Court Opinion

ID: 9891193
Source: CourtListenerOpinion
Date Created: 2023-10-17 19:02:53.404939+00
Date Added: 2024-06-11T13:39:39.027210
License: Public Domain

United States Tax Court

                               T.C. Memo. 2023-124

                ABDUL KHALIQ MUSTAFA MUHAMMAD,
                            Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                      —————

Docket No. 7103-21.                                         Filed October 17, 2023.

                                      —————

Abdul Khaliq Mustafa Muhammad, pro se.

Amanda K. Bartmann and Stephen C. Welker, for respondent.

                           MEMORANDUM OPINION

       LAUBER, Judge: With respect to petitioner’s Federal income tax
for tax years 2017 and 2018, the Internal Revenue Service (IRS or
respondent) determined deficiencies of $13,062 and $12,351 and civil
fraud penalties of $9,797 and $9,263, respectively. The deficiencies stem
from unreported gross income and the disallowance of deductions.

       In his Answer filed July 9, 2021, respondent made affirmative al-
legations regarding petitioner’s alleged unreported income and fraudu-
lent conduct. We directed petitioner to reply to these allegations, but he
failed to do so. We then entered an Order deeming respondent’s affirm-
ative allegations admitted. See Rule 37(c). 1 Respondent has filed a Mo-
tion for Partial Summary Judgment contending that the deemed admis-
sions establish that he is entitled to judgment as a matter of law with

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax
Court Rules of Practice and Procedure. We round all monetary amounts to the nearest
dollar.

                                  Served 10/17/23
                                    2

[*2] respect to the unreported income and the civil fraud penalties. We
will grant the Motion insofar as it pertains to the unreported income.

                              Background

       The following facts are based on the parties’ pleadings and the
Declarations and Exhibits attached to respondent’s Motion. See Rule
121(c). Petitioner resided in Virginia when his Petition was timely filed.

       Petitioner has been an employee of the IRS since 2008. He previ-
ously worked as a tax return preparer. He holds five educational de-
grees, including a master’s in business administration and a Juris Doc-
tor with an alleged specialty in international taxation.

       Petitioner included with his 2017 and 2018 Federal income tax
returns Schedules C, Profit or Loss From Business. He conducted that
business under the name “El Virtuoso Enterprise.” He described it as a
“professional service business.”

      Petitioner claimed numerous deductions in connection with “El
Virtuoso Enterprise,” including substantial deductions for home office
expenses. For 2017 and 2018 he reported gross receipts of $6,000 and
$4,500, respectively, and net losses of $36,515 and $40,124, respectively.
His Schedules C for these years reflected his prior practice of reporting
gross receipts in round-dollar amounts and expenses that vastly ex-
ceeded such receipts. For 2016 he had reported gross receipts of $3,500
and a net loss of $28,429. He has reported a Schedule C loss on every
return he has filed since 2012.

       The IRS selected petitioner’s 2017 and 2018 returns for examina-
tion. When he declined to provide books and records for his Schedule C
business, the revenue agent (RA) issued summonses to his bank in order
to perform a bank deposits analysis. On the basis of that analysis, the
RA determined that petitioner had unreported Schedule C gross receipts
of $8,347 and $7,231 for 2017 and 2018, respectively.

        At the conclusion of the examination the IRS issued petitioner a
timely notice of deficiency, determining the deficiencies and fraud pen-
alties set forth above. He timely petitioned this Court, assigning as er-
rors the treatment of his bank deposits as taxable income, the disallow-
ance of his claimed deductions, and the determination of penalties for
civil fraud.
                                     3

[*3] On July 9, 2021, respondent timely filed an Answer that made 24
affirmative allegations. These included allegations that the RA, employ-
ing the bank deposits analysis, had arrived at the correct amounts of
unreported taxable deposits for 2017 and 2018. Specifically, respondent
alleged as follows:

             Based on a bank deposits analysis properly omitting
      nontaxable amounts (transfers etc.), and offering peti-
      tioner ample opportunity to explain unreported amounts,
      during taxable years 2017 and 2018 petitioner’s net, unre-
      ported taxable deposits into bank accounts were as follows:
      Bank of America (ending in 6546) 2017: $8,347 . . . 2018:
      $7,231.

        Respondent also made several allegations in support of his deter-
mination that petitioner had committed civil fraud. These included al-
legations that petitioner was uncooperative with the RA during the ex-
amination; that he failed to supply accurate books and records of his
Schedule C business; and that he was fully aware of the requirement
that he keep such books and records. Finally, respondent alleged that,
if petitioner is not liable for the fraud penalty, he is liable in the alter-
native for an accuracy-related underpayment penalty under section
6662(a).

