T.C. Summary Opinion 2009-47



                        UNITED STATES TAX COURT



           MARK LAVERN AND SHERYL L. SQUIER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 2896-07S.              Filed March 30, 2009.



        Mark Lavern and Sheryl L. Squier, pro sese.

        H. Elizabeth Downs, for respondent.



     GOLDBERG, Special Trial Judge:     This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.     Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     This case is before the Court on respondent’s motion for

summary judgment pursuant to Rule 121.     Unless otherwise
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indicated, subsequent 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.

     After a concession, respondent’s motion for summary judgment

raises the following issues:   (1) Whether petitioners

underreported income and overstated deductions for 2000, 2001,

and 2002 with respect to their nail kit business; and (2) whether

petitioner husband is liable for the fraud penalty under section

6663 for the 3 years at issue.

                             Background

     Petitioners resided in Oklahoma when they filed their

petition.   Petitioners are deemed to have admitted under Rule

37(c) the following facts.

     Mark Lavern Squier (petitioner) is a former Internal Revenue

Service (IRS) employee and was employed in Oklahoma City,

Oklahoma, during the years in issue and until April 8, 2005.

During 2000, 2001, and 2002 petitioners operated a business under

the name of “Nails by Ruby Crystal.”      The business sold nail kits

consisting of various applications for fingernails and a carpet

cleaning solution.   They made their sales generally from booths

they set up at public events and at shopping malls.

     Both petitioners participated in selling the products.

However, petitioner was responsible for all other aspects of

conducting the business, including purchasing inventory,
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recordkeeping, and banking.   Petitioner prepared their joint

Federal income tax returns for 2000, 2001, and 2002.    Petitioner

prepared the returns by hand at home and brought them to the

Oklahoma City IRS office where he electronically filed the

returns.

     Respondent selected petitioners’ 2000, 2001, and 2002 joint

Federal income tax returns for review.   With respect to the nail

kit business, petitioner failed to report income accurately on

Schedule C, Profit or Loss From Business, as follows.

     Petitioner reported Schedule C income of $62,935, $36,492,

and $28,476 for 2000, 2001, and 2002, respectively.    Using a bank

deposits analysis, the IRS determined the correct income was

$73,619, $68,011, and $55,651 for 2000, 2001, and 2002.

Petitioner fraudulently with an intent to evade tax omitted

income of $10,684, $31,519, and $27,175 for 2000, 2001, and 2002,

respectively.

     Regarding Schedule C cost of goods sold, petitioner reported

$30,615, $19,072, and $27,220, for 2000, 2001, and 2002, when the

correct amounts were $25,693, $15,841, and $14,285, respectively.

Petitioner overstated cost of goods sold by $4,922, $3,231, and

$12,935 for the 3 years at issue.

     Additionally, petitioner fraudulently with an intent to

evade tax claimed false Schedule C deductions for the 3 years, as

follows.
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     Petitioner overstated car and truck expenses by $2,861,

$3,601, and $2,947, by claiming deductions of $7,904, $7,355, and

$7,139 when the correct amounts were $5,043, $3,754, and $4,192

for 2000, 2001, and 2002, respectively.

     Petitioner overstated travel expenses by $2,582, $2,488, and

$1,979, by claiming deductions of $3,393, $2,488, and $2,640 when

the correct amounts were $811, $0, and $661 for 2000, 2001, and

2002, respectively.

     Petitioner overstated other expenses by $4,735, $367, and

$1,491 by claiming deductions of $15,913, $9,593 and $11,334 when

the correct amounts were $11,178, $9,226, and $9,843 for 2000,

2001, and 2002, respectively.

     Respondent determined petitioners are entitled to meals and

entertainment deductions of $900 for each year at issue and a

commissions and fees deduction of $13,592 for 2000.

     As a result of petitioner’s understatements of income and

overstatements of deductions, petitioner substantially

underreported the business’s profits by $36,768, $38,064, and

$42,955 for 2000, 2001, and 2002, respectively.

     In an attempt to hide the true income from the IRS,

petitioner used his home copier to alter the business’s bank

account statements for February, March, April, September,

October, November, and December 2002.   Petitioner submitted the

fraudulent, altered documents to the IRS examiner during the
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audit.   Moreover, petitioner failed to keep adequate books and

records for the business for the years at issue.    Petitioner

later admitted to other IRS agents that he altered the bank

documents.

