Court Opinion

ID: 4337315
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:17:33.234211+00
Date Added: 2024-06-11T14:47:47.188002
License: Public Domain

T.C. Memo. 2008-252

                     UNITED STATES TAX COURT

                MICHAEL S. SILVER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 25859-06.              Filed November 10, 2008.

     Michael S. Silver, pro se.

     C. Teddy Li, for respondent.

                       MEMORANDUM OPINION

     GOEKE, Judge:   Respondent determined income tax

deficiencies and additions to tax for the years 1987, 1988, 1990,

and 1994 (the years in issue) as follows:
                              - 2 -
                                          Additions to Tax
                               Sec.             Sec.           Sec.
   Year     Deficiency    6653(a)(1)(A)     6653(a)(1)(B)     6653(a)(1)

                                           50% of the
                                           interest on
   1987     $334,147        $16,707          $334,707                ---
   1988      532,493           ---              ---            $26,625

                                 Additions to Tax/Penalties
                               Sec.            Sec.           Sec.
   Year     Deficiency        6662         6651(a)(2)        6651(f)

   1990       $1,361           $272              ---            ---
   1994       46,898            ---            $11,725         $34,001

     Unless otherwise indicated, all section references are to

the Internal Revenue Code (Code) in effect for the years in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     Petitioner did not appear for trial.      Thus, because of

petitioner’s failure to communicate with respondent or to appear

for trial at the Court’s Baltimore, Maryland, May 5, 2008, trial

session, respondent moved to dismiss this case for lack of

prosecution and for a default judgment as to the addition to tax

for fraudulent failure to file under section 6651(f).

     Respondent’s motion relies on facts and evidence deemed

admitted by reason of default, through the allegations in

respondent’s answer, and through deemed admissions under Rule 90.
                                - 3 -

                              Background

     At the time his petition was filed, petitioner resided in

Maryland.   During and before the years at issue petitioner was a

licensed attorney who did not actively practice law in the State

of Maryland.

     On August 26, 1992, petitioner filed a voluntary petition

with the U.S. Bankruptcy Court for the District of Maryland

(bankruptcy court) under chapter 11 of the Bankruptcy Code.

     On November 30, 1992, the bankruptcy court ordered

petitioner to file his Federal income tax returns for 1987, 1988,

1989, 1990, and 1991 on or before January 4, 1993.    Petitioner

failed to comply with the bankruptcy court’s order, and no tax

returns were filed for the 1987 through 1991 tax years.      On

January 22, 1993, petitioner’s bankruptcy case was converted to a

chapter 7 bankruptcy proceeding, and petitioner was discharged in

bankruptcy on October 14, 1993.

     In December 1993 petitioner was employed by North American

Title Co. (North American).    North American issued title

insurance binders and policies for commercial and residential

real estate.   North American was required to maintain escrow

accounts of settlement funds deposited and to maintain balances

in these accounts sufficient to cover liabilities created by

escrow transactions.
                               - 4 -

     Beginning around January 1994 and continuing to October

1994, petitioner devised a scheme to defraud and obtain money

from buyers and sellers of residential real estate, their

mortgage companies, and title insurance companies.   Petitioner

discovered that on one residential refinancing, the mortgage

company had funded a mortgage twice.   Instead of repaying the

excess from the escrow account as required, petitioner diverted

in excess of $134,000 from the operating and escrow accounts of

North American for his own use.   As a result of this diversion of

funds, North American was unable to pay its obligations from its

escrow accounts, such as taxes, mortgages, return of excess

settlement funds, and proceeds of sales and refinancings.     When

the mortgage company discovered the double payment, petitioner

made false representations to avoid repayment.   Petitioner

received gross income of approximately $139,248 in 1994 from the

diverted funds.

     On March 1, 1997, a Federal grand jury in the U.S. District

Court for the District of Maryland returned a seven-count

indictment against petitioner--five counts for wire fraud (in

violation of 18 U.S.C. section 1343) and two counts for willful

failure to file income tax returns (in violation of section

7203).   In August 1997 petitioner was disbarred by the Maryland

State Bar.
                               - 5 -

     Petitioner entered a plea of guilty in an agreement reached

on November 7, 1997, to one count of wire fraud and one count of

willful failure to file an income tax return for 1994.     On July

24, 1998, the District Court entered its judgment in a criminal

case (the judgment) pursuant to said guilty plea.   The District

Court dismissed the remaining counts on its own motion.

