1 Rule references are to the Tax Court Rules of Practice and

Procedure. Section references are to the Internal Revenue Code

in effect for the years at issue.

 

 

T.C. Memo. 1997-201

UNITED STATES TAX COURT

CAROLYN M. LEE, Petitioner v. 

 COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3778-94. Filed May 1, 1997.

Jeanne Gramling, for respondent.

MEMORANDUM OPINION

COLVIN, Judge: This case is before the Court on

respondent's motion for entry of default judgment under Rule

123(a).1 Respondent alleges that petitioner has abandoned this
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case, and that she is deemed to have admitted that she is liable

for fraud under Rule 37(c).

We decide this motion based on the parties' pleadings,

admissions, and written submissions. For reasons stated below,

we grant respondent's motion.

Background

Petitioner was incarcerated in Alderson, West Virginia, when

she filed the petition in this case.

Respondent determined deficiencies in petitioner’s income

tax and additions to tax and a penalty as follows:

 Additions To Tax and Penalty 

Year Deficiency Sec. 6653(b)(1) Sec. 6661 Sec. 6663

1988 $48,308 $36,104 $12,035 --

1989 58,190 -- -- $43,643

Petitioner filed her petition on March 3, 1994. In it, she

stated that she would be released from prison in January 1995. 

She asked that we delay proceedings until after she was released

from prison. She filed an amended petition on May 23, 1994.

On July 15, 1994, respondent filed an answer to petitioner's

amended petition. In it, respondent alleged:

6. FURTHER ANSWERING the petition, and in support of

the determination that the underpayments of tax

required to be shown on the petitioner's 1988 and 1989

income tax returns are due to fraud, under the

provisions of I.R.C. § 6653(b)(1) and 6663,

respectively, the respondent alleges:

(a) During the taxable years 1988 and 1989, petitioner

was employed as a civilian fiscal accounting clerk
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with the Logistics Department, Food Subsistence

Section at Camp Lejeune, North Carolina.

(b) In connection with her employment with the Food

Service Division, petitioner was responsible for

collecting money from the mess or dining halls and

turning this money over to the Base Disbursing

Office.

(c) During the taxable years 1988 and 1989, petitioner

also prepared cash collection vouchers which

reflected the total amount of money she turned

over to the Base Disbursing Office.

(d) During the taxable years 1988 and 1989, petitioner

did not turn all money collected from the mess or

dining halls to the Base Disbursing Office, but

instead petitioner misappropriated the amounts of

$152,513 and $186,094 during the taxable years

1988 and 1989, respectively, for her use or

benefit.

(e) Petitioner’s joint 1988 income tax return

reflected adjusted gross income in the amount of

$23,632.15. However, petitioner had unexplained

deposits to various bank accounts in an amount in

excess of $89,000 during the taxable year 1988,

all of which deposits were from the

misappropriated funds.

(f) The petitioner and her husband purchased a Dodge

van in August 1988, for over $15,000 cash, as well

as real property in March 1988 for $5,500 cash,

all of which monies were sourced from the

misappropriated funds.

(g) During the taxable year 1988, petitioner and her

husband also purchased two new Honda automobiles,

a computer, and a used truck, as well as added a

den to their trailer and vacationed in Germany.

(h) Petitioner's joint 1989 income tax return

reflected adjusted gross income in the amount of

$20,783.36. However, petitioner had unexplained

deposits to various bank accounts in an amount in

excess of $159,000 during the taxable year 1989,

all of which deposits were from the

misappropriated funds.
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(i) The petitioner and her husband purchased a GMC

Jimmy, a new travel trailer, a lot, another

computer, a time share condominium at Atlantic

Beach, and two lawn tractors during the taxable

year 1989. Petitioner also vacationed in

California, built a two-story garage, and made a

deposit on a swimming pool.

(j) The petitioner did not report the income that she

received from the misappropriation of funds of her

employer on her 1988 and 1989 income tax returns,

in the respective amounts of $152,513 and

$186,094, and the petitioner is liable for the

deficiencies resulting therefrom.

(k) Petitioner fraudulently and with intent to evade

taxes filed false income tax returns for the

taxable years 1988 and 1989 that intentionally

omitted the misappropriated income. 

(l) All of the underpayments (deficiencies) in income

tax for the taxable years 1988 and 1989 are due to

fraud with intent to evade taxes.

7. FURTHER ANSWERING the petition with respect to

respondent's determination that the underpayment of tax

for the 1989 taxable year is due to fraud, respondent

affirmatively relies upon the doctrine of collateral

estoppel, and alleges:

(a) Petitioner is the same person who was the

defendant in a criminal case of United States v.

Carolyn M. Lee, Case No. 4:92CR00045-2, in the

United States District Court for the Eastern

District of North Carolina.

(b) Respondent is a party in privity with the United

States of America, the prosecuting party in the

aforesaid criminal case in which petitioner was a

defendant.