       Petitioner did not deny (or otherwise reply to) these affirmative
allegations within 45 days. See Rule 37(a). On October 8, 2021,
respondent timely filed a Motion for Entry of an Order that the Unde-
nied Allegations Be Deemed Admitted. See Rule 37(c). By Order served
October 14, 2021, we directed petitioner to file a reply to that Motion by
November 8, 2021. He failed to do so by that date or subsequently. On
January 10, 2022, we entered an Order granting respondent’s Motion
and ruling that the undenied allegations set forth in the Answer “are
deemed admitted for the purposes of this case.”

       On October 13, 2022, respondent filed a Motion for Partial Sum-
mary Judgment, contending that he is entitled to judgment as a matter
of law with respect to the issues of unreported income and civil fraud.
On November 15, 2022, petitioner filed a document he characterized as
a “Combined Motion to Deny Partial Summary Jugement [sic] and to
Vacate Admissions of Income and Underpayment of Tax Due to Fraud.”
We filed this document as a Motion to Vacate (docket entry No. 25) and
a Response to Motion for Partial Summary Judgment (docket entry
No. 26).
                                    4

[*4]                           Discussion

I.     Motion to Vacate the Rule 37(c) Order

       The standard for granting a motion to vacate an order entered
under Rule 37(c) is the same as that for granting a motion to withdraw
or modify a deemed admission under Rule 90(f).             See New v.
Commissioner, 92 T.C. 1146, 1148–49 (1989). To prevail on such a mo-
tion the moving party must establish (1) that the merits of his case will
be advanced by withdrawal of the admission and (2) that no prejudice
will result to the opposing party. See id. at 1149. The first condition
requires the movant to adduce facts that tend to refute the admissions.
See id. at 1149–50. “The bare assertion that admissions will be refuted
is insufficient; the movant must demonstrate that a trial would serve
the presentation of competing evidence.” Om Prakash, M.D., P.C. v.
Commissioner, T.C. Memo. 1990-106, 59 T.C.M. (CCH) 5, 8.

       In his Motion petitioner offers two excuses for his failure to reply
to respondent’s affirmative allegations. He first asserts that he did not
know that respondent had filed an Answer, alleging that he was travel-
ing outside of the United States and “did not have access to email or
regular deliverable mail.” The travel documents he supplied show that
he left the United States on July 16, 2021, one week after the Answer
was filed, and that he returned to the United States on August 18, 2021,
seven weeks before respondent filed his Rule 37(a) Motion. Petitioner
receives electronic service of all filings in this case. We are unconvinced
by his assertion that he was unaware that respondent had filed the An-
swer.

       Second, petitioner alleges that a car accident and resulting injury
he suffered on August 21, 2021, prevented him from complying with our
October 14, 2021, Order directing him to file a reply. To substantiate
those allegations he supplied a letter from his automobile insurance
company and invoices for rotator cuff surgery and physical therapy ses-
sions. But he has not shown that his injury was so debilitating that it
prevented him from complying with our Order or from moving for an
extension of time in which to comply. The fact that he participated in a
pre-trial conference with respondent on October 22, 2021, suggests that
he was well enough to file a reply by our November 8, 2021, deadline.
In any event, we afforded him an additional two months before entering
our Rule 37(c) Order.
                                    5

[*5] On the merits petitioner challenges respondent’s affirmative alle-
gations that the RA, employing the bank deposits analysis, arrived at
the correct amounts of unreported taxable deposits for 2017 and 2018.
Petitioner asserts that certain bank deposits were nontaxable because
they reflected (1) an insurance payment for a casualty loss; (2) cash “al-
ready withdrawn previously from [his bank] account and [later] rede-
posited to cover expenditures”; and/or (3) a cash deposit sourced from “a
loan from [his] Thrift Savings Plan.” But he has supplied no documen-
tary evidence (e.g., insurance records, bank account records, or loan doc-
uments) to support any of these allegations. And he has not averred
under penalty of perjury that any such evidence exists. He has accord-
ingly failed to “demonstrate that a trial would serve the presentation of
competing evidence.” Om Prakash, M.D., P.C., 59 T.C.M. (CCH) at 8.

       Petitioner does not seriously dispute respondent’s affirmative al-
legations relating to possible “badges of fraud,” e.g., that he was unco-
operative with the RA during the examination, that he failed to supply
complete books and records of his Schedule C business, or that (as an
IRS employee and former return preparer) he was aware of the require-
ment that he keep books and records. Rather, he alleges that he did
keep books and records, but that he suffered three separate instances of
water damage (in 2015, 2017, and 2018), resulting in “computer crashes”
that caused him to “los[e] all data storage.”

