Earl E. and JoAnn Hunwardsen v. Commissioner., United States Tax Court - Memorandum Decision, T.C. Memo. 1991-266, Docket No. 516-90., Filed June 11, 1991

Earl E. and JoAnn Hunwardsen v. Commissioner.

United States Tax Court - Memorandum Decision

T.C. Memo. 1991-266

Docket No. 516-90.

Filed June 11, 1991.

Earl E. and JoAnn Hunwardsen, pro se. Kathryn Vetter, for the respondent.

Memorandum Findings of Fact and Opinion

CLAPP, Judge: Respondent determined deficiencies in and additions to the Federal income taxes of petitioners as follows:

__________

^* 50 percent of the amount payable under section 6601 with respect to the portion of the underpayment which is attributable to fraud.

Respondent has conceded the section 6661 additions to tax. The issues are (1) whether we should grant respondent's Motion for Entry of Decisions Against Petitioners; and (2) whether we should grant respondent's Motion for Award of Damages under section 6673.

All section references are to the Internal Revenue Code as amended and in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.

Findings of Fact

Petitioners, Earl E. Hunwardsen (Mr. Hunwardsen) and JoAnn Hunwardsen (Mrs. Hunwardsen), were husband and wife during 1983, 1984, and 1985. They failed to file income tax returns for those years. Petitioners were residents of Acampo, California, when they filed their petition. During the years at issue, Mr. Hunwardsen operated a commercial sweeping business and received the following income:

During 1983, 1984, and 1985, Mrs. Hunwardsen sold Shaklee products. Shaklee paid Mrs. Hunwardsen $17,276 in 1983 and $12,546 in 1984. During the years at issue, petitioners owned a farm which they leased for one-fourth of all profits. Petitioners received money from the sale of livestock during the years at issue. During 1983, 1984, and 1985, petitioners owned and rented a house in Illinois, from which they received $400 per month in rent.

Petitioners last filed an income tax return for the year 1980. On or about May 17, 1983, petitioners filed a claim for refund for all tax paid for 1980. This claim was denied on January 18, 1984. For the tax years 1981 and 1982, petitioners filed protestor Federal income tax forms. Petitioners' 1981 and 1982 taxable years were examined and taxes were assessed for those years. Mr. Hunwardsen, fraudulently and with intent to evade tax, attempted to rescind his social security number. Petitioners failed to provide any records to respondent in connection with the examination of their returns for the years at issue. All or part of the underpayment of tax required to be shown on petitioners' returns for the years at issue is due to fraud with intent to evade taxes known to be owing.

Procedural History

Petitioners are pro se. In their petition and amended petition, they did not address the substance of the issues in this case but made protestor arguments and discovery requests. At no time in this proceeding have petitioners addressed the merits of their case. On May 16, 1990, respondent filed an Answer to Amended Petition, in which respondent affirmatively alleged additions to tax for fraud under section 6653(b)(1) and (2) and specific facts supporting such allegations for petitioners for each year at issue. Petitioners did not file a reply. On August 2, 1990, respondent filed a Motion for Entry of Order that Undenied Allegations in Answer Be Deemed Admitted. In a notice of filing dated August 2, 1990, the Court directed petitioners to file a response to respondent's motion by August 23, 1990. On August 24, 1990, petitioners filed a reply. In this reply, petitioners did not address the substantive claims made in the answer, but made protestor arguments about the lack of delegated authority, jurisdiction, and venue.

On March 19, 1990, petitioners had designated San Francisco, California, as the place of trial. On October 15, 1990, petitioners were mailed a Notice Setting Case for Trial, which notified them that their case had been set for trial in San Francisco, California, on March 11, 1991, at 10 a.m. The notice further stated:

Both parties are expected to be present at that time and be prepared to try the case. YOUR FAILURE TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU.

The notice also advised petitioners that failure to cooperate in the preparation of the case could result in dismissal. Included with the notice was a copy of the Standing Pretrial Order.

By letter dated October 25, 1990, respondent's counsel requested that petitioners meet with her in order to prepare a stipulation of facts. Petitioners did not cooperate with this request. On December 7, 1990, respondent served petitioners with a request for production of documents.

On December 10, 1990, respondent filed a Request for Admissions. On January 7, 1991, petitioner filed a "Denial and Objection to Respondent's Interrogatories and Request for Production of Documents and Request for Admissions." This document contained only protestor arguments. On January 22, 1991, respondent filed a Motion to Review the Sufficiency of the Petitioners' Objections to Respondent's Request for Admissions and Interrogatories used in Conjunction with Request for Admissions and also a Motion to Compel Production of Documents. On January 28, 1991, the Court ordered that (1) the matters in the request for admissions be deemed admitted under Rule 90(e), and (2) the motion to compel production of documents was granted in part and was calendared for hearing in San Francisco on the imposition of sanctions.

On March 11, 1991, the case was called at the trial session in San Francisco, California. Neither petitioners nor any representative of petitioners appeared. Respondent made a Motion for Entry of Decision Against Petitioners under Rule 123(a) and (b). We granted this motion from the bench. Respondent also moved for a penalty under section 6673.

