T.C. Memo. 2017-57



                         UNITED STATES TAX COURT



    BRADLEY A. BALLARD AND PONCELLA BALLARD, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13295-14.                          Filed April 6, 2017.



      Bradley A. Ballard and Poncella Ballard, pro sese.

      Blaine Charles Holiday and John Schmittdiel, for respondent.



                           MEMORANDUM OPINION


      NEGA, Judge: This matter is before the Court on respondent’s motion for

summary judgment under Rule 121.1 Respondent requests summary judgment in

the light of the facts deemed stipulated pursuant to Rule 91(f).


      1
       All Rule references are to the Tax Court Rules of Practice and Procedure.
All section references are to the Internal Revenue Code (Code) in effect for the
years at issue. All amounts are rounded to the nearest dollar.
                                         -2-

[*2] In a notice of deficiency dated March 6, 2014, respondent determined the

following deficiencies, additions to tax, and penalties:

                                               Addition to tax           Penalty
        Year               Deficiency          sec. 6651(a)(1)          sec. 6663
        2008               $248,731               $61,684               $185,051
        2009                145,187                  7,128               107,596
        2010                 64,715                 16,179                48,536

      The issues for our consideration are whether petitioners: (1) underreported

gross receipts and overstated deductions, (2) are liable for additions to tax under

section 6651(a)(1) for failing to file timely returns, and (3) are each liable for

section 6663 fraud penalties for the years 2008-10.

                                     Background

I.    Procedural History

      On March 6, 2014, respondent issued petitioners a notice of deficiency

(notice) for 2008-10. Petitioners timely filed a petition with this Court for

redetermination. On July 31, 2014, respondent filed an answer affirmatively

alleging facts supporting the deficiency and penalty determinations. On October

29, 2014, petitioners filed a reply to answer denying those allegations.

      In the interim, however, petitioners failed to cooperate with respondent in

preparing this case for trial and neglected to further prosecute this action before

the Court. Petitioners also failed to respond to our order to show cause why facts
                                        -3-

[*3] set forth in a proposed stipulation by respondent should not be deemed

admitted under Rule 91(f). We therefore made our order to show cause absolute

on June 3, 2015, and those facts are deemed admitted for purposes of our decision

on respondent’s motion. We incorporate those facts by this reference.

      On July 1, 2016, respondent filed a motion for summary judgment.

Respondent contends that no genuine issues of material fact remain in dispute and

requests we sustain the deficiencies, additions to tax, and fraud penalties

determined in the notice. Respondent contends the facts deemed stipulated under

Rule 91(f) satisfy his burdens as to all relevant issues. By order dated July 6,

2016, we directed petitioners to file a response to the motion for summary

judgment on or before July 27, 2016. To date, petitioners have failed to do so.

When this case was called from the trial calendar during the September 26, 2016,

session of the Court in St. Paul, Minnesota, petitioners failed to appear. Counsel

for respondent appeared and was heard.

II.   Factual Background

      Petitioner husband, Mr. Ballard, operated a sole proprietorship under the

name “Quik Copy”. As Quik Copy, Mr. Ballard operated a print and copy

business wherein he specialized in the unauthorized duplication of copyrighted
                                          -4-

[*4] works. To conceal his piracy Mr. Ballard dealt mostly in cash, kept no

financial or business records, and maintained numerous bank accounts.

       Mr. and Ms. Ballard filed separate tax returns for 2008. Ms. Ballard filed

timely, reporting herself as a head of household, independently supporting her

three children. Mr. Ballard filed as single with no dependents. Mr. Ballard,

however, filed his return nearly five months past due on September 8, 2009.

       For 2009 Mr. Ballard filed as a head of household, claiming Ms. Ballard’s

children as dependents. Again Mr. Ballard failed to file timely, filing this return

on May 3, 2010. Ms. Ballard neither signed this return nor filed separately.

       For 2008 and 2009 Mr. Ballard reported portions of Quik Copy’s receipts

and expenses on his individual tax returns using Schedules C, Profit or Loss From

Business. However, he declined to report any gross receipts or expenses

associated with his illicit activities.

       On June 17, 2010, respondent mailed a Letter 2205-A to Mr. Ballard

informing him that his 2007 return had been selected for examination.

Respondent’s audit expanded to include returns for Mr. Ballard’s 2008 and 2009

tax years, for which respondent’s revenue agent performed a bank deposits

analysis. The bank deposits analysis led respondent to determine that Mr. Ballard
                                         -5-

[*5] had underreported Quik Copy’s gross receipts by $1,118,585 and $740,647

for 2008 and 2009, respectively.

