Smith v. C.I.R.

• Decision Date: 22 April 1991
• Docket Number: No. 90-1049,90-1049
• Citation: 926 F.2d 1470
• Parties: -638, 91-1 USTC P 50,127 Donald G. SMITH, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1470

926 F.2d 1470

67 A.F.T.R.2d 91-638, 91-1 USTC P 50,127

Donald G. SMITH, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 90-1049.

United States Court of Appeals, Sixth Circuit.

Submitted Nov. 8, 1990.

Decided March 8, 1991.

Rehearing and Rehearing En Banc

Denied April 22, 1991.

Donald G. Smith, Cuyahoga Falls, Ohio, pro se.

Peter K. Scott, I.R.S., Office of Chief Counsel, Gary R. Allen, Acting Chief, Kenneth L. Greene, John A. Dudeck, U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for C.I.R.

Before KEITH, KENNEDY, and SUHRHEINRICH, Circuit Judges.

SUHRHEINRICH, Circuit Judge.

Petitioner appeals from the tax court's order denying his motion to vacate a default judgment granting the deficiency amount and fraud penalties. For the reasons stated below, the decision of the tax court is AFFIRMED.

I.

On April 15, 1976, the Commissioner of Internal Revenue ("Commissioner" or "respondent") sent a statutory notice of deficiency to petitioner, Donald G. Smith ("petitioner"), seeking deficiency taxes and fraud penalties based on alleged unreported income for the tax years 1972 and 1973. Petitioner filed a request for redetermination with the tax court on June 17, 1976. At the time he filed his petition, petitioner was incarcerated in the Federal Penitentiary in Lewisburg, Pennsylvania. As his reason for disagreement with the notice of deficiency the petitioner stated that: "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 did not allege any specific facts in support of his contention. Prior to incarceration, petitioner had resided in Ohio.

The Commissioner filed an answer denying the substantive allegations of the petition and further alleging that part of the underpayments of tax required to be shown on petitioner's income tax return for the years in question were due to fraud. In support of the fraud allegation, the answer to the petition listed taxable income derived from various sources in the taxable years 1972 and 1973, including receipts from narcotics trafficking, wagering, odd jobs, real property, and wages and unemployment compensation. The Commissioner'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 relevant taxable years, specific expenditures by petitioner for personal living expenses during the years in issue, and specific nontaxable receipts of petitioner during the years in question. The Commissioner determined 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 thereafter filed a reply entitled "Rebuttal to Respondent's Answer," which only generally disputed the allegations contained in the Commissioner's answer. The petitioner also filed a "Response to Respondent's First Request for Admissions" on April 13, 1978, even though the Commissioner did not file with the Court any request for admissions. ¹ That document also only generally disputed the allegations in the Commissioner's answer. On July 1, 1977, the Commissioner filed a motion to transfer the place of trial from Philadelphia to Cleveland, which the petitioner opposed. That motion was denied at a hearing conducted on August 14, 1977. On March 5, 1981, petitioner's address was changed on all the court records to reflect his transfer to the Federal Correctional Institute, Oxford, Wisconsin.

No further action was taken until June 2, 1987, when a Notice of Trial and Pretrial Order was mailed to petitioner setting the case for trial in Philadelphia, Pennsylvania on November 2, 1987 at 10 a.m. The notice also advised the parties that failure to appear at the time and/or failure to cooperate in the preparation of an agreement on all facts and documents as to which there should be no disagreement might result in dismissal of the case and entry of decision against the defaulting party. The notice was mailed to the Oxford, Wisconsin address. It was not returned to the Court as undeliverable and there is no other indication in the tax court's records that petitioner did not receive this notice.

On September 2, 1987, September 16, 1987, and October 13, 1987, the Commissioner sent petitioner letters to the Oxford, Wisconsin address requesting him to contact the Commissioner for the purpose of preparing the case for trial. The September 16, 1987 letter was forwarded to an Akron, Ohio address petitioner used prior to his Oxford, Wisconsin address. All three letters were eventually returned to the Commissioner as undeliverable.

