926 F.2d 1470 | 6th Cir. | 1991
Lead Opinion
Petitioner appeals from the tax court’s order denying his motion to vacate a default judgment granting the deficiency amount and fraud penalties. For the reasons stated below, the decision of the tax court is AFFIRMED.
I.
On April 15, 1976, the Commissioner of Internal Revenue (“Commissioner” or “respondent”) sent a statutory notice of deficiency to petitioner, Donald G. Smith (“petitioner”), seeking deficiency taxes and fraud penalties based on alleged unreported income for the tax years 1972 and 1973. Petitioner filed a request for redetermination with the tax court on June 17, 1976. At the time he filed his petition, petitioner was incarcerated in the Federal Penitentiary in Lewisburg, Pennsylvania. As his reason for disagreement with the notice of deficiency the petitioner stated that: “I am at Lewisburg penitentiary and am presently sueing [sic] the I.R.S. in Cleveland, Ohio concerning this investigation. I state my taxes are correct to my knowledge. I am requesting appointed counsel.” Petitioner did not allege any specific facts in support of his contention. Prior to incarceration, petitioner had resided in Ohio.
The Commissioner filed an answer denying the substantive allegations of the petition and further alleging that part of the underpayments of tax required to be shown on petitioner’s income tax return for the years in question were due to fraud. In support of the fraud allegation, the answer to the petition listed taxable income derived from various sources in the taxable years 1972 and 1973, including receipts from narcotics trafficking, wagering, odd jobs, real property, and wages and unemployment compensation. The Commissioner’s answer also set forth in detail the facts upon which he based his analysis of petitioner’s net worth, including petitioner’s beginning cash on hand, specific assets acquired and liabilities incurred by petitioner during the relevant taxable years, specific expenditures by petitioner for personal living expenses during the years in issue, and specific nontaxable receipts of petitioner during the years in question. The Commissioner determined an increase in petitioner’s net worth for taxable year 1972 in the amount of $13,181.87 and an increase in petitioner’s net worth for taxable year 1973 in the amount of $19,782.48.
Petitioner thereafter filed a reply entitled “Rebuttal to Respondent’s Answer,” which only generally disputed the allegations contained in the Commissioner’s answer. The petitioner also filed a “Response to Respondent’s First Request for Admissions” on April 13, 1978, even though the Commissioner did not file with the Court any request for admissions.
No further action was taken until June 2, 1987, when a Notice of Trial and Pretrial Order was mailed to petitioner setting the case for trial in Philadelphia, Pennsylvania on November 2, 1987 at 10 a.m. The notice also advised the parties that failure to appear at the time and/or failure to cooperate in the preparation of an agreement on all facts and documents as to which there should be no disagreement might result in dismissal of the case and entry of decision against the defaulting party. The notice was mailed to the Oxford, Wisconsin address. It was not returned to the Court as undeliverable and there is no other indication in the tax court’s records that petitioner did not receive this notice.
On September 2, 1987, September 16, 1987, and October 18, 1987, the Commissioner sent petitioner letters to the Oxford, Wisconsin address requesting him to contact the Commissioner for the purpose of preparing the case for trial. The September 16, 1987 letter was forwarded to an Akron, Ohio address petitioner used prior to his Oxford, Wisconsin address. All three letters were eventually returned to the Commissioner as undeliverable.
When the Commissioner attempted to verify petitioner’s address through computer records, it discovered that petitioner had used the Akron, Ohio address for his 1985 and 1986 tax returns. In October of 1987, the Commissioner learned from the Federal Inmate Locator Service that petitioner had been released on parole from a halfway house in Ohio on May 9, 1984. The Commissioner sent another letter along with a copy of respondent’s trial memorandum on October 26, 1987 to the Akron, Ohio address. Petitioner did not reply.
Petitioner failed to appear for trial on November 2, 1989. Thereafter, upon motion of the Commissioner, the tax court entered a default against the petitioner under Rule 123(a)
II.
