Smith v. Comm'r of Internal Revenue, Docket No. 5448-76.

• Citation: 91 T.C. 1049,91 T.C. No. 66
• Decision Date: 12 December 1988
• Docket Number: Docket No. 5448-76.
• Parties: DONALD G. SMITH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

91 T.C. 1049

91 T.C. No. 66

DONALD G. SMITH, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5448-76.

United States Tax Court

Filed December 12, 1988

P was given prior notice that, in the event that he failed to appear at trial, the Court might enter a decision against him. P failed to appear at trial. R offered no evidence and filed a motion to hold P in default under Rule 123(a) and enter a decision against him for the deficiencies and additions to tax determined by R, including the addition to tax for fraud under sec. 6653(b), I.R.C. 1954. HELD, R's motion for decision by default will be granted. Miller-Pocahontas Coal Co. v. Commissioner, 21 B.T.A. 1360 (1931), overruled. James C. Fee, Jr., for the respondent.

WELLS, JUDGE:

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

+---------------------------------------+
                ¦            ¦          ¦Addition to tax¦
                +------------+----------+---------------¦
                ¦Taxable year¦Deficiency¦sec. 6653(b)1  ¦
                +------------+----------+---------------¦
                ¦1972        ¦$3,866.78 ¦$1,933.39      ¦
                +------------+----------+---------------¦
                ¦1973        ¦4,962.84  ¦2,481.42       ¦
                +---------------------------------------+
                

Respondent has moved that we hold petitioner in default under Rule 123(a) and enter a decision against him for the deficiencies in and additions to tax determined by respondent, including the addition to tax for fraud.

Petitioner was incarcerated in the Federal Penitentiary in Lewisburg, Pennsylvania, at the time he filed his petition. The form petition only stated petitioner's reasons for disagreement with the notice of deficiency as follows: ‘I am at Lewisburg penitentiary and am presently sueing [sic] the I.R.S. in Cleveland, Ohio concerning this investigation. I state my taxes are correct to my knowledge. I am requesting appointed counsel.‘ Petitioner had resided in Ohio prior to being incarcerated.

Respondent's answer denied the substantive allegations of the petition and further alleged:

6. FURTHER ANSWERING the petitioner, and in support of the determination that part of the underpayments of tax required to be shown on the petitioner's income tax returns for the taxable years 1972 and 1973 are due to fraud, the respondent alleges:

(a) During the taxable years 1972 and 1973, petitioner derived taxable income from various sources, including, but not limited to, the following:

(1) Receipts from employment as a production worker with the Goodyear Tire and Rubber Company, Akron, Ohio;

(2) Supplemental unemployment benefits from the Goodyear Tire and Rubber Company, Akron, Ohio;

(3) Receipts from miscellaneous ‘odd jobs‘;

(4) Receipts in respect of real property located at 492 Brittain Road, Akron, Ohio, 496 Brittain Road, Akron, Ohio, 1686 Oakwood Avenue, Akron, Ohio, 2924 Pressler Road, Uniontown, Ohio, and 2916 Pressler Road, Uniontown, Ohio;

(5) Receipts from wagering; and

(6) Receipts from narcotics trafficking.

(b) Petitioner failed to maintain, or to submit for examination by respondent, complete and adequate books of account and records of income as required by the applicable provisions of the Int. Rev. Code of 1954 and the regulations promulgated thereunder.

(1) During the taxable years 1972 and 1973, the petitioner, with intent to evade and defeat taxes, failed to maintain complete and accurate books of account and records of income as required by the applicable provisions of the Int. Rev. Code of 1954 and the regulations promulgated thereunder.

(c) In the absence of complete and adequate books of account and records of income, respondent has determined petitioner's correct taxable income for each of the taxable years 1972 and 1973 on the basis of the net worth method.

* * *

(t) On December 9, 1974, petitioner pleaded guilty in the United States District Court for the Northern District of Ohio of possessing and distributing 40,000 LSD tablets.

* * *

Respondent's answer also set forth in detail the facts upon which he based his analysis of petitioner's net worth, including petitioner's beginning cash on hand, specific assets acquired and liabilities incurred by petitioner during the taxable years in issue, specific expenditures by petitioner for personal living expenses during the years in issue, and specific nontaxable receipts of petitioner during the years in issue. The net worth computation showed an increase in petitioner's net worth for taxable year 1972 in the amount of $13,181.87 and an increase in petitioner's net worth for taxable year 1973 in the amount of $19,782.48.