     On October 9, 2001, petitioner (through his representative)

submitted to respondent’s revenue agent delinquent Federal income

tax returns which included the tax years 1987, 1988, and 1990.

Petitioner failed to file a Federal income tax return for the tax

year 1994 even though he timely filed an automatic extension of

time.

     On September 15, 2006, respondent issued a statutory notice

of deficiency for 1987, 1988, 1990, and 1994 and determined

deficiencies of $334,147, $532,493, $1,361, and $46,898,

respectively.   The deficiencies arose from respondent’s

disallowance of certain partnership, long- and short-term

capital, and other losses and the disallowance of some itemized

deductions petitioner claimed on his Federal income tax returns.

However, respondent did allow some standard and self-employment

tax deductions.   Respondent also determined that petitioner was

liable for:   (1) Additions to tax for negligence under section

6653(a)(1)(A) for the tax year 1987, additions to tax under

section 6653(a)(1)(B) for the tax year 1987, and additions to tax
                               - 6 -

for negligence or disregard of rules and regulations under

section 6653(a)(1) for the tax year 1988; (2) an accuracy-related

penalty pursuant to section 6662 for the tax year 1990; (3) an

addition to tax for failure to pay under section 6651(a)(2) for

the tax year 19941; and (4) a penalty for fraudulent failure to

file for the tax year 1994 under section 6651(f).

     On December 14, 2006, petitioner filed a petition for

redetermination of the deficiencies, additions to tax, and

penalties.

     The Court served a notice setting case for trial and a copy

of the Court’s standing pretrial order on petitioner on December

10, 2007, at petitioner’s address of record.   The notice stated

that “YOUR FAILURE TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE

AND ENTRY OF DECISION AGAINST YOU.”

     By letter dated December 21, 2007, respondent mailed to

petitioner a letter proposing a conference for January 7, 2008.

The letter further informed petitioner that should he fail to

appear for trial, he may be held liable for the full amount of

the deficiencies, additions to tax, and penalties as set forth in

the notice of deficiency.   Petitioner failed to respond or

appear.

     1
      Since the time respondent’s pending motion was filed,
respondent has conceded the addition to tax for failure to pay
under sec. 6651(a)(2) for the tax year 1994.
                               - 7 -

     On February 15, 2008, respondent served on petitioner

informal discovery, including a request for production of

documents, written interrogatories, and a request for admissions.

In these documents petitioner was asked to explain and describe

his business relationships and to provide any and all evidence

establishing petitioner’s interest and basis in such investments

with Fleet Street Associates, Bond Street Associates, and Butcher

& Singer/Keystone Venture I Ltd./LP., for which petitioner

claimed partnership and other losses on his delinquent Federal

income tax returns for the years in issue.   Petitioner failed to

respond to respondent’s requests.

     On February 19, 2008, we filed respondent’s request for

admissions.   Petitioner did not file a response within the 30-day

period, and, consequently, the requested admissions were deemed

admitted under Rule 90(c).

     Before trial, on April 17, 2008, respondent served on

petitioner his pretrial memorandum pursuant to the Court’s

standing pretrial order, which included the date and time of the

calendar call.   Respondent informed petitioner that a motion to

dismiss for lack of prosecution and for default judgment may be

filed for failure to properly prosecute his case.   Petitioner

failed to respond.   On May 2, 2008, respondent telephoned

petitioner and left a message informing him of the date, time,

and location of the calendar call and again reiterated the
                               - 8 -

possible filing of the motion to dismiss.     Petitioner failed to

respond to respondent’s telephone messages.