Opinion

1. Motion for Entry of Decision Against Petitioners

Rule 123(a) provides that if any party fails to plead or proceed as provided by the Rules or as required by the Court, such party may be held in default on the motion of the other party. A taxpayer who does not appear at trial can be held liable for underlying deficiencies on the ground that he has defaulted by not appearing or that he has failed to carry his burden of proof. Smith v. Commissioner [Dec. 45,211], 91 T.C. 1049, 1052 (1988), affd. [91-1 USTC ╤ 50,127] 926 F.2d 1470 (6th Cir. 1991); Doncaster v. Commissioner [Dec. 38,135], 77 T.C. 334, 336 (1981). Respondent may be entitled to a decision under Rule 123(a) that includes additions to tax for fraud when the taxpayer fails to appear for trial and respondent's pleadings allege specific facts sufficient to sustain a finding of fraud. Smith v. Commissioner, supra at 1058.

Petitioners did not properly plead as they never addressed the substantive issues of their case in any of their pleadings. They did not properly proceed as they did not cooperate with respondent in preparation of a stipulation as required by Branerton Corp. v. Commissioner [Dec. 32,479], 61 T.C. 691 (1974), Rule 91, and the Standing Pretrial Order. They did not cooperate with respondent in the request for admissions. We deemed the facts alleged in respondent's request for admissions admitted under Rule 90(e). Petitioners did not comply with respondent's requests for documents or this Court's order that they produce certain documents. Petitioners did not appear at trial. Accordingly, we grant respondent's Motion for Entry of Decision Against Petitioners.

The decision against petitioners shall include the additions to tax for fraud. We find that respondent's specific allegations of fact, which are established due to petitioners' default and the deemed admissions under Rule 90(e), are sufficient to establish fraud under section 6653(b)(1) and (2) by petitioners for the years at issue.

The elements of fraud under this section are first, that an underpayment exists, and second, 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 [Dec. 46,545], 94 T.C. 654, 660-661(1990); Rowlee v. Commissioner [Dec. 40,228], 80 T.C. 1111, 1123 (1983).

The taxpayer's entire course of conduct may be examined to establish the requisite fraudulent intent. Otsuki v. Commissioner [Dec. 29,807], 53 T.C. 96, 105-106 (1969). Badges of fraud include (1) understatement of income or a pattern of underreporting income; (2) failure to keep adequate books and records; (3) failure to cooperate with tax authorities; and (4) failure to file tax returns. Edelson v. Commissioner [87-2 USTC ╤ 9547], 829 F.2d 828, 832 (9th Cir. 1987), affg. a Memorandum Opinion of this Court [Dec. 43,088(M)]; Bradford v. Commissioner [86-2 USTC ╤ 9602], 796 F.2d 303, 307 (9th Cir. 1986), affg. a Memorandum Opinion of this Court [Dec. 41,615(M)]; Merritt v. Commissioner [62-1 USTC ╤ 9408], 301 F.2d 484, 487 (5th Cir. 1962), affg. a Memorandum Opinion of this Court [Dec. 24,183(M)].

Respondent has carried his burden of proving an underpayment by each petitioner for each year at issue by clear and convincing evidence based on the established facts.

Petitioners engaged in a pattern of underreporting or nonreporting of income. Petitioners claimed a refund for all tax paid for 1980. Petitioners' tax years 1981 and 1982 were examined and taxes were assessed for these years. For the tax years 1983 through 1985, petitioners did not report any income. During the years at issue, Mr. Hunwardsen received income from a commercial sweeping business, leased farm property, livestock sales, and rental property. During 1983 through 1985, Mrs. Hunwardsen received income from the sale of Shaklee products, leased farm property, livestock sales, and rental income. This 6-year pattern of underreporting or nonreporting of income by petitioners was done with an intent to evade taxes known to be owing.

Petitioners failed to produce any books and records for any years at issue. We can only conclude that such records did not exist. Petitioners' failure to keep books and records was done with the intent to evade taxes known to be owing through concealment of their income.

Petitioners failed to cooperate with tax authorities. They did not cooperate with respondent in preparing the case, and have inundated the Court and respondent with motions and correspondence that raised only frivolous tax protestor arguments. This noncooperation illustrates petitioners' intent to evade taxes known to be owing by conduct intended to mislead.

Petitioners failed to file income tax returns for the years at issue. Based on the record as a whole, we find that petitioners failed to file because they intended to evade taxes known to be owing through concealing their incomes.

2. Penalty Under Section 6673

Respondent moved for a penalty under section 6673 at trial. Respondent did not renew at trial his motion filed January 22, 1991, which requested sanctions if petitioners failed to comply with the Court's order and produce certain documents. We assume that respondent considers the earlier motion for sanctions to be subsumed in the present motion for a penalty.

For proceedings pending or commenced after December 31, 1989, the Tax Court may impose a penalty of up to $25,000, if, after that date, a taxpayer takes a position that is frivolous. Sec. 6673; Stamos v. Commissioner [Dec. 47,023], 95 T.C. 624, 638 (1990); Brock v. Commissioner [Dec. 46,531(M)], T.C. Memo. 1990-197.

Petitioners filed their petition on January 2, 1990. Petitioners have never addressed the merits of their case. They have raised frivolous tax protestor contentions, such as that the Commissioner of Internal Revenue or this Court does not have "delegated authority," "jurisdiction," or "venue" in their case. These arguments have been rejected many times before. Martin v. Commissioner [85-1 USTC ╤ 9238], 756 F.2d 38, 40 (6th Cir. 1985); Stamos v. Commissioner, supra at 638. Accordingly, respondent's motion for a penalty will be granted, and petitioners are required to pay to the United States a penalty of $15,000.

Decision will be entered under Rule 155.

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