Petitioner filed with the Court a document entitled ‘Rebuttal to Respondent's Answer,‘ which made various accusations against respondent and demands over which this Court has no jurisdiction. That document was filed by the Court as petitioner's reply, and only generally disputed the allegations contained in respondent's answer. Respondent did not file with the Court any request for admissions; nevertheless, petitioner filed a ‘Response to Respondents First request for Admissions‘ on April 13, 1978. That response also did not deny specifically any of the allegations in respondent's answer.

On July 1, 1977, respondent filed a motion to change the place of trial from Philadelphia to Cleveland, and petitioner filed a response in opposition to that motion. On August 14, 1977, a hearing on that motion was attended by petitioner, and the motion was denied. On March 5, 1981, petitioner's address was changed on all Court records to the Federal Correctional Institute, Oxford, Wisconsin (the ‘Oxford, Wisconsin address‘). On June 2, 1987, the Court issued a trial notice setting the case for trial on November 2, 1987, in Philadelphia. That notice was mailed to the Oxford, Wisconsin address and read in pertinent part as follows:

The calendar for that Session will be called at 10:00 a.m. on that date and both parties are expected to be present at that time and be prepared to try the case. YOUR FAILURE TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU.

Your attention is called to the Court's requirement that, if the case cannot be settled on a mutually satisfactory basis, the parties, BEFORE TRIAL, must agree in writing to ALL facts and ALL documents about which there should be no disagreement. Therefore, the parties should contact each other promptly and cooperate fully so that the necessary steps can be taken to comply with this requirement. YOUR FAILURE TO

COOPERATE MAY ALSO RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU.

On September 2, 1987, September 16, 1987, and October 13, 1987, respondent's counsel sent petitioner letters addressed to the Oxford, Wisconsin address. The September 16, 1987 letter was forwarded to an address in Akron, Ohio (the ‘Akron, Ohio address‘) used by petitioner prior to the Oxford, Wisconsin address. All three letters, however, were returned to respondent as undeliverable.

Respondent attempted to determine petitioner's address through respondent's computer records and found that petitioner had used the Akron, Ohio address for his 1985 and 1986 tax returns. In October of 1987, respondent was informed by the Federal Inmate Locator Service that petitioner was released on parole from a halfway house in Ohio on May 9, 1984. On October 26, 1987, respondent sent petitioner another letter along with a copy of respondent's trial memorandum by express mail to the Akron, Ohio address. Respondent received no reply.

Petitioner failed to appear at the call of the instant case from the calendar on November 2, 1987. Respondent filed a written motion to hold petitioner in default and to enter a decision against petitioner for the deficiencies in and additions to tax determined by respondent, including the additions to tax for fraud. The Court served a copy of the motion on petitioner at both the Oxford, Wisconsin address and the Akron, Ohio address. ²

Respondent must prevail on the underlying deficiencies on the ground either that petitioner has defaulted by not appearing at trial or that he has failed to carry his burden of proof. Doncaster v. Commissioner, 77 T.C. 334, 336 (1981).

Respondent, however, bears the burden of proving by clear and convincing evidence that petitioner is liable for the additions to tax for fraud. Section 7454(a); Rule 142(b). See Grosshandler v. Commissioner, 75 T.C. 1, 19 (1980).

We have held that the Commissioner may satisfy his burden of proving liability for the addition to tax for fraud with deemed admissions (see Marshall v. Commissioner, 85 T.C. 267 (1985); Doncaster v. Commissioner, supra; Gilday v. Commissioner, 62 T.C. 260 (1974)), as a consequence of imposed sanctions (see Rechtzigel v. Commissioner, 79 T.C. 132 (1982), affd. on another issue 703 F.2d 1063 (8th Cir. 1983); Marcus v. Commissioner, 70 T.C. 562 (1978), affd. in an unpublished opinion 621 F.2d 439 (5th Cir. 1980)), or by a clear indication on the part of the taxpayer that he no longer would contest the fraud issue (see, e.g., Simmons v. Commissioner, 73 T.C. 1009 (1980); Gordon v. Commissioner, 73 T.C. 736 (1980)).

None of those elements, however, are present in the instant case. We thus are faced squarely with the issue of whether a taxpayer who does not appear at trial can be held liable for an addition to tax for fraud without the introduction into the record of evidence of fraud sufficient to carry respondent's burden of proof. In Miller- Pocahontas Coal Co. v. Commissioner, 21 B.T.A. 1360 (1931), we held that a taxpayer could not be held liable for an addition to tax for fraud absent such evidence. The question then is whether Miller- Pocahontas Coal Co. precludes the grant of respondent's motion in the instant case.

As a threshold matter it is important to note that a charge of fraud is a serious matter that must be proved by clear and convincing evidence. ³ Kerbaugh v. Commissioner, 29 B.T.A. 1014, 1016 (1934), affd. per...