T.C. Memo. 2005-101

UNITED STATES TAX COURT

DONALD G. FORD, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3436-97. Filed May 9, 2005. 

Donald G. Ford, pro se.

Aubrey C. Brown and Andrew M. Winkler, for respondent.

MEMORANDUM OPINION

COLVIN, Judge: This case is before the Court on

respondent’s motion for default and entry of decision. 

Respondent requests that we find petitioner in default and enter

a decision against him for deficiencies including additions to

tax for fraud and the fraud penalty. Petitioner was ordered to

file a response to respondent’s motion, but he failed to do so. 

We will grant respondent’s motion for reasons described below.
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1 Respondent concedes the deficiencies, additions to tax,

and fraud penalty for 1986, 1987, and 1990, if respondent’s

motion is granted. 

Respondent determined deficiencies in petitioner’s income

tax and additions to tax and a penalty for taxable years 1986 to

1990 as follows:1

 Additions to tax Penalty

Year Deficiency Sec. 6651(a)(1) Sec. 6653(b)(1) Sec. 6663

1986 $152,373 $114,280

1987 10,819 8,115

1988 58,380 -- 43,785 --

1989 55,509 $5,266 -- $41,632

1990 45,637 34,228

Section references are to the Internal Revenue Code as in

effect during the years in issue. Rule references are to the Tax

Court Rules of Practice and Procedure.

Background

A. The Pleadings

The petition in this case was filed on February 24, 1997. 

Petitioner lived in Louisville, Kentucky, when the petition was

filed. 

In the answer, respondent alleged:

(a) Throughout the years in issue, Petitioner and

W. Paul Schultz (Schultz), Petitioner’s accountant and

return preparer, willfully conspired to evade and

defeat income tax due from Petitioner for those years.

(b) Petitioner and Schultz willfully made and

signed federal income tax returns for Petitioner’s 1986

through 1990 tax years, which returns were made under

the penalties of perjury and were filed with the

Internal Revenue Service (the Service), which returns

they did not believe to be true and correct as to every
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material matter. In preparing, signing, and filing

those returns, Petitioner and Schultz knew that the

returns were false and fraudulent as to material

matters. 

(c) Throughout the years in issue, Petitioner was

a used car dealer in Louisville, Kentucky, and Schultz

was a Certified Public Accountant in that same city.

(d) The manner and means by which Petitioner and

Schultz sought to carry out the conspiracy to evade

income tax for Petitioner’s tax years in issue included

the willful creation of a fraudulent assignment of a

note receivable. It was further a part of such effort

to evade and defeat Petitioner’s income tax liability

for Petitioner and Schultz to cause this fraudulent

transaction and loss to be reported and carried forward

on Petitioner’s returns. The fraudulent loss amount

was $300,000.00.

(e) In furtherance of their conspiracy Petitioner

and Schultz committed a number of overt acts.

(f) In about 1984, Petitioner sold real estate to

Huber’s, Inc., for a total of $1,500,000.00.

(g) On his return for his 1984 tax year,

Petitioner reported that he had sold the land for

$400,000.00, that his basis in the land was

$440,000.00, and that his loss on the sale of the land

was $40,000.00. He further reported that he sold the

buildings on the land for $1,100,000.00 and was

electing the installment method of reporting that sale,

with the result that he paid no tax on the sale of the

buildings for his 1994 tax year. His election required

that he report as taxable income a portion of all

payments he received on the sale of the buildings.

(h) On the above sale, Huber’s, Inc., paid

Petitioner a $400,000.00 down payment and gave him a

promissory note for $1,100,000.00. Huber’s Inc. made

interest payments on the note until in or about the

year 1986.

(i) In July, 1986, Ken Huber (Huber), president

of Huber’s, Inc., notified Petitioner of its intent to

pay off the $1,100,000.00 note. Petitioner asked Huber

if Huber’s, Inc., would agree to pay off $800,000.00 of
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the note and renegotiate a note for the remaining

$300,000 balance, which Huber’s, Inc., subsequently

agreed to do.

(j) On December 10, 1986, Petitioner and his then

wife, Margaret Ford, executed an assignment conveying

all of Petitioner’s interest in the $1,100,000.00 note

to Schultz. The assignment recited that it was made in

consideration for Schultz’s payment of $800,000.00 to

Petitioner.

(k) On that same date, Schultz applied for and

received a loan in the amount of $800,000.00 from the

Bank of Louisville. Schultz’s loan application showed

no information about his ability to repay the loan.

(l) On that same date, Schultz used the proceeds

of the $800,000.00 loan to purchase a one year

certificate of deposit in the amount of $800,000.00

payable to Petitioner.

(m) On that same date, Petitioner executed a

collateral assignment and hypothecation agreement to

the Bank of Louisville, pledging the certificate of

deposit as collateral for the Bank of Louisville’s

$800,000.00 loan to Schultz.

(n) On that same date, Petitioner paid $2,000.00

to Schultz for accounting fees.

(o) On December 23, 1986, Huber’s, Inc.,

transferred $800,000.00 from its account at Citizen’s

Fidelity Bank & Trust Company to the Bank of

Louisville, where the funds were applied to the payment

of Schultz’s $800,000.00 loan.

