
UNITED STATES TAX COURT
EDWARD R. VOCCOLA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 7699-05, 14888-05, Filed January 15, 2009.
12005-06.
Edward R. Voccola, pro se.
Nina P. Ching, for respondent.
MEMORANDUM OPINION
NIMS, Judge: This matter is before the Court on
respondent’s motions for summary judgment under Rule 121 and
motions to dismiss for lack of prosecution under Rule 53. Unless
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otherwise indicated, all Rule references are to the Tax Court
Rules of Practice and Procedure, and all section references are
to the Internal Revenue Code in effect for the years in issue.
Respondent determined deficiencies in and an addition to tax
and penalties on petitioner’s Federal income tax as follows:
Penalty Addition to Tax
Year Deficiency Sec. 6663 Sec. 6651(a)(2)
1996 $56,715 $38,284.50 $14,178.75
1997 110,501 82,875.75 --
1998 122,762 92,071.50 --
1
2001 87,451 65,588.25 --
2002 147,966 110,974.50 --
2003 22,519 16,889.25 --
1
Respondent originally determined a $17,490.20 sec. 6662(a)
accuracy-related penalty in the notice of deficiency. The Court
granted respondent permission to file an amendment to the answer
to the amended petition, whereby respondent asserted the sec.
6663 penalty.
The issues for consideration are: (1) Whether petitioner
underreported income during the years in issue; (2) whether
petitioner is liable for the addition to tax for failure to
timely pay tax under section 6651(a)(2); and (3) whether
petitioner is liable for fraud penalties under section 6663.
We will grant respondent’s motions for summary judgment as
to the deficiencies and fraud penalties, rendering respondent’s
motions to dismiss moot. We will deny respondent summary
judgment on the issue of the addition to tax under section
6651(a)(2).
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Background
These cases are consolidated for purposes of trial,
briefing, and opinion and involve deficiencies, an addition to
tax, and penalties for the 1996, 1997, 1998, 2001, 2002, and 2003
taxable years. Petitioner was a resident of Massachusetts at the
time he filed the petitions in all three cases.
In docket No. 14888-05 respondent sent petitioner a notice
of deficiency for the 1996 tax year. Petitioner filed a petition
with this Court on August 11, 2005, challenging the determined
deficiency and the addition to tax. On August 3, 2006,
respondent served a request for admissions on petitioner.
Petitioner did not respond. On March 13, 2007, respondent filed
a motion for summary judgment on the basis of the deemed
admissions of the unanswered request for admissions.
In docket No. 7699-05 respondent sent petitioner a notice of
deficiency for the 2001 tax year. Petitioner filed a petition
with this Court on April 26, 2005, challenging the determined
deficiency and fraud penalty. On December 23, 2005, respondent
served a request for admissions on petitioner.1 On August 3,
2006, respondent served petitioner with a second request for
1
There was some uncertainty at the hearing on respondent’s
motions for summary judgment as to whether petitioner received
all three requests for admissions originally served by
respondent. However, petitioner did, in fact, receive copies of
the requests enclosed in a letter respondent later sent to
petitioner on Feb. 27, 2007, almost 3 full months before the
hearing on respondent’s motions for summary judgment.
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admissions. Petitioner never responded to either request for
admissions. On April 4, 2007, respondent filed a motion for
summary judgment on the basis of the deemed admissions from both
requests for admissions.
In docket No. 12005-06 respondent sent petitioner notices of
deficiency for the 1997, 1998, 2002, and 2003 tax years.
Petitioner filed a petition with this Court on June 23, 2006,
challenging the determined deficiencies and fraud penalties. On
August 21, 2006, respondent filed an answer to the petition.
Petitioner did not file a reply to respondent’s answer. On
October 17, 2006, pursuant to Rule 37(c), respondent moved for
entry of an order that the undenied allegations in the answer be
deemed admitted by petitioner. The Court ordered petitioner to
file a reply by November 13, 2006,2 but petitioner never did so.
On December 6, 2006, the Court granted respondent’s Rule 37(c)
motion and deemed admitted the allegations in respondent’s
answer. On April 4, 2007, respondent filed a motion for summary
judgment on the basis of the deemed admissions of the allegations
in the answer.
The Court ordered petitioner to file responses to the
motions for summary judgment, but he did not do so. On May 21,
2
The Rule 37(c) notice was returned to the Court marked “Box
Closed - Unable to Forward - Return to Sender”, but petitioner
received a copy of the order granting the Rule 37(c) motion with
respondent’s letter of Feb. 27, 2007.