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

Baltimore, Maryland, on May 5, 2008.      Petitioner did not appear,

file a pretrial memorandum, submit a Rule 50(c) statement in lieu

of appearance, or request a continuance.     At that time respondent

filed the motion to dismiss as provided by Rule 123(b).     At the

conclusion of the proceeding the Court issued an order directing

petitioner to show cause on or before June 4, 2008, why

respondent’s motion to dismiss should not be granted and a

decision entered against petitioner determining deficiencies in

tax, additions to tax, and penalties due in the amounts and for

the years set forth in respondent’s motion to dismiss.     The Court

has received no response and the order was not returned due to a

change of address.

                             Discussion

A.   Failure To Properly Prosecute

     Rule 123(b) provides:

          (b) Dismissal: For failure of a petitioner
     properly to prosecute or to comply with these Rules or
     any order of the Court * * * the Court may dismiss a
     case at any time and enter a decision against the
     petitioner. The Court may, for similar reasons, decide
     against any party any issue to which such party has the
     burden of proof, and such decision shall be treated as
     a dismissal * * *.
                               - 9 -

In addition, Rule 149 provides in part:

          (a) Attendance at Trials: The unexcused absence
     of a party or party’s counsel when a case is called for
     trial will not be ground for delay. The case may be
     dismissed for failure properly to prosecute * * *.

          (b) Failure of Proof: Failure to produce
     evidence, in support of an issue of fact as to which a
     party has the burden of proof * * * may be ground for
     dismissal or for determination of the affected issue
     against that party. * * *

The Court may dismiss a case at any time and enter a decision

against the taxpayer for failure properly to prosecute his case,

failure to comply with the Rules of the Court, or for any cause

that the Court deems sufficient.    Rule 123(b); Mills v.

Commissioner, T.C. Memo. 2007-270; Stephens v. Commissioner, T.C.

Memo. 2005-183.   Dismissal is appropriate where the taxpayer’s

failure to comply with the Court’s Rules and orders is due to

willfulness, bad faith, or fault.   See Dusha v. Commissioner, 82
T.C. 592, 599 (1984); McCammon v. Commissioner, T.C. Memo. 2007-

3; Curci v. Commissioner, T.C. Memo. 2005-273.    In addition, the

Court may dismiss a case for lack of prosecution if the taxpayer

inexcusably fails to appear at trial and does not otherwise

participate in the resolution of his claim.   Rule 149(a);

Rollercade, Inc. v. Commissioner, 97 T.C. 113, 116-117 (1991);

Brooks v. Commissioner, 82 T.C. 413, 423-424 (1984), affd.

without published opinion 772 F.2d 910 (9th Cir. 1985); Curci v.

Commissioner, supra; Smith v. Commissioner, T.C. Memo. 2003-266,
                               - 10 -

affd. sub nom. Hook v. Commissioner, 103 Fed. Appx. 661 (10th

Cir. 2004).

     Petitioner disregarded the Court’s Rules and standing

pretrial order by failing to cooperate with respondent in

preparing this case for trial.   Documentation in the record

demonstrates that respondent repeatedly requested petitioner to

comply with respondent’s informal discovery requests, which

petitioner rebuffed.   Petitioner’s continuous refusal to meet

respondent’s request for discovery made it impossible for the

parties to exchange information, conduct negotiations, or prepare

a stipulation of facts before trial.    Petitioner failed to

prepare and submit a pretrial memorandum before the scheduled

trial session as required by the Court’s standing pretrial order

and failed to produce any documents relevant to his case.      In

addition, petitioner failed to appear at the scheduled trial

session.

     Petitioner’s course of conduct throughout the proceedings

demonstrated that these failures are due to petitioner’s

willfulness, bad faith, or fault, and we conclude that dismissal

of this case is appropriate.   Petitioner has failed to comply

with the Court’s Rules and orders and has failed properly to

prosecute his case.    See Rollercade, Inc. v. Commissioner, supra

at 116-117; Smith v. Commissioner, supra.    Petitioner is not

eligible for the benefit of section 7491 in the light of his
                                - 11 -

failure to cooperate with reasonable requests of respondent for

information and other matters respecting this case.   See sec.

