Arkansas Leasing Serv. v. Commissioner

ARKANSAS LEASING SERVICE, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Arkansas Leasing Serv. v. Commissioner Docket No. 6390-93 United States Tax Court T.C. Memo 1994-498; 1994 Tax Ct. Memo LEXIS 506; 68 T.C.M. (CCH) 891; October 11, 1994, Filed *506 An order and order of dismissal and decision will be entered for respondent. For respondent: Nancy W. Hale. FAY FAY MEMORANDUM OPINION FAY, Judge: This case is before the Court on, inter alia, respondent's motion to dismiss for failure to properly prosecute, filed March 21, 1994, and her motions for sanctions, filed February 9, 1994, and March 21, 1994. On March 21, 1994, this case was called at the Court's trial calendar in Hot Springs, Arkansas. Petitioner did not appear. Respondent was heard, whereupon the Court took respondent's motions under consideration. By statutory notice, dated December 29, 1992, respondent determined deficiencies in and additions to petitioner's Federal income taxes in the following amounts: Additions to Tax Sec. Sec. Sec. Year Deficiency 6653(b)(1) 6653(b)(2) [1984] $ 16,715 $ 8,358 [1] $ 4,179 [1] -- [1986] 1,067 [1] -- All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. The issues for decision*507 are: (1) Whether respondent's motion to dismiss for failure to properly prosecute, with respect to those items for which petitioner bears the burden of proof, should be granted. We hold that it should. (2) Whether petitioner is liable for the additions to tax for fraud as determined by respondent. We hold that it is. 1 Background Petitioner filed Federal income tax returns for all the years at issue. In response to respondent's notice of deficiency, petitioner, by and through its counsel, Stephen E. Adams, timely filed its petition on March 29, 1993. Petitioner had its principal place of business in Russellville, Arkansas, at the time the petition was filed. Petitioner was represented by counsel throughout the course of these proceedings. Respondent's answer, filed June 4, 1993, asserts specific affirmative allegations of fact in support of the determination that petitioner*508 is liable for the additions to tax for fraud for the years at issue. Petitioner did not file a reply, and on August 30, 1993, respondent filed a motion for entry of order that undenied allegations in answer be deemed admitted, pursuant to Rule 37(c). The Court notified petitioner of the filing of respondent's motion and advised it that, if it did not file a reply to respondent's affirmative allegations of fact, respondent's motion would be granted. Petitioner did not file a reply in response to this notice, and on September 28, 1993, respondent's motion was granted, and the undenied specific affirmative allegations of fact in respondent's answer were deemed admitted. 2 *509 On October 15, 1993, this case was set for a March 21, 1994, trial date in Hot Springs, Arkansas. This notice setting case for trial, in pertinent part, clearly states: YOUR FAILURE TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU. * * * * * * YOUR FAILURE TO COOPERATE MAY ALSO RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU. On November 18, 1993, respondent served petitioner with respondent's request for admissions. Petitioner did not respond to respondent or file the original of a response, with proof of service on respondent, with the Court. Therefore, on December 20, 1993, the first day not a Saturday, Sunday, or holiday which was at least 30 days after the request for admissions had been served on petitioner, respondent's requests for admissions were deemed admitted pursuant to Rule 90. On December 27, 1993, respondent's motion to compel production of documents was filed, such motion detailing petitioner's failure to respond to informal discovery requests. By order dated January 4, 1994, respondent's motion was granted, and petitioner was ordered to produce the desired records. This order also stated that *510 failure to comply with such order could result in sanctions including dismissal of the case and entry of decision against petitioner. On January 24, 1994, respondent's motion to compel answers to interrogatories was filed, such motion detailing petitioner's failure to respond to informal discovery requests. By order dated January 28, 1994, respondent's motion was granted, and petitioner was ordered to answer the desired interrogatories. This order also stated that failure to comply with such order could result in sanctions including dismissal of the case and entry of decision against petitioner. On February 9, 1994, respondent filed a motion for sanctions detailing petitioner's failure to produce requested documents, such failure constituting a violation