The United States Courts of Appeals have exclusive jurisdiction to review decisions of the tax court, except as provided in 28 U.S.C. § 1254, “in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” 26 U.S.C. § 7482(a); Headrick v. Commissioner, 918 F.2d 1263, (6th Cir.1990); Threlkeld v. Commissioner, 848 F.2d 81, 83 (6th Cir.1988). Thus, a tax court’s findings of fact can be disturbed only if they are clearly erroneous; questions of law are subject to de novo review. Estate of Shafer v. Commissioner, 749 F.2d 1216, 1218 (6th Cir.1984) (citation omitted); see also Headrick, supra, (questions of law reviewed de novo). Upon such review, the courts of appeals “shall have power to affirm or, if the decision of the Tax Court is not in accordance with law, to modify or to reverse the decision of the Tax Court, with or without remanding the case for a rehearing, as justice may require.” 26 U.S.C. § 7482(c)(1). Petitioner’s appeal is properly before this court, since his legal residence for purposes of venue on appeal is Ohio, the state where he lived prior to incarceration and after being paroled and that state in which he still owns property. See 26 U.S.C. § 7482(b).
A.
The first issue presented for consideration is whether the tax court properly entered a default judgment granting fraud penalties, based exclusively on the allegations in the Commissioner’s answer, where the taxpayer filed a reply to the Commissioner’s answer and a response to requests for admissions, but subsequently failed to participate in preparing a stipulation of facts and to appear for trial.
In this case the Commissioner issued a notice of deficiency to the petitioner in which he asserted that there were deficiencies in the petitioner’s income taxes for 1972 and 1973. The Commissioner’s deficiency determinations are presumed correct. The taxpayer therefore bears the burden of proving otherwise. Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 291, 79 L.Ed. 623 (1935); Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933); Davis v. Commissioner, 674 F.2d 553, 553 (6th Cir.1982); Tax Ct.R. 142(a). The Commissioner also issued a 50 percent penalty for fraud with respect to the deficiencies pursuant to 26 U.S.C.
In Miller-Pocahontas Coal, supra, the Board of Tax Appeals
It is well established that courts have inherent power to dismiss and/or enter a default when a party disobeys a court order or otherwise interferes with the efficient administration of justice. Link v. Wabash R.R. Co., 370 U.S. 626, 630-31, 82 S.Ct. 1386, 1388-89, 8 L.Ed.2d 734 (1962); Harris v. Callwood, 844 F.2d 1254, 1255 (6th Cir.1988); accord Coston v. Detroit Edison Co., 789 F.2d 377, 379 (6th Cir.1986); see also Roland v. Salem Contract Carriers, Inc., 811 F.2d 1175, 1177-78 (7th Cir.1987) (“[t]he power to sanction through dismissal is essential to the district courts’ ability to manage efficiently their heavy caseloads and thus protect the interest of all litigants”). Also, pursuant to the authority granted it by Congress, the tax court has enacted the “Rules of Practice and Procedure of the United States Tax Court Rules.” 26 U.S.C. § 7453; see also, 26 U.S.C. foil. § 7453; 60 T.C. 1057 (1973); accord, Louisville Builders Supply Co. v. Commissioner, 294 F.2d 333, 339 (6th Cir.1961) (tax court’s powers are limited to those given by specific acts of Congress and by court’s own rules adopted pursuant to congressional authorization plus such inherent powers as may be in a quasi judicial body). The Rules govern practice and procedure in all cases and proceedings in the tax court, Tax Ct.R 1(a), and are to be construed “to secure the just, speedy and inexpensive determination of every case.” Tax Ct.R. 1(b). The tax court rules are modeled after the Federal Rules of Civil Procedure. See Introduction to Rules of Practice and Procedure of the United
Tax Ct.R. 123(b), which is derived from Fed.R.Civ.P. 41(b), provides that the court may dismiss a case and enter a decision against the petitioner “[f]or failure of a petitioner properly to prosecute or to comply with these Rules or any order of the Court_” Tax Ct.R. 123(b). Thus, because the petitioner bears the burden of proof with respect to the deficiency assessment, dismissal of the petition is an appropriate sanction for his noncompliance. See Bosurgi v. Commissioner, 87 T.C. 1403, 1407 n. 3 (1986).