      During the examination Mr. and Ms. Ballard provided respondent’s

examiner with professionally prepared amended joint returns for years 2008 and

2009 (amended returns) and their joint 2010 return, which at that time was

approximately seven months past due. Petitioners also consented to an extension

of the period of limitations on assessment.

      Petitioners’ amended returns purported to correct Mr. Ballard’s reporting of

Quik Copy’s gross receipts for 2008 and 2009. The amended returns, however,

still exhibited significant underreporting when compared with respondent’s bank

deposits analysis. Additionally, petitioners failed to substantiate the business

expenses and capital losses for which they claimed deductions in their amended

2008 and 2009 returns and in their newly filed 2010 return.

      Respondent concluded the examination and issued petitioners a notice of

deficiency for years 2008-10. Respondent disallowed deductions for all

unsubstantiated expenses and capital losses for years 2008-10. On the basis of the

bank deposits analysis, respondent increased petitioners’ Schedule C gross

receipts for 2008 and 2009. Finally, respondent determined additions to tax for

failure to file timely and fraud penalties for years 2008-10 for each petitioner.
                                        -6-

[*6]                                 Discussion

I.     Summary Judgment Standard

       Summary judgment is intended to expedite litigation and avoid unnecessary

and expensive trials. Fla. Peach Corp. v. Commissioner, 

, 681 (1988).

Summary judgment may be granted with respect to all or any part of the legal

issues in controversy when there exists no genuine dispute as to any material fact

and a decision may be rendered as a matter of law. Rule 121(a) and (b). The

moving party bears the burden of proving there is no genuine issue of material

fact, and factual inferences will be read in a manner most favorable to the

nonmoving party. Dahlstrom v. Commissioner, 

, 821 (1985).

       The facts in this matter have been deemed stipulated under Rule 91(f) and

are not in dispute. Facts deemed admitted or stipulated may be found sufficient to

uphold deficiency determinations and also to satisfy respondent’s burden of

proving fraud. See Rechtzigel v. Commissioner, 

, 141 (1982), aff’d

per curiam, 

 (8th Cir. 1983); Doncaster v. Commissioner, 

 (1981); see also Console v. Commissioner, T.C. Memo. 2001-232, slip op. at

9, aff’d, 85 F. App’x 869 (3d Cir. 2003).
                                        -7-

[*7] II.     Income Tax Deficiencies for Years 2008, 2009, and 2010

       Section 61(a) provides that gross income includes “all income from

whatever source derived”. Section 162 permits taxpayers to deduct from gross

income the ordinary and necessary expenses of carrying on a trade or business.

Section 1211 generally permits individuals to deduct capital losses to the extent of

capital gains plus $3,000. The Code requires, however, that taxpayers maintain

books and records sufficient to establish their income and the substance of any

deductions claimed. See sec. 6001.

       Generally, the Commissioner’s deficiency determinations are presumed

correct, and taxpayers bear the burden of proving otherwise. Rule 142(a); Welch

v. Helvering, 

, 115 (1933).

       The undisputed facts establish the existence of deficiencies. Respondent’s

bank deposits analysis shows that Mr. Ballard understated his Schedule C gross

receipts for years 2008 and 2009. Mr. Ballard failed to maintain any business

records. See Nicholas v. Commissioner, 

, 1064 (1978) (holding bank

deposits analysis sufficient when taxpayer fails to maintain required records).

Additionally, petitioners failed to substantiate their business expenses and capital

losses in excess of the amounts that respondent allowed as deductions for 2008-
                                           -8-

[*8] 10. Respondent is therefore entitled to a decision as a matter of law with

respect to the deficiencies for 2008-10.

III.   Section 6651(a)(1) Additions to Tax for 2008, 2009, and 2010

       Generally, individual and married taxpayers must file their Federal income

tax returns on or before April 15. Sec. 6072(a). Section 6651(a)(1) imposes an

addition to tax on a taxpayer’s failure to do so. The section 6651 addition to tax

will not apply if the taxpayer’s failure to file a timely return was due to reasonable

cause and not due to willful neglect. Sec. 6651(a)(1).

       The Commissioner bears the initial burden of production in establishing

liability for an addition to tax. Sec. 7491(c). The taxpayer bears the burden of

raising and proving reasonable cause. Rule 142; Higbee v. Commissioner, 

, 447 (2001).