7491(a)(2)(B).   Accordingly, we shall grant respondent’s motion

to dismiss this case for lack of prosecution and for default

judgment.   However, because respondent has determined that

petitioner is liable for additions to tax and a penalty pursuant

to section 7491(c), the burden of production is on respondent,

and we must determine whether respondent has satisfied his burden

of production.

B.   Burden of Production

     Section 7491(c) provides:

          SEC. 7491(c). Penalties.--Notwithstanding any
     other provision of this title, the Secretary shall have
     the burden of production in any court proceeding with
     respect to the liability of any individual for any
     penalty, addition to tax, or additional amount imposed
     by this title.

In order to satisfy his burden of production under section

7491(c), the Commissioner must produce evidence that it is

appropriate to impose the relevant penalty, addition to tax, or

additional amount.   Wheeler v. Commissioner, 127 T.C. 200, 206

(2006), affd. 521 F.3d 1289 (10th Cir. 2008); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).   Once the Commissioner

meets his burden, the taxpayer must come forward with sufficient

evidence to persuade the Court that the Commissioner’s

determinations are incorrect.
                                - 12 -

     Respondent determined that petitioner is liable for

additions to tax under sections 6651(a)(2) and (f) and

6653(a)(1), (a)(1)(A) and (B), and a penalty under section 6662.

Because petitioner contested his liability for the additions to

tax and penalty in his petition, respondent has the burden of

production under section 7491(c) to come forward with evidence

that it is appropriate to hold petitioner liable for the

additions to tax and penalty.    In addition, respondent bears the

burden of proof to establish fraudulent intent by clear and

convincing evidence regarding section 6651(f).    See sec. 7454(a);

Rule 142(b).

     1.    Section 6651(f) Addition to Tax

     Respondent determined that for 1994 petitioner is liable

under section 6651(f) for a $34,001 addition to tax for

fraudulent failure to file.

     Section 6651(f) imposes an addition to tax of up to 75

percent of the amount of tax required to be shown on the return

where the failure to file a Federal income tax return is due to

fraud.    To establish fraudulent intent, the Commissioner must

prove that a taxpayer intended to evade a tax known or believed

to be owed by conduct intended to conceal, mislead, or prevent

the collection of tax.    Akland v. Commissioner, 767 F.2d 618, 621

(9th Cir. 1985), affg. T.C. Memo. 1983-249; Powell v. Granquist,

252 F.2d 56 (9th Cir. 1958).
                                - 13 -

     The existence of fraud is a question of fact that must be

considered on the basis of an examination of the entire record

and the taxpayer’s entire course of conduct.    Petzoldt v.

Commissioner, 92 T.C. 661, 699 (1989).    Respondent’s burden of

proving fraud can also be met by facts deemed admitted pursuant

to Rule 37(c).    Doncaster v. Commissioner, 77 T.C. 334, 336-337

(1981).    In the case of a default, facts alleged by respondent in

the answer are deemed to be true, and judgment for respondent is

proper if those facts are sufficient to show that petitioner

fraudulently failed to file his tax return for 1994.    See Smith

v. Commissioner, 91 T.C. 1049, 1056-1057 (1988), affd. 926 F.2d
1470 (6th Cir. 1991).    With respect to the addition to tax under

section 6651(f), the entry of a default judgment as a sanction

under Rule 104(c)(3) has the effect of deeming admitted all of

respondent’s factual and conclusory allegations relating to

section 6651(f) that are set forth in the answer.    Smith v.

Commissioner, supra at 1056.

     Since fraud can seldom be established by direct proof, the

requisite intent may be inferred from any conduct, the likely

effect of which would be to conceal, mislead, or otherwise

prevent the collection of taxes the taxpayer knew or believed he

owed.     Spies v. United States, 317 U.S. 492, 499 (1943); Rowlee

v. Commissioner, 80 T.C. 1111 (1983); Vogt v. Commissioner, T.C.

Memo. 2007-209.
                              - 14 -

     Courts have developed several objective “badges” of fraud,

including:   (1) Understatement of income; (2) inadequate records;

(3) failing to file tax returns; (4) providing implausible or

inconsistent explanations of behavior; (5) concealment of assets;

(6) failing to cooperate with taxing authorities; (7) filing

false Forms W-4, Employee’s Withholding Allowance Certificate;

(8) failing to make estimated tax payments; (9) dealing in cash;

(10) engaging in a pattern of behavior that indicates an intent

to mislead; and (11) filing false documents.   Vogt v.