The rule which immediately concerns us is Tax Ct.R. 123(a),
As one ground for overruling Miller-Pocahontas Coal, the Smith majority held that its adoption of Tax Ct.R. 123(a), effective January 1, 1974, implicitly overruled its earlier decision to the extent Miller-Pocahontas Coal adopted a per se rule requiring that evidence of fraud be formally introduced in every ease. In support, the court pointed to the language of Rule 123(a) which provides that the court “may, in its discretion, conduct hearings to ascertain whether a default had been committed.” Tax Ct.R. 123(a) (emphasis added). We believe that from the tax court’s inherent and statutory authority to regulate its docket and adopt rules of procedure flows the ability to effectively overrule a prior decision that has become outmoded and serves as an impediment to the court’s mission of securing just, speedy and inexpensive determination of all cases before it. This is especially true when the rule had no counterpart in prior tax court rules and therefore could not have been a factor in the earlier court’s determination. See Note to Rule 123(a), 60 T.C. at 1130.
Secondly, as the tax court stated, the rule of Miller-Pocahontas Coal has been nullified in practice by other tax court procedures. As noted above, the tax court has already relieved the Commissioner of the burden of putting on his case for the addition to tax for fraud in actions involving the use of deemed admissions (Rules 37(c), 90(c), or 91(f)), and sanctions (Rule 104(c)(3)).
When any party has failed to plead or otherwise proceed as provided by these Rules or as required by the Court, he may be held in default by the Court either on motion of another party or on the initiative of the Court. Thereafter, the Court may enter a decision against the defaulting party, upon such terms and conditions as the Court may deem proper, or may impose such sanctions (see, e.g., Rule 104) as the Court may deem appropriate. The Court may, in its discretion, conduct hearings to ascertain whether a default has been committed, to determine the decision to be entered or the sanctions to be imposed, or to ascertain the truth of any matter.
*1477 Because the taxpayer’s failure to respond (after failing to cooperate with respondent in the pretrial process) occurs no later in the proceedings than the taxpayer’s failure to appear at trial in a case in which the Commissioner makes no such attempt, the only reason to treat one failure to respond differently from the other is that one provides “proof” of fraud through deemed admissions under our Rules while the other, theoretically, does not.... [W]e think that distinction to be superannuated and without relevance in present-day proceedings in this Court.
Smith, 91 T.C. at 1055-56. Since the effect of a default is to establish the well-pleaded facts of the non-defaulting party, the establishment of such facts through a default is no different than establishing such facts through deemed admissions. Id. at 1052. See Bosurgi, supra, (where tax court entered default without a hearing against taxpayer even though the Commissioner had burden of proof on the issue of transferee liability). Thus, as aptly stated by the tax court below, when a taxpayer fails to cooperate with the Commissioner and the tax court it is “patently absurd” to:
“recite a litany of ‘deemed’ admissions, ‘find’ facts not disputed, and then ‘decide’ the case as best we can, issuing a written opinion in every case. Often we have a ‘trial’, the respondent putting on his case without the presence or participation of the taxpayer. These little one-act pantomimes complete with briefs and an opinion are a charade in which we can no longer indulge. The enormous growth in our caseload requires that we recognize the inconvenience these useless and futile histrionics impose on other citizens having business before this Court.”
Smith, 91 T.C. at 1058 (citing Doncaster, 77 T.C. at 344-45 (Wilbur, J., concurring) (citation omitted)). See also Bosurgi, supra, 87 T.C. at 1408 (“[i]f a taxpayer does not think well enough of his case to defend it where the Government has the burden of proof, this Court should default him. To hold a trial in a case abandoned by the taxpayer is at best an indulgence of archaic manners and at worst an insult to the taxpayers who have a rightful claim on this Court’s time”).
Third, as held by the tax court, changes in the revenue code have undercut the rationale of Miller-Pocahontas Coal. In Miller-Pocahontas Coal, the Board of Tax Appeals declined to grant the fraud penalty in the default context because it determined that the revenue acts made a clear distinction between a deficiency in tax and a penalty, and that section 906(c) of the Revenue Act of 1924, 43 Stat. 253, 336, as amended by the Revenue Acts of 1926 and 1928, “provide[d] that a dismissal shall require an affirmance of the deficiency only.”