       Respondent determined that both petitioners bore liability for the section

6651(a)(1) additions to tax for years 2008-10. Respondent established that

petitioners failed to file timely returns for those years and has therefore met his

burden of production.2 Petitioners failed to introduce evidence of reasonable

       2
       For purposes of sec. 6651, the Code assigns “deemed filed” dates to the
amended joint returns of couples who had previously filed separately. Sec.
6013(b)(3). By virtue of the filing of their amended 2008 return Mr. and Ms.
Ballard are deemed to have filed untimely on September 8, 2009, the date of Mr.
                                                                     (continued...)
                                         -9-

[*9] cause for their untimely filings. Accordingly, we sustain respondent’s section

6651(a)(1) determinations.

IV.   Fraud Penalties

      A.     In General

      When any part of an underpayment of tax is attributable to fraud, section

6663(a) imposes a penalty equal to 75% of that underpayment. To prove fraud,

the Commissioner must establish that: (1) an underpayment of tax exists and (2) a

portion of the underpayment is attributable to the taxpayer’s fraudulent intent to

evade tax thereon. Sec. 7454(a); Rule 142(b); see Katz v. Commissioner, 

, 1143 (1988).

      Respondent bears the burden of proof and must prove fraud by clear and

convincing evidence for each year, 2008-10. See sec. 7454(a); Rule 142(b). Facts

deemed admitted or stipulated may be found sufficient to satisfy respondent’s

burden of proving fraud. See Console v. Commissioner, T.C. Memo. 2001-232;

Ambroselli v. Commissioner, T.C. Memo. 1999-158. In evaluating a motion for




      2
        (...continued)
Ballard’s initial individual return. See sec. 6013(b)(3)(i). Similarly, the filing date
for their 2009 amended return is deemed to be the date of Mr. Ballard’s untimely
filing on May 3, 2010. See sec. 6013(b)(3)(ii).
                                        - 10 -

[*10] summary judgment we review all factual inferences in the light most

favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. at 821.

      Mr. Ballard underreported his gross receipts for 2008 and 2009.

Respondent’s bank deposits analysis clearly establishes the existence of an

underpayment for each year. However, fraud requires an intentional wrongdoing

on the part of the taxpayer undertaken with the specific purpose of evading tax.

Sadler v. Commissioner, 

, 102 (1999). Fraud is never presumed and

must be established by independent evidence for each year at issue. Petzoldt v.

Commissioner, 

, 698-700 (1989).

      Because direct proof of a taxpayer’s fraudulent intent is rarely available,

fraud may be established by circumstantial evidence. Niedringhaus v.

Commissioner, 

, 210 (1992). The existence of fraudulent intent is a

question of fact resolved by examination of the entire record and the taxpayer’s

course of conduct. Id. at 210-211; King’s Court Mobile Home Park, Inc. v.

Commissioner, 

, 516 (1992).

      Various kinds of circumstantial evidence--or “badges of fraud”--may

combine to support a finding of fraudulent intent, including: (1) a taxpayer’s

consistent pattern of understating income and filing false returns, (2) failure to

maintain adequate records, (3) concealment of assets, (4) dealing in cash,
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[*11] (5) implausible or inconsistent explanations of behavior, (6) and failure to

cooperate with tax authorities. McGraw v. Commissioner, 

, 971 (8th

Cir. 2004), aff’g Butler v. Commissioner, T.C. Memo. 2002-314. This Court also

recognizes engaging in and attempting to conceal illegal activity as a badge of

fraud. Niedringhaus v. Commissioner, 99 T.C. at 211.

      B.     Mr. Ballard’s Actions in 2008 and 2009

      The deemed admissions establish strong evidence of Mr. Ballard’s

fraudulent conduct in 2008 and 2009. Continuing a pattern of behavior from prior

years,3 Mr. Ballard significantly underreported Quik Copy’s gross receipts for

2008 and 2009. Mr. Ballard derived these unreported gross receipts from his

unauthorized duplication and sale of DVDs and CDs. Mr. Ballard conducted this

portion of his business in cash and neglected to keep any books or records thereof.

Mr. Ballard trafficked these cash funds in and among multiple bank accounts and

intermingled this cash with his personal assets. Mr. Ballard’s actions indicate he

ultimately desired to conceal this income--and the income’s illicit sources--by

filing false returns with respondent.