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2007, the Court heard respondent’s motions for summary judgment,
at which time petitioner did not appear and had not filed a Rule
50(c) statement in lieu of an appearance. The cases were
consolidated on respondent’s oral motion, and respondent filed a
motion to dismiss for lack of prosecution in all three cases.
At the hearing, respondent also presented testimony
concerning petitioner’s fraud. Internal Revenue Service PSP
Section Chief Laura Benner (Ms. Benner) testified that petitioner
engaged in a pattern of filing his Federal income tax returns
early, before Forms W-2, Wage and Tax Statement, were generally
issued, and therefore created his own Forms W-2 from various
payroll statements in order to do so. On his returns petitioner
claimed significant losses on Schedule C, Profit or Loss From
Business, to offset Form W-2 wage income. He then filed amended
returns to increase and carry back those losses to prior years.
However, in order to qualify as a Schedule C trader in
securities, a taxpayer is generally required to rely on trading
activity as a primary source of income and meet meticulous
recordkeeping standards. Petitioner did not qualify as a
Schedule C trader in securities because he had substantial Form
W-2 income for some of the years in issue and failed to present
any of the required mark-to-market accounting. Furthermore,
petitioner had been banned from trading securities by the
Securities and Exchange Commission, yet he continued to claim
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Schedule C losses for 2002 and 2003. In fact, respondent found
no evidence of any trading activity by petitioner during those
years. Petitioner also engaged in a pattern of claiming
unverifiable charitable contribution deductions on Schedule A,
Itemized Deductions.
Respondent’s motions for summary judgment request that we
sustain the deficiencies, addition to tax, and penalties
determined in the notices of deficiency. Respondent contends the
facts deemed admitted under Rules 37(c) and 90(c) satisfy his
burdens of proof as to the deficiencies, addition to tax, and
penalties.
The facts deemed admitted under Rules 37(c) and 90(c) are
summarized as follows.
Petitioner omitted income and claimed false deductions on
his 1996, 1997, 1998, 2001, 2002, and 2003 income tax returns as
part of a 10-year pattern of intentionally evading tax.
On March 29, 2000, petitioner was indicted on three counts
of tax evasion in violation of section 7201. He was charged with
filing fraudulent joint income tax returns for the 1993, 1994,
and 1995 taxable years, in that they overstated itemized
deductions, reported negative taxable income, and reported a tax
liability of zero. He pleaded guilty to all 3 counts, and the
U.S. District Court for the District of Massachusetts entered
judgment accordingly on December 30, 2000.
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On September 10, 2002, petitioner was indicted on 11 counts
of securities fraud, 2 counts of falsely representing Social
Security numbers, 4 counts of mail fraud, and 1 count of wire
fraud. He pleaded guilty to all of the charges.
For the tax years at issue petitioner filed Forms 1040, U.S.
Individual Income Tax Return, Forms 1045, Application for
Tentative Refund, and Forms 1040X, Amended U.S. Individual Income
Tax Return, to claim losses and generate refunds to which he was
not entitled for those years.
In June 2002 petitioner filed a late return for the 1996 tax
year. He reported taxable income of $42,356 and a tax liability
of $9,256. After credits, he reported a tax liability of zero.
On or about December 7, 2000, petitioner filed a late return
for the 1997 tax year and reported a tax liability of $107,652.
Upon receipt of the return, respondent made math error
adjustments under section 6213(b)(1), recomputing petitioner’s
total tax liability as $110,501.35. Petitioner did not contest
these adjustments.
On or about December 11, 2000, petitioner filed a late
return for the 1998 tax year. He reported a tax liability of
$122,762 and on or about April 30, 2001, received a refund of
$63,561.85.
For the 2001 tax year petitioner filed a timely return and
reported a tax liability of negative $196,260. On or about May
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10, 2002, he filed a Form 1040X, increasing his claimed Schedule
C losses and reporting a tax liability of negative $338,625.
For the 2002 tax year petitioner filed a timely return,
reporting adjusted gross income of negative $249,398, taxable
income of negative $361,292, a tax liability of zero, and an
overpayment of $922. He also submitted a Form 1045, seeking to
carry back a net operating loss of $249,398 to the 1997 tax year.
Respondent accordingly issued petitioner a $95,428 refund for
1997.
On June 5, 2003, respondent received petitioner’s amended
return for the 2002 tax year. Petitioner decreased his adjusted
gross income to negative $435,939 and taxable income to negative
$547,783. On or about June 1, 2004, respondent received a second
Form 1045, whereby petitioner increased the net operating loss
being carried back to the 1997 tax year to $311,479. Respondent
accordingly issued an additional refund of $15,073 plus interest
of $203.70. Petitioner’s carrybacks allowed him to receive
refunds of all the tax he had paid for the 1997 taxable year, and
he then carried forward the remaining $343,334 of claimed net
operating losses to the 1998 taxable year. This resulted in a
refund of $122,762 plus interest of $1,659.04.