Commissioner, supra; see also Bradford v. Commissioner, 796 F.2d
303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Cooley v.

Commissioner, T.C. Memo. 2004-49.   No single factor is

necessarily sufficient to establish fraud; however, a combination

of several of these factors may be persuasive evidence of fraud.

Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984),

affg. per curiam T.C. Memo. 1982-603.   This case involves

numerous “badges” of fraud:   (1) Petitioner willfully failed to

file an income tax return under section 7203 or make payment for

the taxable year 1994; (2) petitioner failed to report

substantial income for the 1994 tax year; (3) petitioner

attempted to conceal assets and income from a fraudulent scheme

for which he was criminally indicted and pleaded guilty; and (4)

petitioner failed to cooperate with respondent.
                             - 15 -

     Accordingly, the Court is granting a judgment by default for

respondent with respect to the $34,001 addition to tax under

section 6651(f) determined for the year 1994 for fraudulent

failure to file and willful negligence.   See Rechtzigel v.

Commissioner, 79 T.C. 132, 143 (1982), affd. per curiam on

another ground 703 F.2d 1063 (8th Cir. 1983).

     2.   Section 6653 Additions to Tax

     Respondent determined that petitioner is liable for

additions to tax for the tax year 1987 for negligence (1) of

$16,707 under section 6653(a)(1)(A), and (2) 50 percent of the

interest due on the portion of the underpayment attributable to

negligence ($334,707) under section 6653(a)(1)(B).   Respondent

also determined an addition to tax for negligence of $26,625

under section 6653(a)(1) for 1988.

     Section 6653(a)(1) and (a)(1)(A) and (B) imposes an addition

to tax2 if any part of the underpayment is due to negligence or

intentional disregard of rules and regulations.   Negligence is

defined as a “lack of due care or failure to do what a reasonable

and ordinarily prudent person would do under the circumstances.”

     2
      The additions to tax under sec. 6653(a)(1)(A) and (B) are
for an amount equal to 5 percent of the underpayment, and an
amount equal to 50 percent of the interest payable under sec.
6601 with respect to the portion of the underpayment which is
attributable to negligence for the period beginning on the last
date prescribed by law for payment of such underpayment and
ending on the earlier of the date of the assessment of the tax or
the date of payment.
                               - 16 -

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967),

affg. in part and remanding in part 43 T.C. 168 (1964) and T.C.

Memo. 1964-299; Neely v. Commissioner, 85 T.C. 934, 947 (1985);

see Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1984),

affg. 79 T.C. 714 (1982)

     To prevail on the issue of negligence, taxpayers must prove

that their actions in connection with the transaction were

reasonable in the light of their experience and business

sophistication.   Avellini v. Commissioner, T.C. Memo. 1995-489;

Dister v. Commissioner, T.C. Memo. 1987-217.    If a taxpayer is

misguided, unsophisticated in tax law, and acts in good faith, we

may conclude that he or she is not liable for the addition to tax

for negligence.   Collins v. Commissioner, 857 F.2d 1383, 1386

(9th Cir. 1988), affg. Dister v. Commissioner, T.C. Memo. 1987-

217; Hansen v. Commissioner, 820 F.2d 1464, 1469 (9th Cir. 1987).

     On both his 1987 and 1988 Forms 1040, U.S. Individual Tax

Return, petitioner claimed partnership losses and long-term

capital losses for 1987 and 1988 from Fleet Street Associates and

Bond Street Associates.    However, Fleet Street Associates and

Bond Street Associates did not file Federal income tax returns

for the tax years 1987 or 1988.    Respondent provided redacted
                                 - 17 -

copies of IRS tax transcripts which showed that no returns were

filed by these partnerships for the tax years 1987 or 1988.