When the Commissioner attempted to verify petitioner's address through computer records, it discovered that petitioner had used the Akron, Ohio address for his 1985 and 1986 tax returns. In October of 1987, the Commissioner learned from the Federal Inmate Locator Service that petitioner had been released on parole from a halfway house in Ohio on May 9, 1984. The Commissioner sent another letter along with a copy of respondent's trial memorandum on October 26, 1987 to the Akron, Ohio address. Petitioner did not reply.

Petitioner failed to appear for trial on November 2, 1989. Thereafter, upon motion of the Commissioner, the tax court entered a default against the petitioner under Rule 123(a) ² of the Rules of Practice and Procedure of the United States Tax Court ("Tax Ct.R.") for the full amount of the deficiency and fraud penalties, based solely upon the well-pleaded allegations in the Commissioner's answer. Specifically, the tax court held that petitioner had failed to "otherwise proceed" under Tax Ct.R. 123(a) by failing to communicate with the court, by failing to comply with the pretrial order regarding preparation of a stipulation of facts as required under Tax Ct.R. 91(a), and by failing to appear at trial. In granting the fraud penalties, the court in a reviewed opinion, ³ expressly overruled its earlier decision in Miller-Pocahontas Coal Co. v. Commissioner, 21 B.T.A. 1360 (1931), which held that a taxpayer cannot be held liable for an addition to tax for fraud unless the Commissioner introduces into the record evidence of fraud sufficient to carry the Commissioner's burden of proof. ⁴

The tax court entered its decision against petitioner for the deficiencies in and addition to tax on December 27, 1988. Before that decision became final, see 26 U.S.C. Sec. 7481(a)(1), petitioner timely filed a motion to set aside the default pursuant to Tax Ct.R. 123(c), ⁵ claiming that he had first become aware of the opinion granting the Commissioner's motion to hold petitioner in default and enter a decision against him when he read a newspaper article discussing the decision on January 4, 1989. That motion was denied on April 17, 1989. ⁶ This appeal followed.

II.

The United States Courts of Appeals have exclusive jurisdiction to review decisions of the tax court, except as provided in 28 U.S.C. Sec. 1254, "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. Sec. 7482(a); Headrick v. Commissioner, 918 F.2d 1263, (6th Cir.1990); Threlkeld v. Commissioner, 848 F.2d 81, 83 (6th Cir.1988). Thus, a tax court's findings of fact can be disturbed only if they are clearly erroneous; questions of law are subject to de novo review. Estate of Shafer v. Commissioner, 749 F.2d 1216, 1218 (6th Cir.1984) (citation omitted); see also Headrick, supra, (questions of law reviewed de novo ). Upon such review, the courts of appeals "shall have power to affirm or, if the decision of the Tax Court is not in accordance with law, to modify or to reverse the decision of the Tax Court, with or without remanding the case for a rehearing, as justice may require." 26 U.S.C. Sec. 7482(c)(1). Petitioner's appeal is properly before this court, since his legal residence for purposes of venue on appeal is Ohio, the state where he lived prior to incarceration and after being paroled and that state in which he still owns property. See 26 U.S.C. Sec. 7482(b).

A.

The first issue presented for consideration is whether the tax court properly entered a default judgment granting fraud penalties, based exclusively on the allegations in the Commissioner's answer, where the taxpayer filed a reply to the Commissioner's answer and a response to requests for admissions, but subsequently failed to participate in preparing a stipulation of facts and to appear for trial.

In this case the Commissioner issued a notice of deficiency to the petitioner in which he asserted that there were deficiencies in the petitioner's income taxes for 1972 and 1973. The Commissioner's deficiency determinations are presumed correct. The taxpayer therefore bears the burden of proving otherwise. Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 291, 79 L.Ed. 623 (1935); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933); Davis v. Commissioner, 674 F.2d 553, 553 (6th Cir.1982); Tax Ct.R. 142(a). The Commissioner also issued a 50 percent penalty for fraud with respect to the deficiencies pursuant to 26 U.S.C Sec. 6653(b). ⁷ In contrast with the deficiency assessment, the burden of proof as to the fraud penalty is on the Commissioner, who must prove the fraud by "clear and convincing" evidence. 26 U.S.C. Sec. 7454; Tax Ct.R. 142(a); ⁸ Traficant v. Commissioner, 884 F.2d 258, 264 (6th Cir.1989). The addition to tax for fraud is a civil provision, enacted "primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud." Helvering v. Mitchell, ...