For the 2003 tax year petitioner filed a timely return and
reported adjusted gross income of negative $238,547, a tax
liability of zero, and an overpayment of $5,155. Upon receipt of
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petitioner’s 2003 return, respondent made math error adjustments
and recomputed petitioner’s adjusted gross income as negative
$228,548 and his overpayment as $3,425. Petitioner did not
contest these adjustments.
Petitioner prepared all of the returns and applications for
refund himself. He holds a master’s degree in business
administration from Temple University Graduate School of
Business, a juris doctor degree from Suffolk University School of
Law, and a master of laws degree in taxation from Boston
University School of Law. He also has years of work experience
as a tax specialist.
Petitioner engaged in a pattern of underreporting his income
tax from 1993 to 2003. He claimed unsubstantiated Schedule A
deductions, Schedule C expenses and losses, losses on Schedules
D, Capital Gains and Losses, and other deductions and credits on
Forms 1040. Petitioner also claimed he was in the business of
being a “trader in securities” using a “mark-to-market”
accounting method. He failed to make timely section 475(f)
elections and was not engaged in a Schedule C trade or business
as a trader in securities during these years. In fact,
petitioner worked full time as an employee for State Street Bank
& Trust Co. from 1994 to 1999.
For the 1996 tax year petitioner understated his tax
liability by $56,715. In calculating his reported tax liability
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of $9,256, he deducted an unsubstantiated $3,000 net capital
loss. This deduction stemmed from an alleged $225,138 short-term
capital loss carryover from 1995 which he could not substantiate.
Petitioner also overstated his Schedule A itemized
deductions by $58,947. He falsely claimed that he donated
“equipment, clothing, books, etc.” to a nonexistent St. Vincent
DePaul in Hingham, Massachusetts. Petitioner also claimed other
unsubstantiated miscellaneous deductions of $24,728, asserting
that he was entitled to a deduction for “income reported for
another taxpayer.”
On Schedule C petitioner claimed negative $67,406 of “Other
income” and expense deductions of $5,400, for a total loss of
$72,806. These expense deductions comprised a $5,000 deduction
for legal and professional services and a $400 deduction for
office expenses. Petitioner could not substantiate any of the
expenses and did not have a Schedule C business called “Osprey
Capital” in 1996, as claimed on his return.
Petitioner’s correct tax liability3 was $57,675. He
claimed, but failed to substantiate, an $8,296 general business
credit carryforward. After an allowed child care credit of $960,
petitioner’s understatement was $56,715.
3
Respondent’s requested admission incorrectly states that
taxable income was $57,675.
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For the 1997 tax year petitioner understated his tax
liability in the amount of $135,502.4 He claimed an
unsubstantiated Schedule C loss of $60,127, consisting of “Other
income” of negative $30,057 and interest expenses of $30,070. He
also claimed an unsubstantiated total net operating loss
carryback of $311,479. This alleged net operating loss carryback
originated from fabricated losses claimed on the 2002 return and
the amended 2002 return.
After the carrybacks and carryforwards claimed on his
return, petitioner reported taxable income of negative $26,173
and a tax liability of zero. Petitioner’s correct taxable income
and tax liability were $374,614 and $135,502, respectively.
For the 1998 tax year petitioner understated his tax
liability by $227,331. Petitioner claimed an unsubstantiated
Schedule C loss of $256,371, consisting of negative $245,769 in
“Other income” and $10,602 in interest expenses. Petitioner
claimed a total net operating loss carryback of $343,334 which he
could not substantiate. The alleged net operating loss carryback
again originated from fabricated losses claimed on the 2002
return and the amended 2002 return.
4
Neither for 1997 nor for 1998, infra, does the
understatement coincide with the deficiency, supra, because
respondent appears to have determined deficiencies only in the
amounts of the refunds received by petitioner. Respondent did
not seek deficiencies for the full amounts of the
understatements.
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After carrybacks and carryforwards, petitioner reported
taxable income of negative $24,417 and a tax liability of zero.
Petitioner’s correct taxable income was $631,813, and his correct
tax liability was $227,331.
For the 2001 tax year petitioner understated his income tax
liability by $87,451. He failed to report $229,815 in realized
short-term gains from sales of stock and bonds, $2,437 in
interest income, $50,293 in Massachusetts State income tax
refunds, and $2,024 in unemployment compensation from the
Commonwealth of Massachusetts.
