Court Opinion

ID: 4486136
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:12.770752+00
Date Added: 2024-06-11T15:02:46.128365
License: Public Domain

SHIELDS, J., dissenting: I am in agreement with the dissent by Judge Cohen (p. 1066), but I feel that the following comments are also needed. First, even though there is no extensive discussion in the legislative history of section 7454(a) as to the rationale for imposing upon respondent the burden of proof with respect to fraud, such imposition is clearly in line with the long-established principle that: The rules which impose the burden of proof on one alleging fraud and which deny a presumption of fraud rest on the fact that fraud is regarded as criminal in its essence, and involves moral turpitude at least, while on the other hand, the presumption is that all men are honest, that individuals deal fairly and honestly, that private transactions are fair and regular, and that participants act in honesty and good faith. The presumption is against the existence of fraud and in favor of innocence, the presumption against fraud approximating in strength the presumption of innocence of crime. * * * [37 C.J.S., Fraud, sec. 94 (1943); fn. refs, omitted.] See also 37 Am. Jur. 2d 596-597 (1968), where the principle is stated as follows: The party who alleges fraud as the basis of a cause of action or defense has the burden of establishing it by the requisite quantum of proof in order to prevail in the action. Since in the absence of particular circumstances the presumption is in favor of good faith, innocence, and honesty, and against fraud, the party who alleges fraud ordinarily must carry the burden of producing evidence to prove it. * * * [Fn. refs, omitted.] It would appear, where as in this case, respondent produces no proof of fraud either by deemed admissions or otherwise, the strong presumption against fraud would carry the issue for petitioner. Secondly, Rule 123(a) is derived from rule 55(a) and (b) of the Federal Rules of Civil Procedure (FRCP) which deeds with defaults. Rule 123(b) is derived from FRCP 41(b) which deals with dismissals. Since Rule 123(a) and (b) was derived from the FRCP, the case law under the Federal Rules of Civil Procedure is helpful in determining the scope of Rule 123(a) and (b). Gordon v. Commissioner, 73 T.C. 736, 741 (1980). In Bosurgi v. Commissioner, 87 T.C. 1403, 1407 (1986), we pointed out that by analogy to FRCP 55(a), the party that bears the burden of proof in a Tax Court case is entitled to move for entry of a default pursuant to Rule 123(a) and by analogy to rule 41(b), the party that does not bear the burden of proof may move for dismissal pursuant to Rule 123(b). The significant difference between FRCP 55 and 41, and by analogy between Rules 123(a) and 123(b), is the different standards which must be met before the rules apply. Under rule 41(b), a defendant (the party without the burden of proof — respondent on the deficiency issue in the Tax Court) may move for dismissal for failure of the plaintiff (petitioner) to prosecute or to comply with the FRCP or any order of the court. Conversely, under rule 55 a default is available to the party with the burden of proof (respondent on the issue of fraud) when the other party (petitioner) has failed to “plead or otherwise defend” as provided by the FRCP. The phrase “otherwise defend” as used in rule 55 refers to defenses and objections available to a defendant by motion prior to filing an answer as indicated by the following: The words “otherwise defend” refer to the interposition of various challenges to such matters as service, venue, and the sufficiency of the prior pleading, any of which might prevent a default if pursued in the absence of a responsive pleading. [See rule 12(b), FRCP.] As stated by the court in Bass v. Hoagland [172 F.2d 205, 210 (5th Cir. 1949), cert. denied 338 U.S. 816.]: Rule 55(a) authorizes the clerk to enter a default “When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules.” This does not require that to escape default the defendant must not only file a sufficient answer to the merits, but must also have a lawyer or be present in court when the case is called for a trial. The words “otherwise defend” refer to attacks on the service, or motions to dismiss, or for better particulars, and the like, which may prevent default without presently pleading to the merits. [10 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure, sec. 2682, at 409-410 (2d ed. 1983); fn. refs, omitted.] In Bass v. Hoagland, 172 F.2d 205, 210 (5th Cir. 1949), the court continued by stating: When Bass by his attorney filed a denial of the plaintiff’s case neither the clerk nor the judge could enter a default