(p) On that same date, Huber’s, Inc., executed a

promissory note to Schultz in the amount of

$300,000.00.

(q) On that same date, Schultz executed an

assignment conveying all of his interest in the

$300,000.00 note to Petitioner and his wife.

(r) On that same date, Schultz executed a limited

power of attorney to name Petitioner as his attorney in

fact on all matters pertaining to the $300,000.00 note.
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(s) On that same date, Petitioner paid $6,000.00

to Schultz for accounting fees.

(t) On that same date, the Bank of Louisville

debited Petitioner’s personal checking account for

$2,036.67 and credited that amount to interest owed on

Schultz’s $800,000.00 note.

(u) On March 20, 1988, Huber’s, Inc., paid in

full the balance on the $300,000.00 promissory note,

plus interest, by a check payable to Schultz in the

amount of $330,969.93.

(v) On that same date Schultz endorsed the

$330,969.93 check for deposit in petitioner’s checking

account.

(w) On October 19, 1987, Petitioner filed his

return for his 1986 tax year. The return included a

Schedule C for "Financing - Sales Notes." The Schedule

C shows gross receipts of $800,000.00, with a related

cost of goods sold of $1,100,000.00, and a loss in the

amount of the $300,000.00 difference. When the loss

was combined with interest income, the net result was a

negative gross income of $187,586.00. And the net

result on Petitioner’s return for his 1986 tax year is

a reported loss for taxable income of $234,345.00, and

a return that is false as to a material fact.

(x) The negative taxable income of $234,586.00

produced carryforward amounts that were carried forward

to Petitioner’s returns for his 1987, 1988, 1989, and

1990 tax years, making each of those returns false as

to a material fact.

(y) As part of his fraudulent actions, Petitioner

willfully failed to report on his return for his 1986

tax year the $800,000.00 in income that he received as

an installment payment on the 1984 sale of the

buildings. If that income had been properly reported

it would have resulted in $739,840.00 in additional

taxable income for Petitioner’s 1986 tax year.

(z) As part of his fraudulent actions, Petitioner

willfully failed to report on his return for his 1988

tax year the $300,000.00 in income that he received as

an installment payment on the 1984 sale of the

buildings. If that income had been properly reported
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it would have resulted in $277,440.00 in additional

taxable income for Petitioner’s 1988 tax year.

(aa) Petitioner knowingly, willfully, and with

the intent to evade tax signed and caused to be filed

with the Service returns for his 1986 through 1990 tax

years that understated his tax liability for each year.

(ab) Petitioner reported a negative taxable

income of $234,345.00 on his return for his 1986 tax

year when he then and there well knew and believed that

the sale reported thereon should have been reported as

an installment sale with a taxable gain of $739,840.00,

which when combined with the other items of income and

expense on his return would have resulted in taxable

income of $805,495.00 for his 1986 tax year.

(ac) Petitioner reported a $234,775.00 net loss

carry forward on his return for his 1987 tax year and a

negative taxable income of $184,120.00 for that year

when he then and there well knew and believed that he

should not have reported any loss carry forward and

that he should have reported a positive taxable income

in the amount of $50,665.00.

(ad) Petitioner reported a $180,320.00 loss carry

forward on his return for his 1988 tax year and a

negative taxable income of $140,347.00 for that year

when he then and there well knew and believed that he

should not have reported any loss carry forward, that

he should have reported taxable installment sale income

of $277,440.00, and a positive taxable income in the

amount of $317,413.00.

(ae) Petitioner reported a $136,147.00 loss carry

forward on his return for his 1989 tax year and a

negative taxable income of $76,230.00 for that year

when he then and there well knew and believed that he

should not have reported any loss carry forward and

that he should have reported a positive taxable income

in the amount of $59,517.00.

(af) Petitioner reported a $72,230.00 loss carry

forward on his return for his 1990 tax year and a

taxable income of $21,833.00 for that year when he then

and there well knew and believed that he should not

have reported any loss carry forward and that he should
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have reported a taxable income in the amount of

$94,063.00.

(ag) Petitioner omitted $31,500.00 in dividend

income from Don Ford Cars, Inc., from his return for

his 1989 tax year with the intent to understate, and

defeat the federal income tax on that income item.

(ah) Petitioner omitted $22,917.00 in interest

income received from C. Ball from his return for his

1990 tax year with the intent to understate, evade, and

defeat the federal income tax on that income item.

(ai) Petitioner omitted $39,874.00 and $22,233.00

in interest income from Don Ford Cars, Inc. from his

returns for his 1989 and 1990 tax years, respectively,

with the intent to understate, evade, and defeat the

federal income tax on those amounts.

(aj) Petitioner omitted $55,955.00 and $33,664.00

in interest income from Tri-City Credit from his

returns for his 1989 and 1990 tax years, respectively,

with the intent to understate, evade, and defeat the

federal income tax on those amounts.

(ak). Petitioner omitted $7,000.00 in rent income

from Don Ford Cars, Inc. from his return for his 1989

tax year with the intent to understate, evade, and

defeat the federal income tax on that amount.