(c) On or about July 6, 1992, petitioner plead [sic]

guilty to one count of willfully making and

subscribing a false Federal income tax return for

the 1989 taxable year in violation of the

provisions of I.R.C. § 7206(1), which petitioner

signed under penalties of perjury knowing that the

return was not true and correct as to every
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material matter. Said income tax return reported

total income of $20,783.26, whereas petitioner

knew and believed that her total income was

substantially in excess of that which was

reported.

(d) An issue in the instant Tax Court case is whether

petitioner received income over and above the

amount reported on her income tax return for the

1989 taxable year.

(e) The fact that petitioner received income which

intentionally was not reported on her 1989 income

tax return is evidence, in part, that the

underpayment was due to fraud.

(f) The prior criminal conviction of petitioner under

I.R.C. § 7206(1) is conclusive and binding upon

petitioner, and by reason thereof, the petitioner

is estopped in this case under the doctrine of

collateral estoppel, to deny that she willfully

made and subscribed to a false income tax return

for the 1989 taxable year that she knew was not

true and correct as to every material matter in

that she failed to report the substantial

additional income that she received in the 1989

taxable year.

Petitioner did not file a reply to respondent's allegations. 

On September 29, 1994, respondent filed a motion under Rule 37(c)

to have the undenied allegations of fact deemed admitted. By

notice of filing dated September 29, 1994, the Court directed

petitioner to file a reply on or before October 20, 1994. 

Petitioner did not respond, and we granted respondent's motion on

October 28, 1994.

Petitioner was released from prison sometime before July

1995.
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Thereafter, the Court set this case for trial in WinstonSalem, North Carolina. The notice stated that "YOUR FAILURE TO

APPEAR MAY RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION

AGAINST YOU."

Respondent's counsel and petitioner had a telephone

conference shortly before that trial session, during which

petitioner said that she would not appear at the trial session.

This case was called at the Court's trial calendar in

Winston-Salem, North Carolina. Petitioner did not appear, file a

pre-trial memorandum, or request a continuance. At that time,

respondent filed the motion for default judgment under Rule

123(a).

Discussion

Rule 123(a) provides that if any party fails to plead or

otherwise proceed as provided by the Rules or as required by the

Court, that party may be held in default on the motion of the

other party. Dismissal of a case is a sanction resting in the

discretion of the trial court. Levy v. Commissioner, 87 T.C.

794, 803 (1986). A taxpayer's failure to proceed as required by

the Court's Rules, unexcused failure to appear at a trial, and

failure to participate in any meaningful way in the resolution of

the case can result in a dismissal of the action against him or

her for failure to prosecute properly in actions where a taxpayer

seeks the redetermination of a deficiency. Basic Bible Church v.
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Commissioner, 86 T.C. 110, 112 (1986); Brooks v. Commissioner, 82

T.C. 413, 424-425 (1984), affd. without published opinion 772

F.2d 910 (9th Cir. 1985); Freedson v. Commissioner, 67 T.C. 931,

935-936, 938 (1977), affd. 565 F.2d 954 (5th Cir. 1978). 

Petitioner did not appear at the trial session in WinstonSalem, North Carolina, and failed to submit a trial memorandum,

as required by the Court’s Standing Pre-Trial Order, or request a

continuance. Petitioner has abandoned her case. Respondent's

motion for entry of default judgment as to the deficiencies and

addition to tax is granted. Rule 123(a).

Respondent has also moved to default petitioner for the

addition to tax and penalty for fraud. Petitioner has failed to

proceed with her case within the meaning of Rule 123(a). Under

these circumstances, a default decision for fraud is appropriate

if, in the answer, respondent alleged facts which, if proven,

clearly and convincingly support such a judgment. Smith v.

Commissioner, 91 T.C. 1049, 1058 (1988), affd. 926 F.2d 1470 (6th

Cir. 1991). The granting of the Rule 37(c) motion has the effect

of establishing facts pleaded in the answer.

The facts respondent alleged in the answer, deemed admitted,

constitute clear and convincing evidence that petitioner

fraudulently underpaid her taxes for the years in issue. Because

petitioner did not respond to respondent's Rule 37(c) motion, she

is deemed to have admitted that: (1) She misappropriated for her
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own use or personal benefit $152,513 in 1988 and $186,094 in 1989

in connection with her work at Camp Lejeune, North Carolina; (2)

in 1988, she deposited $89,000 of the misappropriated funds in

various bank accounts; (3) in 1989, she deposited $159,000 of the

misappropriated funds in various bank accounts; (4) petitioner

used the misappropriated funds in 1988 to buy three vehicles, a

computer, and to pay for a European vacation, and in 1989 to buy

several vehicles, to buy and improve property, and to pay for a

vacation; (5) she did not report the income that she

misappropriated; (6) she understated her taxable income for those

years; and (7) all of each understatement for 1988 and 1989 was

due to fraud with intent to evade taxes.

In the answer, respondent alleges specific facts which,

having been deemed admitted, clearly and convincingly show that

petitioner fraudulently underpaid her income taxes for 1988 and

1989. Thus, we grant respondent's motion for entry of default

pursuant to Rule 123(a). 

To reflect the foregoing,

An appropriate order will

be issued, and decision will

be entered for respondent.