against him. The burden of proof was put on the plaintiff in any tried. When neither Bass nor his attorney appeared at the trial, no default was generated; the case was not confessed. The plaintiff might proceed, but he would have to prove his case. [Emphasis added.] Nevertheless, there is some authority for treating “failure to defend” as used in rule 55 as the reverse side of “failure to prosecute” as used in rule 41. See Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61 (2d Cir. 1981), where the court found that a defendant’s nonappearance at a deposition, dismissal of counsel, vague and unresponsive answers to interrogatories, and failure to appear at trial were sufficient to support a finding that he had “failed to plead or otherwise defend” under rule 55. However, in his treatise, Moore argues that rule 55 is not adapted to that end. 6 J. Moore, M. Taggart & J. Wicker, Moore’s Federal Practice, par. 55.03(1), at 55-14 (2d ed. 1988). Thus, a default under rule 55 of FRCP appears to be available only when a defendant fails to file an answer or make a motion under FRCP 12(b) which is required to be made before pleading. Once an answer is filed it appears that a default under rule 55 is no longer available. However, rule 55 is not the only authority in the FRCP for the entry of a default judgment. For example, FRCP 37 authorizes a judgment by default as a sanction for failure to comply with a discovery order, failure to appear for a deposition, failure to serve answers or objections to interrogatories, or failure to respond to a request for the production or inspection of documents. Of course, we have similar authority under Rule 104. In the case before us, the majority concludes that petitioner has failed to plead or otherwise proceed under Rule 123(a) by failing to communicate with the Court, failing to appear at trial, failing to participate in preparation of the case for trial, and particularly failing to comply with Rule 91(a) with regard to the preparation of a stipulation of facts. In similar situations in the past we have entered a decision including the addition to tax for fraud, against the petitioner as a sanction under Rule 104. Rechtzigel v. Commissioner, 79 T.C. 132 (1982), affd. 703 F.2d 1063 (8th Cir. 1983), citing cases arising under FRCP 37 from which 104 was derived. In final analysis, I am convinced that a default in this case under Rule 123(a) is neither proper for the reasons set forth above nor necessary because the same result could be obtained as in Rechtzigel by means of a sanction under Rule 104. Such a disposition would not only be in accordance with Rule 123 and FRCP 37, 41, and 55, but would avoid overruling Miller-Pocahontas Coal Co. v. Commissioner, 21 B.T.A. 1360 (1931), which has been on the books for over 50 years. It would also avoid the concern which exists (1) with respect to the nature and amount of proof which the respondent has to produce in order to overcome the presumption against fraud, and (2) with respect to default judgments generally. With respect to the latter see 10 C. Wright, A. Miller & M. Kane, supra, sec. 2681, and at 402, where it is stated: Under modern procedure, defaults are not favored by the law and any doubts usually will be resolved in favor of the defaulting party. As the court said in Janoske v. Porter, [64 F.2d 958, 961 (7th Cir. 1933)]: “The default of a party to an action is always a harsh measure, and no party should ever be defaulted, unless the grounds upon which such default is authorized are clearly and authoritatively established and are in such clear and certain terms that the party to be defaulted can know, without question, that he is subject to default if he does not act in a certain manner.” The reason for this attitude is that contemporary procedural philosophy encourages trial on the merits. Defaults especially are disfavored in certain actions. One general class of cases of this type consists of actions involving material issues of fact. Another is litigation in which substantial amounts of money are involved. Policy also weighs heavily in favor of trial on the merits and against default judgments in cases calling into question the constitutionality of a state statute or raising other significant public issues. [Fn. refs, omitted.] Almost all fraud cases involve material issues of fact and the amount in litigation is almost always substantial inasmuch as it is 50 percent of the understatement of tax. Furthermore, the entry of a default judgment in favor of respondent for the amount of the addition to tax without the introduction of any evidence would in my opinion constitute a significant public issue. Chabot, Cohen, Wright, and Parr, JJ., agree with this dissent.