      3
       Mr. Ballard habitually underreported his Quik Copy gross receipts. See
Ballard v. Commissioner, T.C. Memo. 2016-205 (showing that Mr. Ballard
exhibited a nearly identical pattern of conduct in years 2005, 2006, and 2007).
                                        - 12 -

[*12] Although Mr. Ballard ostensibly cooperated with respondent during the

audit--by submitting amended returns prepared by a professional--those returns

continued his trend of underreporting Schedule C gross receipts. Mr. Ballard’s

actions with respect to his 2008 and 2009 tax years were clearly undertaken with

an intent to conceal income and prevent the collection of tax. Respondent has

satisfied his burden of proof with respect to Mr. Ballard’s fraudulent intent for

years 2008 and 2009.

      C.     Ms. Ballard’s Actions in 2008 and 2009

      Generally, spouses are jointly and severally liable for the total tax due

arising from their joint Federal income tax return. See sec. 6013(d)(3). In the case

of joint returns, however, the fraud penalty “shall not apply with respect to a

spouse unless some part of the underpayment is due to the fraud of such spouse.”

Sec. 6663(c). Respondent bears the burden of proving by clear and convincing

evidence that Ms. Ballard committed fraud. The actions of Mr. Ballard may not be

imputed to Ms. Ballard. See Stone v. Commissioner, 

, 227-228

(1971); Norris v. Commissioner, T.C. Memo. 2011-161.

      We find insufficient evidence in the record to justify holding that Ms.

Ballard acted fraudulently or intended to evade tax for 2008 or 2009. This paucity

contrasts with the overwhelming evidence showing that Mr. Ballard acted with
                                        - 13 -

[*13] fraudulent intent throughout 2008 and 2009. For 2008 Ms. Ballard

individually filed a return whose accuracy respondent has not questioned.

Similarly, no facts indicate that Ms. Ballard knew about or aided in the preparation

of Mr. Ballard’s fraudulent 2009 head of household return, of which she was not a

signatory.

      Respondent does not allege, and the facts do not indicate, that Ms. Ballard

made a habit of underreporting her income or underpaying her tax liabilities. The

facts suggest neither her involvement in her husband’s business activities--

legitimate or illicit--nor her knowledge of the inner workings of its operation.

Similarly the bank deposits analysis examined only the accounts of Mr. Ballard

and gives rise to no inference that Ms. Ballard knew of, had an interest in, or was

authorized to draw upon those accounts. Accordingly, we hold that Ms. Ballard

bears no liability for the fraud penalties for tax years 2008 and 2009.

      D.     Mr. and Ms. Ballard’s Actions in 2010

      As noted above, Mr. and Ms. Ballard cooperated with respondent by

voluntarily consenting to an extension of the period of limitations and by

attempting to comply with their filing obligations by submitting their then-

delinquent 2010 tax return during the audit. Petitioners’ joint 2010 return was
                                         - 14 -

[*14] professionally prepared, and it appears that they made an earnest attempt at

ascertaining their true tax liability.

       The revenue agent’s bank deposits analysis covered only 2008 and 2009,

and respondent did not otherwise determine petitioners to have underreported any

income for 2010. Rather, in issuing the notice respondent accepted the gross

receipts petitioners reported for 2010 while disallowing their claimed capital loss

deductions and business expense deductions for lack of substantiation. While

respondent’s decision to disallow these deductions may be sufficient to establish a

presumptive deficiency, he must still establish the existence of a fraudulent

underpayment by clear and convincing evidence. See DiLeo v. Commissioner, 

, 873 (1991) (the Commissioner “cannot discharge this burden by simply

relying on the taxpayer’s failure to prove error in his determination of the

deficiency”), aff’d, 

 (2d Cir. 1992).

       Considering the record and all factual circumstances, we do not find clear

and convincing evidence of an underpayment for 2010 or that either petitioner

acted with the requisite fraudulent intent in 2010. For 2010, unlike 2008 and

2009: (1) respondent does not allege that Mr. Ballard maintained bank accounts

for subterfuge or the intermingling of business and personal assets; (2) petitioners

did not file a flagrantly false return; and (3) respondent did not determine that
                                       - 15 -

[*15] petitioners underreported gross income or overstated deductions. The facts

with respect to 2010 establish a run-of-the-mill deficiency arising from failure to

substantiate expenses underlying claimed deductions, not the existence of fraud.

      To reflect the foregoing,


                                                An appropriate order and decision

                                       will be entered.