Petitioner claimed an unsubstantiated Schedule C net loss of
$164,418, but his trading activity during the 2001 tax year was
not substantial, frequent, regular, and continuous. He also
received Form W-2 wage income of $4,673 from Herb Chambers, Inc.
(Herb Chambers).
Petitioner reported a tax liability of negative $196,260 on
his 2001 return and negative $338,625 on his amended return. His
correct tax liability was $259,410.
For the 2002 tax year petitioner understated his tax
liability by $147,966. He failed to report $785,000 in capital
gain income, $266 in wage income from Herb Chambers, and $582 in
interest income from the Massachusetts Department of Revenue and
the U.S. Department of the Treasury.
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Petitioner and his former spouse, Joanne P. Voccola (Joanne
Voccola), sold their residence in Hingham, Massachusetts, for
$1,375,000 on July 17, 2002. They had purchased the property for
$340,000 as tenants by the entirety on December 13, 1990.
Petitioner, however, failed to substantiate his ownership
interest and basis in the property at the time of the sale.
Petitioner also improperly claimed dependency exemptions for
his three children during the 2002 taxable year. Petitioner and
his spouse divorced in 2002, and Joanne Voccola was granted
physical custody of their three children. Petitioner did not
attach a Form 8332, Release of Claim to Exemption for Child of
Divorced or Separated Parents, to his 2002 return and was not
entitled to claim the dependency exemptions.
Petitioner worked as a mortgage broker during the 2002 tax
year, earning $5,125 of self-employment income from GMC Mortgage
(for which he received a Form 1099-MISC, Miscellaneous Income)
but incorrectly reporting it as “other income” on his return. On
his amended return he claimed an unsubstantiated Schedule C loss
of $450,052, consisting of negative $339,266 of “other income”
and $110,786 of unsubstantiated expenses.
On his amended return he reported taxable income of negative
$547,783 and a tax liability of zero. His correct taxable income
was $750,184, and his correct tax liability was $147,966.
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For the 2003 tax year, petitioner understated his income tax
liability by $22,519. He failed to report interest income of
$4,017 and a prior year’s State refund of $350.
Petitioner again claimed dependency exemptions for his three
children during the 2003 taxable year. He did not have physical
custody of the children and was not entitled to claim said
exemptions.
Petitioner reported $77,302 of gross receipts on his
Schedule C, but he erroneously reported as Schedule C income
$27,112 in wages that he received from Ark Mortgage & Investment
Co. (Ark Mortgage). Respondent accordingly adjusted the gross
receipts reported to $50,189. Since petitioner’s Schedule C
self-employment income from Ark Mortgage was actually $52,644, he
underreported his Schedule C income by $2,455. Petitioner also
claimed various expenses of $60,849 and “other income” of
negative $245,000, which he could not substantiate. The total
unsubstantiated net Schedule C loss he claimed on the return was
$255,660.
Petitioner reported taxable income of negative $245,498 and
a tax liability of zero. His correct taxable income was $72,605,
and his correct tax liability was $22,519.
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Petitioner failed to maintain, or to submit for examination
by respondent, complete and adequate books and accounts of his
income-producing activities, expenses, and deductions for the
years in issue, as required.
Discussion
Summary judgment may be granted when there is no genuine
issue of material fact and a decision may be rendered 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 opposing
party cannot rest upon mere allegations or denials in his
pleadings and must “set forth specific facts showing that there
is a genuine issue for trial.” Rule 121(d). The moving party
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. Dahlstrom
v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.
Commissioner, 79 T.C. 340, 344 (1982).
The first issue for decision is whether we should grant
respondent summary judgment as to the deficiencies for the years
in issue.
Respondent’s motions for summary judgment are supported by
petitioner’s failure to answer the affirmative allegations in
respondent’s answer and requests for admissions. Where a reply
is not filed, affirmative allegations in the answer will be
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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), affg. T.C.
Memo. 1992-198.
Similarly, a request for admissions is deemed admitted
unless an objection or written answer specifically denying the
matter is served within 30 days after service of the request.
Rule 90(c); Freedson v. Commissioner, 65 T.C. 333, 334-336
(1975), affd. 565 F.2d 954 (5th Cir. 1978). Facts deemed
admitted under Rule 90(c) may satisfy the burden of proving that
no genuine issue of material fact exists as to respondent’s
deficiency determinations and that the Commissioner is entitled
to a decision as a matter of law. Marshall v. Commissioner, 85
T.C. 267, 272 (1985).