(al) In addition to conspiring with Schultz to

evade and defeat income tax for his 1986 through 1990

tax years, Petitioner also gave Schultz information

from which to prepare his returns. Petitioner with the

intent to evade and defeat federal income tax sometimes

did not give complete and correct information to

Schultz in order to maximize his fraudulent tax

benefits.

(am) A part of each deficiency in income tax for

Petitioner’s taxable years 1986 through 1990 is due to

fraud with intent to evade taxes.

Petitioner filed a reply in which he denied all allegations

relating to fraud and alleged that he undertook the transactions

described in respondent’s reply in good faith and relied on
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2 On Mar. 22, 2001, an amendment to petition was filed in

which petitioner alleged that respondent was barred by the

doctrines of collateral estoppel, res judicata, and waiver, and

by sec. 6212 from proceeding with this case. On May 1, 2001, an

answer to amended petition was filed in which respondent denied

the allegations in the amendment to petition.

Schulz and other tax professionals after disclosing all of the

relevant facts to them.2

 B. Procedural History

This case was set for trial in Louisville, Kentucky, several

times, but was continued on November 7, 1997, September 30, 1998,

December 22, 1999, and February 6, 2001. This case was called

for report at the February 5, 2001, Louisville, Kentucky, trial

session and set for trial at a special session of the Court to

begin on April 23, 2001. A stipulation of facts was filed on

April 3, 2001. However, the case was continued on April 17,

2001, and the special session was canceled. 

Motions to withdraw filed by petitioner’s counsel Robert C.

Webb and Scott William Dolson were granted on January 9, 2002,

and September 5, 2002. 

Petitioner, his adult son, and respondent had several

discussions in an effort to narrow the issues or resolve this

case, as ordered by the Court on October 1, 2003. The

discussions did not result in a narrowing of the issues. Around

February 9, 2004, petitioner’s son told respondent’s counsel that
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petitioner did not have a guardian or anyone with power of

attorney or any authority to represent his interests. 

Respondent requested a letter verifying the above, but no

letter was provided to respondent. Rule 60(d) provides that,

absent a duly appointed representative to represent an

incompetent taxpayer’s interest in the Tax Court, the incompetent

person may act by a next friend or by a guardian ad litem. See

Campos v. Commissioner, T.C. Memo. 2003-193. There is no

indication in the record that petitioner or his son has tried to

appoint a guardian or to have anyone act as next friend.

Petitioner failed to file status reports in response to

Court orders dated October 1, 2003, and July 14, 2004. The July

14, 2004, Order warned petitioner that failure to “respond to

this order without good cause shown may result in dismissal of

this case.” Petitioner did not file a response to respondent’s

Motion For Default And Entry Of Decision, as ordered by the Court

on September 15, 2004. The Court’s September 15, 2004, order

warned petitioner that “failure to file a response could result

in respondent’s motion being granted and decision entered against

petitioner.” 

Discussion

If a 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 or on the initiative
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of the Court. Thereafter, the Court may enter a decision against

the defaulting party. Rule 123.

Petitioner’s son alleges that petitioner cannot proceed due

to petitioner’s mental health. We have given petitioner and his

son an extended amount of time to make arrangements to proceed. 

However, neither petitioner nor anyone else has provided the

Court with a response that adequately recognizes petitioner’s

obligations in this matter or respondent’s legitimate interest in

pursuing this case. There must be a procedural means to bring

the case to a close regardless of petitioner’s mental health. 

Petitioner has failed to proceed as ordered by the Court and has

abandoned his case. Petitioner defaulted by not complying with

orders of this Court beginning more than a year and a half ago. 

Respondent’s motion for default as to deficiencies for 1988 and

1989 and addition to tax under section 6651(a)(1) for 1989 will

be granted.

A taxpayer may be liable for fraud based on default if the

Commissioner alleges sufficient facts in the answer to support a

finding of fraud even if the taxpayer denies the facts the

Commissioner alleged in the answer. Smith v. Commissioner, 926

F.2d 1470, 1478 (6th Cir. 1991), affg. 91 T.C. 1049 (1988);

Rechtzigel v. Commissioner, 79 T.C. 132, 142 n.11 (1982), affd.

703 F.2d 1063 (8th Cir. 1983); see Gordon v. Commissioner, 73

T.C. 736 (1980). 
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The facts alleged in respondent’s affirmative pleadings are

sufficient to establish fraud by clear and convincing evidence. 

Petitioner received substantial amounts of unreported income. 

Bradford v. Commissioner, 796 F.2d 303, 308 (9th Cir. 1986),

affg. T.C. Memo. 1984-601. Petitioner’s pattern of substantially

underreporting income for several years is strong evidence of

fraud, Holland v. United States, 348 U.S. 121, 137-139 (1954), as

is the fact that he deliberately overstated his deductions, 

Drobny v. Commissioner, 86 T.C. 1326, 1349-1351 (1986).

The facts pleaded in respondent's answer clearly establish

that petitioner fraudulently underpaid his income taxes for 1988

and 1989. Thus, we will grant respondent's motion for default

pursuant to Rule 123(a).

An appropriate order and

decision will be entered.