Judge Shields argues in his dissent that Rule 123(a) does not allow for entry of default after the taxpayer files a reply (as was the case here), based on an analogy to Fed.R.Civ.P. 55(a);
Finally, we note that in order to safeguard against the automatic imposition of the fraud addition, the court admonished that, “the Commissioner’s pleadings must allege specific facts sufficient to sustain a finding of fraud before he will be entitled to a decision that includes an addition to tax for fraud upon the failure of a taxpayer to appear for trial.” Smith, 91 T.C. at 1058. Here, the tax court found that the Commissioner’s specific allegations, once taken to be true by petitioner’s default, were sufficient to carry his burden of prov
We are not unmindful of the heavy burden placed upon the tax court by doctrine of stare decisis and that any decision to depart from the doctrine requires “special justification.” Arizona v. Rumsey, 467 U.S. 203, 212, 104 S.Ct. 2305, 2311, 81 L.Ed.2d 164 (1984). On the other hand, stare decisis is not “an inexorable command,” and the Supreme Court has indicated that a departure may be justified when a court feels obliged “to bring its opinions into agreement with experience and with facts newly ascertained.” Vasquez v. Hillery, 474 U.S. 254, 266, 106 S.Ct. 617, 624-25, 88 L.Ed.2d 598 (1986) (quoting Burnet v. Coronado Oil and Gas Co., 285 U.S. 393, 412, 52 S.Ct. 443, 625, 76 L.Ed. 815 (1932) (Brandéis, J., dissenting). Further, we know of no authority which prevents a court, sitting en banc, from overruling one of its prior decisions when it has determined that the rule is outdated and an impediment to legal process. We therefore find that the court has provided adequate justification for its decision to formally overrule Miller-Pocahontas Coal since the rationale underlying the decision has been undermined by subsequent procedural and statutory developments, and because continued adherence to the rule interferes with efficient administration of the tax court.
B.
Petitioner’s second argument on appeal is that the tax court erred in denying his timely motion to set aside the default under Tax Ct.R. 123(c), which provides that a default may be set aside “for reasons deemed sufficient by the court and upon motion expeditiously made.” This court has indicated that a “glaring abuse” of discretion is not required for reversal of the harsh sanction of default. United Coin Meter v. Seaboard Coastline R.R., 705 F.2d 839, 846 (6th Cir.1983) (citation omitted).
We have articulated the following factors to be considered in determining whether to set aside default: 1) whether the non-defaulting party will be prejudiced; 2) whether the defendant has a meritorious defense; and 3) whether the culpable conduct of the defendant led to the default. United Coin Meter, supra, 705 F.2d at 845 (citations omitted). See also Shepard Claims Serv., Inc. v. William Darrah & Assoc., 796 F.2d 190, 194-95 (6th Cir.1986); INVST Financial Group, Inc. v. Chem-Nuclear Systems, Inc., 815 F.2d 391, 399 (6th Cir.), cert. denied, 484 U.S. 927, 108 S.Ct. 291, 98 L.Ed.2d 251 (1987); Berthel
“Where the defaulting party and counsel have not shown disrespect for the court, or have given evidence of respect for the court’s process by their haste in acting to set aside the default, the courts have been inclined toward leniency- Clear-
ly, however, the court may refuse to set aside a default, where the defaulting party has no meritorious defense, where the default is due to willfulness or bad faith, or where the defendant offers no excuse at all for the default.” (Footnotes omitted).
We do not believe it appropriate to attempt a precise definition of “culpable conduct.” Where the party in default satisfies the first two requirements for relief and moves promptly to set aside the default before a judgment is entered, the district court should grant the motion if the party offers a credible explanation for the delay that does not exhibit disregard for the judicial proceedings.
796 F.2d at 194-95 (quoting J. Moore, 6 Moore’s Federal Practice 55.01[2] at 55-61, 62 (1985 ed)).
Here the tax court found that there was no indication in the record that petitioner had acted willfully or in bad faith with respect to the default. It did find however that the petitioner failed to exhibit that he had a meritorious defense. We have stated that:
[A] defense is sufficient if it contains even a hint of a suggestion which, proven at trial, would constitute a complete defense. The key consideration is to determine whether there is some possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the default.
