Doncaster v. Comm'r of Internal Revenue

• Decision Date: 11 August 1981
• Docket Number: Docket No. 12794-80.
• Citation: 77 T.C. 334
• Parties: RICHARD M. DONCASTER, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

77 T.C. 334

RICHARD M. DONCASTER, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 12794-80.

United States Tax Court

Filed August 11, 1981.

Pursuant to Rule 37(c), Tax Court Rules of Practice and Procedure, respondent moved that affirmative allegations of specific facts and of fraud with intent to evade tax contained in his answer be deemed admitted. Also pursuant to Rule 37(c), such motion was set for hearing, at which petitioner failed to appear or otherwise to respond to the motion, and the Court ordered that all affirmative allegations contained in the answer be deemed admitted. Held, the deemed admitted affirmative allegations were sufficient to carry respondent's burden of proof as to fraud (see Rule 142(b), Tax Court Rules of Practice and Procedure), and respondent's motion for summary judgment on that issue is granted. Held, further, that, as a result of petitioner's failure to appear at trial and submit any evidence, in respect to the underlying deficiency, he has failed to carry his burden of proof as to that element of the case (see Rule 142(a), Tax Court Rules of Practice and Procedure), and respondent's motion for judgment by default is granted. Richard M. Doncaster, pro se.

Charles W. Maurer, Jr., for the respondent.

OPINION

TANNENWALD , Chief Judge:

Respondent determined a deficiency in the amount of $6,947.50 in petitioner's Federal income tax for 1976 and an addition to tax for fraud under section 6653(b)¹ in the amount of $3,473.75. The case is before us on respondent's motion for a default judgment as to the underlying deficiency and for summary judgment as to the addition to tax for fraud.

The petition herein sets forth the claim that petitioner is a duly ordained clergyman and pastor of the Freedom Church; that, because he has taken a vow of poverty, all the money he earned was contributed to further the missionary work of the church; that, by virtue of the Bill of Rights and First Amendment to the Constitution, religious and secular law were separated; and that, as a consequence, petitioner is not subject to tax on his earnings.

Respondent filed an answer in which he denied the substantive allegations of the petition and further alleged as follows:

7. FURTHER ANSWERING the petition, and in support of the determination that a part of the underpayment of tax required to be shown on the petitioner's joint income tax return for the taxable year 1976 is due to fraud, the respondent alleges:

(a) During the taxable year 1976 the petitioner received dividend income in a total amount of $1,512.00.

(b) The petitioner failed to report any dividend income on his 1976 federal income tax return.

(c) On his 1976 federal income tax return the petitioner claimed a deduction of $22,833.00 for contributions to “The Freedom Church.”

(d) The petitioner did not make contributions to “The Freedom Church” during the taxable year 1976 in the amount of $22,833.00.

(e) “The Freedom Church” is not an organization entitled to receive deductible contributions under I.R.C. sec. 170(c)(2).

(f) On his 1976 federal income tax return, the petitioner understated his taxable income in the amount of $22,195.00.

(g) On his 1976 federal income tax return, the petitioner understated his income tax liability in the amount of $6,947.50.

(h) The petitioner, fraudulently, and with intent to evade tax, omitted taxable income of $22,195.00 from his 1976 federal income tax return.

(i) A part of the underpayment of tax required to be shown on the petitioner's 1976 federal income tax return is due to fraud with intent to evade tax.

Petitioner having failed to file a reply, respondent moved for entry of an order that the undenied allegations in the answer be deemed admitted. That motion was served upon petitioner together with a notice of hearing on the motion on December 10, 1980, in Washington, D.C. Petitioner did not appear at the hearing or otherwise respond to respondent's motion, and the Court, on December 10, 1980, entered an order granting respondent's motion and deeming admitted “the undenied affirmative allegations contained in paragraphs 7(a) to (i), inclusive, of respondent's Answer.” A copy of that order was served upon petitioner on December 17, 1980.

This case was noticed for trial at a trial session of the Court commencing on May 4, 1981, in Boston, Mass., and a copy of the notice setting the case for trial was served upon petitioner on January 29, 1981. Petitioner did not appear when the case was called from the calendar on May 4, 1981, nor again when it was called for trial on May 5, 1981.² At the latter time, respondent advised the Court that he would not present testimony on the issue of the addition to tax under section 6653(b) but would rely on the deemed admitted allegations of his answer to carry his burden of proof on that issue.