       Petitioner did not reply to respondent’s affirmative allegations de-
spite being given ample opportunity to do so. And in his Motion papers
he failed to produce facts that would tend to refute respondent’s allega-
tions regarding unreported income and possible badges of fraud. See
New, 92 T.C. at 1148–50; Om Prakash, M.D., P.C., 59 T.C.M. (CCH) at 8.
We will accordingly deny his Motion to Vacate.

II.   Summary Judgment

       The purpose of summary judgment is to expedite litigation and
avoid costly, unnecessary, and time-consuming trials. See FPL Grp.,
Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant
summary judgment when there is no genuine dispute as to any material
fact and a decision may be rendered as a matter of law. Rule 121(a)(2);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17
F.3d 965 (7th Cir. 1994). In deciding whether to grant summary judg-
ment, we construe factual materials and inferences drawn from them in
the light most favorable to the nonmoving party. Sundstrand Corp., 98
T.C. at 520.
                                    6

[*6] Facts deemed admitted under Rule 37(c) are considered conclu-
sively established and may be relied on by the Commissioner even when
he bears the burden of proof. See Marshall v. Commissioner, 85 T.C.
267, 272–73 (1985); Baptiste v. Commissioner, T.C. Memo. 1992-198, 63
T.C.M. (CCH) 2649, 2649, aff’d, 29 F.3d 1533 (11th Cir. 1994). Where
the moving party makes and properly supports a motion for summary
judgment, “the nonmovant may not rest on the allegations or denials in
that party’s pleadings” but must set forth specific facts, by affidavit or
otherwise, showing that there is a genuine dispute for trial. Rule 121(d).

      A.     Gross Receipts

        A taxpayer must maintain books and records establishing the
amount of his gross income. See § 6001. When a taxpayer does not keep
accurate books and records, the Commissioner may reconstruct his in-
come “under such method as, in the opinion of the Secretary, does clearly
reflect income.” § 446(b); see Petzoldt v. Commissioner, 92 T.C. 661, 693
(1989). Such reconstruction “need only be reasonable in light of all sur-
rounding facts and circumstances.” Petzoldt, 92 T.C. at 687. “When a
taxpayer keeps no books or records, has large bank deposits, and offers
no plausible explanation of such deposits, the Commissioner is not arbi-
trary or capricious in resorting to the bank deposit method for compu-
ting income.” Estate of Mason v. Commissioner, 64 T.C. 651, 657 (1975),
aff’d, 566 F.2d 2 (6th Cir. 1977).

       The bank deposits method starts with the presumption that all
money deposited into a taxpayer’s bank account during a given period
constitutes taxable income. Price v. United States, 335 F.2d 671, 677
(5th Cir. 1964); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). This
presumption is rebutted to the extent the deposits are shown to include
nontaxable amounts, and “the Government must take into account any
non-taxable source . . . of which it has knowledge.” Price, 335 F.2d at
677; DiLeo v. Commissioner, 96 T.C. 858, 868 (1991), aff’d, 959 F.2d 16
(2d Cir. 1992). After the IRS reconstructs a taxpayer’s income and de-
termines a deficiency, the taxpayer bears the burden of proving that the
IRS’s implementation of the bank deposits method was unfair or inac-
curate. See Clayton v. Commissioner, 102 T.C. 632, 645–46 (1994);
DiLeo, 96 T.C. at 871–72.

       Employing the bank deposits method, the RA determined that pe-
titioner received unreported gross receipts of $8,347 and $7,231 for 2017
and 2018, respectively. In the Answer respondent alleged that “during
taxable years 2017 and 2018 petitioner’s net, unreported taxable
                                    7

[*7] deposits into bank accounts were as follows: Bank of America (end-
ing in 6546) 2017: $8,347 . . . 2018: $7,231.” When petitioner did not
reply, the Court entered its Order deeming this allegation admitted. See
Rule 37(c). This deemed admission alone suffices to establish that no
genuine dispute exists as to the issue of unreported gross income. See
Marshall, 85 T.C. at 272–73.

       Assuming arguendo that petitioner had timely denied the affirm-
ative allegations, he has failed to produce evidence that could create a
genuine dispute over whether he received unreported income. See Rule
121(d) (requiring nonmovant to set forth specific facts supported by evi-
dence); Vallone v. Commissioner, 88 T.C. 794, 801 (1987). He contends
that some bank deposits were attributable to an insurance payout, re-
deposited cash, or a Thrift Savings Plan loan. But he has offered no
evidence, such as bank records, insurance records, or loan documents,
to substantiate these assertions. We will thus grant summary judgment
for respondent on the issue of petitioner’s unreported gross income.