Respondent alleged in his answer and requests for admissions
that petitioner omitted income and claimed false deductions which
he could not substantiate for the years in issue. By virtue of
petitioner’s failure to respond and the Court’s granting of
respondent’s Rule 37(c) motion, petitioner is deemed to have
admitted these facts. These deemed admissions satisfy
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respondent’s burden of proving no genuine issue of material fact
exists, and we accordingly will grant respondent summary judgment
as to the deficiencies.
The second issue for decision is whether we should grant
respondent’s motion for summary judgment on the section
6651(a)(2) addition to tax for the 1996 tax year.
Section 6651(a)(2) provides for an addition to tax of up to
25 percent for failure to timely pay the tax shown on the return
unless such failure was due to reasonable cause and not willful
neglect. Respondent erred when he applied the applicable 25
percent rate to the full amount of the deficiency. Petitioner is
not liable for any addition to tax under section 6651(a)(2)
because his total tax shown on the return was zero. The tax
shown on the return is reduced by the amount of credits which may
be claimed. Sec. 301.6651-1(d)(1), Proced. & Admin. Regs.
Petitioner’s 1996 return showed an initial tax liability of
$9,256. He then claimed a child care credit of $960 and a
general business credit of $8,296. Since the total tax shown on
petitioner’s return was zero, there is no amount to which the
section 6651(a)(2) addition to tax may be applied.
Although respondent subsequently disallowed the general
business credit, this does not render petitioner liable for the
penalty. The disallowance creates a deficiency rather than a
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nonpayment of tax shown on the return. In Service Center Advice
200001037 (Nov. 10, 1999), the Commissioner detailed the effect
of reductions of different types of credits:
For purposes of the Form 1040, U.S. Individual Income
Tax Return, the “amount shown as tax on the return” is
the amount of total tax as shown on the line
immediately above the payments section * * * [line 51
on 1996 Form 1040]. * * * [Refundable] credits are
considered “below the line” credits because they are
all applied after the calculation of total tax
* * * [below line 51 on 1996 Form 1040]. These credits
are treated like payments of tax. All other credits
[i.e., nonrefundable credits] are included in the
calculation of the total tax and are considered “above the
line” credits * * *
* * * reductions to non-refundable credits directly
affect the calculation of the total tax, whereas
reductions to refundable credits do not. Since the
§ 6651(a)(2) penalty is only applicable to the failure to
pay tax as shown on the return, reductions to non-refundable
credits would not trigger the § 6651(a)(2) penalty
* * *
While the informal guidance provided by Service Center
Advice is not binding on the Commissioner--unlike the effect of
revenue rulings under Rauenhorst v. Commissioner, 119 T.C. 157
(2002)--the analysis provided by this particular advisory is
correct as it relates to the business credit petitioner claimed.
The general business credit is a nonrefundable credit, and
respondent’s disallowance of the credit results in an adjustment
to petitioner’s total tax. The amount of the disallowed credit
is therefore included in the deficiency, thus rendering it
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subject to the section 6663 fraud penalty but not the section
6651(a)(2) addition to tax. We will accordingly deny respondent
summary judgment as to the section 6651(a)(2) addition to tax.
The third issue is whether we should grant respondent’s
motion for summary judgment as to the section 6663 fraud
penalties.
Section 6663 imposes a penalty equal to 75 percent of the
portion of any underpayment attributable to fraud. The
Commissioner bears the burden of proving by clear and convincing
evidence that an underpayment exists and some portion of each
underpayment is due to fraud with the intent to evade tax. Sec.
7454(a); Rule 142(b). This burden may be satisfied by facts
deemed admitted under Rule 37(c), Doncaster v. Commissioner, 77
T.C. 334, 336-338 (1981), or Rule 90(c), Coninck v. Commissioner,
100 T.C. 495, 499 (1993); Marshall v. Commissioner, supra at 273.
Respondent’s burden of proof as to the section 6663 fraud
penalties is satisfied by petitioner’s deemed admissions and the
testimony presented by respondent. By failing to respond to
affirmative allegations in the answer and requests for
admissions, petitioner is deemed to have admitted that he
fraudulently omitted income and claimed false deductions as part
of a plan to evade tax during the years in issue. Petitioner is
also deemed to have admitted that he fraudulently filed returns
for those years in order to claim losses and generate refunds to
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which he was not entitled. These deemed admissions conclusively
establish that the underpayments of tax were due to fraud with
intent to evade tax. The admissions are further supported by Ms.
Benner’s testimony. For these reasons, we will grant
respondent’s motions for summary judgment as to the section 6663
penalties.
To reflect the foregoing,
Appropriate orders and
decisions will be entered.