     Respondent’s adjustments caused mathematical increases to

petitioners’ self-employment tax for each year, which in turn

increased petitioners’ self-employment adjustments on page 1 of

their joint Forms 1040, U.S. Individual Income Tax Return.

Additionally, respondent increased petitioners’ total income for

2001 by $197 to include a State income tax refund that petitioner

had omitted.

     In summary, the adjustments caused increases to petitioners’

joint Federal income tax liabilities by $10,706, $14,698, and

$17,111 for 2000, 2001, and 2002, respectively.    Petitioner had

reported $1,156, $4,057, and $3,896 when the correct tax

liabilities were $11,862, $18,755, and $21,007, respectively, for

2000, 2001, and 2002.

     Respondent issued separate notices of deficiency dated

November 8, 2006, to each petitioner, but confusingly addressed

each separate notice in petitioners’ joint names.    The difference

between the two notices was that with respect to petitioner,

respondent determined fraud penalties under section 6663, while

with respect to petitioner wife respondent determined accuracy-

related penalties under section 6662(a), as follows:
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                                                Accuracy-
                   Joint      Fraud Penalty   Related Pen.
        Year    Deficiency      Sec. 6663     Sec. 6662(a)
        2000      $10,706       $8,029.50      $2,141.20
        2001       14,698       11,023.50       2,939.60
        2002       17,111       12,833.25       3,422.20

     Petitioners timely petitioned the Court and attached the

notice of deficiency addressed jointly to petitioners but which

respondent intended separately for each petitioner.   In paragraph

4 of the petition, petitioner set forth the following reasons he

believes they are entitled to relief:

     I WAS NOT ALLOWED SUFFICIENT BUSINESS DEDUCTIONS. I
     BELIEVE I SHOULD RECEIVE A DEDUCTION IN DEFICIENCY. I
     CAN PROVIDE PROOF [SIC] THAT THE AMOUNT OF BUSINESS
     EXPENSES I WAS ALLOWED WAS FAR LESS THAN WAS ACTUALLY
     INCURRED. ALSO, I WAS ASSESSED A FRAUD PENALTY OF ALL
     THREE YEARS BUT SHOULD ONLY HAVE FRAUD PENALTY FOR ONE
     YEAR.

     Respondent filed an answer on April 6, 2007, setting forth

affirmative allegations in subparagraphs a. through ee.,

inclusive of paragraph 6 of the answer.

     Petitioners failed to file a reply to respondent’s answer.

In a letter dated June 11, 2007, respondent informed petitioners

that Rule 37(a) required a response from petitioners to the

affirmative allegations before July 5, 2007, or respondent would

file a motion for entry of an order that the undenied allegations

in the answer be deemed admitted if petitioners made no response.

Petitioners did not file a response.
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     In accordance with Rule 37(a), on June 28, 2007, respondent

filed a motion for entry of order that undenied allegations in

the answer be deemed admitted pursuant to Rule 37(c).

Additionally, on June 28, 2007, the Clerk of the Court served

petitioners with a notice of filing of the motion for order under

Rule 37.   In the second paragraph of the notice the Clerk

informed petitioners that if they filed a reply as required by

Rule 37(a) and (b) on or before July 19, 2007, respondent’s

motion would be denied, but if not, the Court would grant

respondent’s motion and deem admitted the affirmative

allegations.   Petitioners failed to file a reply, and on August

20, 2007, the Court granted the motion.

     In a notice dated January 9, 2008, the Clerk served the

parties with a “Notice Setting Case for Trial” at a session

beginning on June 9, 2008, in Oklahoma City, Oklahoma.

Subsequently on April 4, 2008, respondent filed the motion for

summary judgment.   In the motion, because of the confusion

respondent caused by the joint names on the notices, respondent

conceded the section 6662(a) accuracy-related penalties as to

petitioner wife.

     The Court ordered that petitioners file a written response

on or before April 30, 2008.   Because petitioners failed to file

a written response, the Court set respondent’s motion for summary

judgment for hearing at the Oklahoma City, Oklahoma, trial
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session beginning on June 9, 2008, thus affording petitioners an

opportunity to be heard.    When the case was called from the

calendar on June 9, 2008, there was no appearance by or on behalf

of petitioners.    Respondent’s counsel appeared and was heard.

The Court took respondent’s motion for summary judgment under

advisement.

                              Discussion

     The first issue for decision is whether we should grant

respondent’s motion for summary judgment as to the deficiencies

for the years in issue.

     When the pertinent facts are not in dispute, a party may

move for summary judgment to expedite the litigation and avoid an

unnecessary and potentially expensive trial.     Fla. Peach Corp. v.