of this Court's January 4, 1994, order. On February 25, 1994, petitioner was ordered to file a response or objection to respondent's motion by March 4, 1994. Petitioner did not respond to this order, and on March 9, 1994, respondent's motion for sanctions was granted in part, the Court holding in abeyance that part of respondent's motion which requested dismissal of petitioner's case. On March 7, 1994, respondent filed a motion*511 for summary judgment, accompanied by a memorandum of authorities and an affidavit in support of respondent's motion for summary judgment. Petitioner was ordered to respond or object to respondent's motion by March 16, 1994; however, petitioner did not comply with this order. Respondent thereafter on March 21, 1994, when this case was called for trial, filed a supplement to her motion for summary judgment. Petitioner, to date, has not responded to respondent's motion for summary judgment; therefore, pursuant to Rule 121(d), we may enter a decision against petitioner on this basis alone. As stated earlier, this case was called for trial on March 21, 1994, in Hot Springs, Arkansas. Petitioner did not appear at this time through counsel or otherwise, nor did petitioner submit a trial memorandum as prescribed by our Rules. Respondent then filed the following motions: (1) A supplement to motion for sanctions with respect to petitioner's failure to produce documents, wherein respondent requests that a default judgment be entered against petitioner pursuant to Rule 123(a); (2) a motion for sanctions with respect to petitioner's failure to answer interrogatories, wherein respondent again*512 requests that a default judgment be entered against petitioner pursuant to Rule 123(a); (3) a motion to dismiss for failure to properly prosecute pursuant to Rule 123, accompanied by respondent's memorandum of law in support of her motion to dismiss for failure to properly prosecute, wherein respondent details petitioner's complete and unexcusable failure to cooperate throughout the course of these proceedings; and, as stated above, (4) a supplement to motion for summary judgment. The Court, thereafter, took these motions under consideration. Discussion In light of the record taken as a whole, the Court finds that petitioner has clearly indicated, as shown by its conduct and the overall record in this case, that it no longer wishes to contest any issue involved in this case. Moreover, we find that petitioner's failure to cooperate with respondent during the pretrial period made it impossible for respondent to conduct negotiations, exchange information, and stipulate mutually agreeable facts as required by Rule 91(c). The standing pretrial order has not been complied with by petitioner, nor has petitioner complied with the mandates of the Court as set forth in Branerton Corp. v. Commissioner, 61 T.C. 691 (1974).*513 Furthermore, petitioner has defied every order of this Court and has failed to respond in any way to respondent's inquiries and the Court's orders. Therefore, we now grant respondent's motion to dismiss with respect to the deficiencies and additions to tax pursuant to section 6661, for which petitioner has the burden of proof, and thereby sustain respondent's determination with respect to these issues. Rule 123(a) provides, in pertinent part, that a party may be held in default when he has failed to proceed as provided by our Rules or as required by this Court. Rule 123(a); Smith v. Commissioner, 91 T.C. 1049, 1056 (1988), affd. 926 F.2d 1470 (6th Cir. 1991). The action or nonaction on the part of a taxpayer that constitutes sufficient grounds to apply Rule 123(a) in proceedings before us is a matter within this Court's discretion. Smith v. Commissioner, supra at 1056. Petitioner's failure to proceed as provided by the Rules of this Court and its failure to cooperate with this Court and respondent constitute more than sufficient grounds for the entry of a default judgment against it. *514 Additionally, both of respondent's motions for sanctions, in light of the entire record, will be granted. For the foregoing and other reasons reflected in the record, the Court, on its own initiative and pursuant to respondent's requests in her motions for sanctions, holds petitioner in default and will proceed to analyze respondent's request for an increased deficiency and her fraud determinations accordingly. 