      B.     Fraud

       Section 6663(a) imposes a penalty of 75% on any portion of an
underpayment of tax attributable to fraud. Fraud is intentional wrong-
doing designed to evade tax believed to be owing.                 Neely v.
Commissioner, 116 T.C. 79, 86 (2001). The existence of fraud is a ques-
tion of fact to be resolved upon consideration of the entire record. Estate
of Pittard v. Commissioner, 69 T.C. 391, 400 (1977).

       Fraud is not to be presumed or based upon mere suspicion.
Petzoldt, 92 T.C. at 700. Respondent has the burden of proving fraud,
and that burden must be carried by clear and convincing evidence. See
§ 7454(a); Rule 142(b). But because direct proof of a taxpayer’s intent is
rarely available, fraudulent intent may be established by circumstantial
evidence. Petzoldt, 92 T.C. at 699. The Commissioner satisfies his bur-
den of proof by showing that “the taxpayer intended to evade taxes
known to be owing by conduct intended to conceal, mislead, or otherwise
prevent the collection of taxes.” Parks v. Commissioner, 94 T.C. 654, 661
(1990). The taxpayer’s entire course of conduct may be examined to es-
tablish the requisite intent, and an intent to mislead may be inferred
from a pattern of conduct. Webb v. Commissioner, 394 F.2d 366, 379
(5th Cir. 1968), aff’g T.C. Memo. 1966-81; Stone v. Commissioner, 56
T.C. 213, 224 (1971).
                                     8

[*8] Circumstances that may indicate fraudulent intent, often called
“badges of fraud,” include but are not limited to (1) understating income,
(2) keeping inadequate records, (3) giving implausible or inconsistent
explanations of behavior, (4) concealing income or assets, (5) failing to
cooperate with tax authorities, (6) engaging in illegal activities, (7) sup-
plying incomplete or misleading information to a tax return preparer,
(8) providing testimony that lacks credibility, (9) filing false documents
(including false tax returns), (10) failing to file tax returns, and
(11) dealing in cash. See Schiff v. United States, 919 F.2d 830, 833 (2d
Cir. 1990); Bradford v. Commissioner, 796 F.2d 303, 307–08 (9th Cir.
1986), aff’g T.C. Memo. 1984-601; Parks, 94 T.C. at 664–65; Recklitis v.
Commissioner, 91 T.C. 874, 910 (1988); Morse v. Commissioner, T.C.
Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff’d, 419 F.3d 829 (8th Cir.
2005). Respondent may rely on facts deemed admitted in an effort to
discharge his burden of proof. See Marshall, 85 T.C. at 272–73. But
summary judgment on the ultimate issue of fraud is generally inappro-
priate when issues of motive and intent are material. See Espinoza v.
Commissioner, 78 T.C. 412, 417 (1982).

       We have deemed petitioner to have admitted certain affirmative
allegations relating to possible “badges of fraud,” e.g., that he was unco-
operative with the RA during the examination, that he failed to supply
accurate books and records of his Schedule C business, and that (as an
IRS employee and former return preparer) he was aware of the require-
ment that he keep books and records. However, we do not think that
these admissions alone are sufficient to satisfy respondent’s burden of
proving fraud by clear and convincing evidence. Petitioner alleges (for
example) that he was unable to supply books and records to the RA be-
cause those records had been destroyed by water damage. Such a fact,
if true, could tend to support petitioner’s contention that he lacked the
subjective intent to commit fraud. He will be free at trial to offer evi-
dence substantiating the water damage allegation and other allegations
bearing upon his intent.

       Because we are not satisfied that the facts deemed admitted es-
tablish by clear and convincing evidence that petitioner intended to
evade payment of tax, we will deny summary judgment with respect to
the fraud penalties. Those penalties remain for trial, as do respondent’s
                                           9

[*9] disallowance of Schedule C and other deductions and his alterna-
tive assertion of accuracy-related penalties under section 6662(a). 2

       To reflect the foregoing,

       Appropriate orders will be issued.

        2 Petitioner makes various allegations concerning the RA’s conduct during the

examination and appears to argue that this behavior invalidates the notice of defi-
ciency. We disagree. Proceedings in the Tax Court are conducted de novo, and we will
generally not look behind a notice of deficiency to examine the Commissioner’s motives
or the administrative policies and procedures involved in making his determinations.
See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). A narrow ex-
ception to this rule applies where a taxpayer proffers substantial evidence of unconsti-
tutional conduct on the part of an IRS official. See id. at 328. Petitioner has offered
no plausible evidence along those lines.