Commissioner, 

, 681 (1988).     Summary judgment is

appropriate when no genuine issue exists as to any material fact

and when the Court may render a decision as a matter of law.

Rule 121(b); Sundstrand Corp. v. Commissioner, 

, 520

(1992), affd. 

(7th Cir. 1994).    The party moving for

summary judgment (in this instance, respondent) bears the burden

of showing that no genuine issue exists as to any material fact

and the Court will draw factual inferences in the manner most

favorable to the party opposing summary judgment (here,

petitioners).     New Millennium Trading, L.L.C. v. Commissioner,

131 T.C. __, __ (2008) (slip op. at 6).
                                - 9 -

     Respondent’s bank deposits analysis presents prima facie

evidence of income.    See Tokarski v. Commissioner, 

, 77

(1986).   Respondent further supports his motion for summary

judgment with petitioners’ failure to answer the affirmative

allegations in the answer.   Respondent alleged that petitioners

fraudulently understated income and overstated deductions with

respect to the nail kit business.   Because petitioners failed to

deny or object to these allegations, and because respondent

timely moved for their admission, the undenied affirmative

allegations are deemed admitted under Rule 37(c).    It is well

settled that facts deemed admitted under Rule 37(c) are

considered conclusively established even where the Commissioner

bears the burden of proof.    Marshall v. Commissioner, 

, 272-273 (1985).   Therefore, we find the admissions are

adequate to support respondent’s burden of proving no genuine

issue of material fact exists as to the deficiency

determinations.   Accordingly, as a matter of law, respondent is

entitled to summary adjudication with regard to the deficiencies

for the years at issue.

     The second issue is whether we should grant respondent’s

motion for summary judgment as to the section 6663 civil fraud

penalties.

     Section 6663(a) imposes a penalty equal to 75 percent of the

portion of any underpayment attributable to fraud.    The
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Commissioner bears the burden of proving by clear and convincing

evidence that an underpayment exists and that some portion of the

underpayment for each year is due to fraud with the intent to

evade tax.    Sec. 7454(a); Rule 142(b); Parks v. Commissioner, 

, 660-661 (1990); see also sec. 7491(c).

       Fraud is an actual wrongdoing with an intent to evade a tax

believed to be owing.    Marshall v. Commissioner, supra at 272-

273.    Fraud is never presumed and must be established by

independent evidence of fraudulent intent.    Petzoldt v.

Commissioner, 

, 699 (1989).    Accordingly, the

existence of fraud is a question of facts and circumstances that

a court must consider on the basis of an examination of the

entire record and the taxpayer’s entire course of conduct,

Petzoldt v. Commissioner, supra at 699, including the taxpayer’s

background, education, and experience, Niedringhaus v.

Commissioner, 

, 211 (1992).

       The Commissioner’s burden of proving fraud may be met with

facts deemed admitted pursuant to Rule 37(c).    Doncaster v.

Commissioner, 

, 337 (1981).    Because 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,
                               - 11 -

, 499 (1943); Rowlee v. Commissioner, 

,

1123-1124 (1983).

     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.    Niedringhaus v.

Commissioner, supra at 211.    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, 

, 1461 (6th Cir. 1984), affg. per

curiam T.C. Memo. 1982-603.

     Petitioners’ deemed admissions of facts evidenced numerous

badges of fraud:    (1) Petitioner fraudulently understated income

and overstated deductions for all years at issue with respect to

the nail kit business; (2) he failed to maintain adequate records

for all 3 years; (3) he used his home copier to alter bank

statements which he provided to the IRS in an attempt to evade

tax; (4) he failed to cooperate with respondent and was

nonresponsive throughout the litigation, failing even to appear
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at his own hearing; and (5) he possessed greater than average

knowledge of the requirements of the Internal Revenue Code

because of his years of employment with the IRS.

     The facts deemed admitted under Rule 37(c) amply satisfy

respondent’s burden of proof.    See Doncaster v. Commissioner,

supra at 337.   We are convinced that the totality of the evidence

establishes the existence of fraud under section 6663 for 2000,

2001, and 2002.   Accordingly, because there are no material facts

in dispute and because respondent has satisfied the burden of

proof, we grant respondent’s motion for summary judgment with

respect to the fraud penalties for all 3 years at issue.

     To reflect our disposition of the issues,


                                          An appropriate order and

                                     decision will be entered for

                                     respondent.