3 *515 Section 6653(b) provides for an addition to tax for fraud. In order to sustain the determination as to the fraud addition to tax for a year, the Commissioner must prove, by clear and convincing evidence, that some part of the underpayment for that year is due to fraud with the intent to evade tax. Sec. 7454(a); Rule 142(b); Akland v. Commissioner, 767 F.2d 618, 621 (9th Cir. 1985), affg. T.C. Memo. 1983-249; Habersham-Bey v. Commissioner, 78 T.C. 304, 311 (1982); Doncaster v. Commissioner, 77 T.C. 334, 336 (1981); Tschudy v. Commissioner, T.C. Memo. 1993-567. The Commissioner must show that the taxpayer intended to evade taxes by conduct calculated to conceal, mislead, or otherwise prevent the collection of such taxes. Wedvik v. Commissioner, 87 T.C. 1458, 1468-1469 (1986); Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). Fraud will never be presumed. Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Fraud may, however, be proven by circumstantial*516 evidence and reasonable inferences drawn from the facts, because presentation of direct proof of a taxpayer's intent is seldom possible. Wedvik v. Commissioner, supra at 1469; Rowlee v. Commissioner, supra at 1123. A taxpayer's entire course of conduct is examined to establish the requisite fraudulent intent. Recklitis v. Commissioner, 91 T.C. 874, 909-910 (1988). To meet the burden of proving fraud, the Commissioner must show that (1) there was an underpayment, and (2) the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Sec. 7454(a); Rule 142(b); Recklitis v. Commissioner, supra at 909. The Commissioner cannot rely on the taxpayer's failure of proof to satisfy the Commissioner's burden of presenting proof of fraud. Olinger v. Commissioner, 234 F.2d 823, 824 (5th Cir. 1956), affg. in part and revg. in part T.C. Memo. 1955-9. We find, in light of the record, that there was an underpayment of tax*517 for each of the tax years in issue. We now turn to the element of petitioner's intent. The Commissioner is entitled to satisfy the burden of proof by relying on facts deemed admitted, as a consequence of imposed sanctions, or by a clear indication on the part of the taxpayer that he no longer would contest the fraud issue. Smith v. Commissioner, supra at 1052-1053; see also Marshall v. Commissioner, 85 T.C. 267 (1985); Doncaster v. Commissioner, supra. All three of these factors exist in the instant case. Holding the taxpayer in default under Rule 123(a) has the effect of admitting all well-pleaded facts in the Commissioner's answer. Smith v. Commissioner, supra at 1056-1058; see also Bosurgi v. Commissioner, 87 T.C. 1403, 1409 (1986); Stanko v. Commissioner, T.C. Memo. 1993-513. This is true even when a reply has been filed by a taxpayer which addresses the facts pleaded by the Commissioner in the answer. Smith v. Commissioner, 926 F.2d at 1478; Rechtzigel v. Commissioner, 79 T.C. 132, 142 n.11 (1982)*518 ("the necessary effect of defaulting petitioner is to deem admitted the affirmative allegations in the answer irrespective of petitioner's denial [in the reply]. The sanction thus converts the denial into an admission."), affd. 703 F.2d 1063 (8th Cir. 1983); see Gordon v. Commissioner, 73 T.C. 736 (1980); Walden v. Commissioner, TC. Memo. 1993-56; Byars v. Commissioner, T.C. Memo. 1992-169. No reply, however, was filed in the instant case. Entry of a default decision for the fraud addition is appropriate upon a determination, which is within this Court's discretion, that the pleadings set forth sufficient facts to support such a judgment. Smith v. Commissioner, 91 T.C. at 1058-1059. The Commissioner's pleadings must, however, allege specific facts sufficient to sustain a finding of fraud before the Commissioner will be entitled to a decision that includes an addition to tax for fraud upon the failure of a taxpayer to appear for trial. Id. at 1058. We must now decide whether (1) respondent's specific*519 affirmative allegations of fact contained in the answer in the instant case, taken to be true by respondent's motion for entry of order that undenied allegations in answer be deemed admitted, granted September 28, 1993; (2) petitioner's default in this case; and, (3) the facts deemed admitted in this matter due to petitioner's failure to respond to respondent's request for admissions, taken together, are sufficient to establish the existence of fraud. See id. at 1059. The decision of the Court of Appeals for the Sixth Circuit in Solomon v. Commissioner, 732 F.2d 1459, 1461-1462 (6th Cir. 1984), affg. T.C. Memo. 1982-603, sets forth a nonexclusive list of the "'badges' of fraud" that demonstrate fraudulent intent. These badges include: (1) The failure to file tax returns, (2) the failure to report, and understatement of, income, (3) the taxpayer's failure to give the Government access to his records, (4) the taxpayer's failure to keep adequate books and records, (5) the taxpayer's experience and knowledge of tax laws, and (6) concealment of assets. Implausible or inconsistent explanations of*520 behavior are additional indicia of fraud. Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601. Additionally, the taxpayer's failure to appear for trial can be indicative of fraud. Smith v. Commissioner, 91 T.C. at 1059-1060. The taxpayer's entire course of conduct can be indicative of fraud. Stone v. Commissioner, 56 T.C. 213, 224 (1971). False and misleading statements to the Commissioner's agents are also indicia of fraud. Truesdell v. Commissioner, 89 T.C. 1280, 1303 (1987). Because a corporation can act only through its officers and agents, the intentions of the corporate officers and shareholders can be imputed to the corporation. Botwinik Bros., Inc. v. Commissioner, 39 T.C. 988, 996 (1963). Similarly, when a dominant shareholder's or officer's interests are not antagonistic toward the corporation, the shareholder's or officer's fraudulent intent can be imputed to the corporation. Auerbach Shoe Co. v. Commissioner, 216 F.2d 693 (1st Cir. 1954),*521 affg. 21 T.C. 191 (1953). Petitioner is deemed to have admitted all the affirmative allegations of fact in respondent's answer, as well as the admissions in respondent's request for admissions. Furthermore, we find that the affirmative allegations of fact contained in the answer and respondent's request for admissions now deemed admitted are factually sufficient to establish the existence of fraudulent conduct by petitioner. These factors, coupled with the record in its entirety and petitioner's conduct as interwoven with the conduct of the taxpayers in Arkansas Oil & Gas, Inc. v. Commissioner, T.C. Memo. 1994-497, and Braden v. Commissioner, T.C. Memo. 1994-496, wherein the fraud additions to tax were sustained, allow the Court to sustain the fraud addition in the instant case. The badges of fraud we find significant are, inter alia, as follows: (1) Petitioner's sole shareholder, Dale S. Braden's, and its representatives' false and misleading statements to respondent during the course of the examination of the tax years at issue; (2) its failure to keep adequate books and records; (3) its*522 consistent and substantial receipt of and failure to report income over a period of consecutive years; (4) its consistent and substantial underpayments of income tax over a period of consecutive years; (5) its disguising nondeductible expenditures as business expenses; (6) its knowledge of the requirement to file true and accurate tax returns, as is imputed through its sole shareholder, who is highly educated and is an attorney; (7) its failure to comply with known reporting requirements; (8) its failure to cooperate in the determination of its tax liabilities; and (9) its failure to appear and contest the determinations against it. In light of the record taken as a whole and reasonable inferences therefrom, we now find that the facts in this case show, by clear and convincing evidence, that petitioner intended to evade taxes known to be owing for the tax years at issue by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Our review of the entire record in this case, including the well-pleaded facts contained in respondent's answer, satisfies us that respondent's determination of deficiencies and additions to tax in the statutory notice, and the*523 additions to tax for fraud asserted in the answer, should be and are sustained by both holding petitioner in default, pursuant to Rule 123(a), and dismissing its case. To reflect the foregoing, An order and order of dismissal and decision will be entered for respondent. Footnotes 1. Fifty percent of the interest due on the deficiency.↩ 1. A motion for summary judgment was filed by respondent; however, this will be denied as moot because of the decision rendered herein.↩ 2. There are four pages of affirmative allegations of fact in respondent's answer which are now deemed admitted. There is also one page of requested admissions in her request for admissions which are also deemed admitted. In the interest of brevity we will not reproduce these deemed admissions here, but rather incorporate them by this reference as though set forth in full herein.↩ 3. Respondent, in her memorandum brief, alerts the Court to note 2 in Rechtzigel v. Commissioner, 703 F.2d 1063, 1064 n.2 (8th Cir. 1983), affg. 79 T.C. 132 (1982), wherein the Court of Appeals stated that it was troubled by the entry of a default judgment on the fraud additions to tax based on facts deemed admitted as a result of sanctions imposed on the taxpayer, who was present at trial in that case. We find that Rechtzigel↩ is clearly distinguishable from the instant matter, and, while we understand the Court of Appeals' concern, we feel comfortable that the result we reach here is proper based on the record taken as a whole.