As to the underlying deficiency, there is no question that respondent should prevail, either on the ground that the petitioner has defaulted by virtue of his nonappearance at trial and/or has failed to carry his burden of proof. Gilday v. Commissioner, 62 T.C. 260 (1974); Roldan v. Commissioner, T.C. Memo. 1980-73; Rule 142(a).

As to the addition to tax for fraud, the burden of proof is on the respondent (sec. 7454(a); Rule 142(b)), and he must carry that proof by clear and convincing evidence (see Grosshandler v. Commissioner, 75 T.C. 1, 19 (1980)). In this case, respondent has chosen to rely solely on petitioner's failure to reply to the answer and the order of the Court deeming the affirmative allegations of the answer admitted to carry his burden of proof. Under Rule 36(b), once a petitioner assigns error to the determination of fraud in the deficiency notice (as petitioner did herein), the respondent must affirmatively plead fraud in his answer and include therein the facts in support thereof. This respondent did by means of the allegations set forth in paragraph 7 of the answer. Once respondent so pleads and the petitioner fails to file a reply, the affirmative allegations are deemed denied unless the respondent files a motion for an order “that specified allegations in the answer be deemed admitted,” in which case the motion will be noticed for hearing. Rule 37(c). The foregoing procedure has the obvious purpose of permitting the issues to be tried to be narrowed, thus conserving the time and efforts of both the parties and the Court. Comparable provisions are contained in sections 7(a) and 8(c), Federal Rules of Civil Procedure.³ Every element of the required scenario was followed herein, and the allegations of paragraph 7 of the answer, including subparagraphs (h) and (i), were deemed admitted.

It is clear from the foregoing that a petitioner cannot, by total and continued silence, ensure that he will not be considered as having, in effect, conceded his case. The fact that subparagraphs (h) and (i) are worded in conclusory language does not require a different conclusion. They were “specified allegations” within the meaning of Rule 37(c); in our judgment, their deemed admission more than satisfies the respondent's burden of proof. Marcus v. Commissioner, 70 T.C. 562, 577 (1978); cf. Ritchie v. Commissioner, 72 T.C. 126, 129 (1979). We are reinforced in our conclusion by the numerous holdings that fraud is a question of fact—-albeit an ultimate question of fact. E.g., Grosshandler v. Commissioner, supra at 19. Even if we were to take the view that, in the context of this case, the ultimate issue of fraud should not be considered a pure question of fact, it is at least a question of “the application of law to fact” and consequently is an appropriate matter for the Court to deem admitted.⁴ Cf. Rule 90(a), Tax Court Rules of Practice and Procedure; rule 36(a), Fed. R. Civ. P. So that there will be no misunderstanding, we emphasize that the deemed admissions of the allegations of paragraphs 7(a) through 7(g) are also of importance in respect of respondent's ability to establish his fraud case; he has the burden of proving the facts necessary to show an underpayment (to which the addition to tax for fraud attaches) and may not rely upon petitioner's failure to produce evidence in order to carry his (respondent's) burden in that respect. Estate of Beck v. Commissioner, 56 T.C. 297, 363 (1971).

Nothing in Gordon v. Commissioner, 73 T.C. 736 (1980), and its suggestion as to the possible continued vitality of Miller-Pocahontas Coal Co. v. Commissioner, 21 B.T.A. 1360 (1931) (see 73 T.C. at 742), dictates that we should require respondent to present affirmative evidence of fraud, independent of the deemed admissions.⁵ In Gordon, respondent did not utilize the procedure encompassed by Rule 37 and, in point of fact, petitioner filed a reply denying the affirmative allegations of fraud.

Decision will be entered for the respondent.

Reviewed by the Court.

DAWSON , J., concurring:

I concur both in the result of this case and in the analysis of the majority opinion. I disagree with the dissent that the Court's holding will operate as a trap for “unwary taxpayers” against whom the fraud penalty has been alleged by the Commissioner. I think our Rules preclude the possibility that the addition to tax for fraud will be imposed by default against a petitioner who indicates, however inartfully, that respondent should be put to his proof.

Under Rule 37(c), respondent's affirmative allegations of fraud are deemed denied in the absence of a reply. The petitioner is thus protected against his or her own inaction. However, respondent can move for an order that the undenied allegations be deemed admitted. Under Rule 21(a), such a motion must be served on the petitioner. The usual Rule 37(c) motion is not incomprehensible to the average petitioner. At the very least, it intuitively alerts him to the fact that respondent contemplates action adverse to his interest. Such alert should elicit some protective response. In any event, the Court does not automatically...