     Respondent determined that petitioner was not allowed the

claimed losses because (1) petitioner failed to establish what

his adjusted basis was in these partnerships, (2) petitioner

failed to establish that any loss was sustained, or (3) it was

not established that the deduction was allowable as a deduction

or loss under any section of the Code.

     Thus, respondent contends that petitioner has not provided

evidence or demonstrated that his underpayment of tax was not due

to negligence or disregard of rules or regulations or a

substantial understatement of income tax.   Respondent also

contends that petitioner did not have reasonable cause or act in

good faith for the years at issue.

     We agree and find that respondent has carried the burden of

production, and we sustain the additions to tax under section

6653(a)(1), (a)(1)(A) and (B) for 1987 and 1988.

     3.   Section 6662 Penalty

     Respondent determined that petitioner is liable for an

accuracy-related penalty under section 6662 of $272 for 1990

because the underpayment of tax was attributable to negligence.

     Section 6662(a) imposes a penalty of 20 percent of the

portion of the underpayment of tax which is attributable to,

inter alia, negligence or disregard of rules or regulations, sec.
                                - 18 -

6662(b)(1), or a substantial understatement of income tax, sec.

6662(b)(2).    For purposes of section 6662(a), the term

“negligence” includes any failure to make a reasonable attempt to

comply with the Code, and the term “disregard” includes any

careless, reckless, or intentional disregard.     Sec. 6662(c); sec.

1.6662-3(b), Income Tax Regs.     Negligence has also been defined

as a “‘lack of due care or failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.’”

Neely v. Commissioner, supra at 947 (quoting Marcello v.

Commissioner, supra at 506); Criss v. Commissioner, T.C. Memo.

2002-62.

     A taxpayer will not be liable for a penalty under section

6662 if he had reasonable cause.     Sec. 6664(c).   The

determination of whether a taxpayer acted with reasonable cause

and in good faith is made on a case-by-case basis, taking into

account all facts and circumstances.     Sec. 1.6664-4(b)(1), Income

Tax Regs.     The most important factor is the extent of the

taxpayer’s effort to assess the taxpayer’s proper liability.

“Circumstances that may indicate reasonable cause and good faith

include an honest misunderstanding of fact or law that is

reasonable in light of the experience, knowledge, and education

of the taxpayer.”     Sec. 1.6664-4(b)(1), Income Tax Regs.

(emphasis added); see Reynolds v. Commissioner, 296 F.3d 607, 618

(7th Cir. 2002) (“experience, knowledge and education” proviso
                              - 19 -

was fatal to taxpayer who was attorney, C.P.A., and IRS audit

supervisor), affg. T.C. Memo. 2000-20; Emerson v. Commissioner,

T.C. Memo. 2001-186 (lawyer liable for accuracy-related penalty

for failing to keep adequate records required by section 6001).

     Petitioner claimed on his 1990 Form 1040 ordinary losses

(other section 1231 losses) and partnership losses (nonpassive

losses) from Fleet Street Associates and a short-term capital

loss from the entity Butcher & Singer/Keystone Venture I Ltd.

Respondent provided a redacted copy of an IRS tax transcript

which showed that no return was filed by these partnerships for

the tax year 1990.   Thus, the bases in these partnerships had not

been substantiated, and the losses were disallowed.   Accordingly,

on the basis of the entire record and the deemed admissions, the

Court finds that respondent has satisfied the burden of

production with respect to the accuracy-related penalty under

section 6662(a) imposed on petitioner for the taxable year 1990.

Respondent has shown that petitioner failed to keep adequate

books and records and negligently failed to report income.   In

addition, petitioner’s educational and professional background

does not support an honest misunderstanding of facts and laws.

Petitioner has not provided evidence or demonstrated that his

underpayment of tax was not due to negligence or disregard of

rules or regulations.   Respondent contends that because

petitioner has failed to introduce any evidence to indicate that
                               - 20 -

he was not negligent, petitioner has failed to meet his burden of

proof.   We agree.   Accordingly, we sustain respondent’s

determination that petitioner is liable for an accuracy-related

penalty under section 6662 for the year 1990 of $272.

     To reflect the foregoing,

                                          An appropriate order and

                                     decision will be entered.