INVST Financial Group, Inc., 815 F.2d at 399 (internal citations and quotations omitted). The record reflects the tax court’s findings that petitioner offered “no explanation or reason for the asserted difference between his net worth computation and respondent’s” and “no suggestion that he has any evidence to support his computation.” See Smith, 57 T.C.M. at 132. Indeed, the only material allegation in the record is defendant’s assertion in his reply to the Commissioner's answer, that his net worth was approximately one third of the amount asserted by respondent. Petitioner’s general assertion regarding his net worth is tantamount to a general denial and, as such, did not amount to even a “hint of a suggestion” that petitioner could dispute the allegations of the government’s answer. See INVST Financial Group, supra, 815 F.2d at 399. We therefore find that the tax court did not abuse its discretion concluding that petitioner had failed to present a meritorious defense.
As a second ground for denying petitioner’s motion to set aside default, the tax court found that petitioner had failed to advance a credible explanation for his disregard of judicial proceedings. The tax court rejected petitioner’s assertion that Commissioner knew or could have known of petitioner’s correct address and was therefore responsible for petitioner’s failure to receive notice of the setting of his case for trial. It observed that it was incumbent on petitioner to notify the court of a change in his address pursuant to Tax.Ct.R. 21(b)(4) and that as petitioner had selected that forum to review his tax liability, he was bound by its Rules. 57 T.C.M. at 132. We agree with the tax court’s conclusion that petitioner’s failure to keep the Court advised of his address over a seven year period clearly violated its Rules and displayed “a reckless disregard for the petition he filed in the instant case and for the judicial proceedings he instituted by filing his petition.” Id. (citing Shepard Claims Serv., 796 F.2d at 194) (emphasis in tax court opinion).
Finally, the tax court concluded that prejudice would result to the respondent, the court, and the other taxpayers in reviewing litigation. In sum, we find no abuse of discretion in the tax court’s denial of petitioner’s motion to set aside the default judgment. Accordingly, for all the foregoing reasons we AFFIRM the decision of the tax court.
. The Commissioner states in his brief that he served a request for admissions on the petitioner. The United States Tax Court's docket sheet contains no entry that this document was filed with the court. Rule 90 of the Rules of Practice and Procedure of the United States Tax Court provides that a party may without leave of the court, serve on any other party a written request for admissions, but that the party making the request "shall serve a copy thereof on the other
. The full text of Tax Ct.R. 123(a) is set out at page 1476, n. 10 of this opinion.
. The tax court consists of 19 members. Pursuant to statutory authority, the chief judge of the tax court may divide the tax court into divisions of one or more judges. 26 U.S.C. § 7444(c), Tax Ct.R. 3(a). After a division hears and makes a determination upon a proceeding before it, it is required to "make a report of any such determination which constitutes its final disposition of the proceeding." 26 U.S.C. § 7460(a). The chief judge, within 30 days of the filing of the report, may determine that the report shall be reviewed by the whole court with or without a hearing. The full court will then make its own report. 26 U.S.C. § 7460(b). If this is the case, the divisional report is not a part of the record on appeal. Id. See 9 J. Moore, B. Ward, J. Lucas, Aioore’s Federal Practice, ¶ 213.02[4].
.The court’s opinion is found at 91 T.C. 1049 (1988). The majority opinion reflects the views of eleven judges. Judge Whalen concurred. He agreed with the majority’s view that the Com
. Tax Ct.R. 123(c) provides: “Setting Aside Default or Dismissal: For reasons deemed sufficient by the Court and upon motion expeditiously made, the Court may set aside a default or dismissal or the decision rendered thereon."
. The Tax Court’s memorandum opinion denying the petitioner's motion to set aside default is published at 57 T.C.M. 131 (CCH) (1989).
. The addition to tax for fraud in effect at the time petitioner was charged provided for a penalty equal to 50 percent of the portion of the underpayment attributable to the fraud. The 50 percent fraud penalty was increased to 75 percent in the 1986 Amendments to the statute. Pub.L. 99-514, § 1503(a). The current section provides for an addition to tax equal to 75 percent of the portion of underpayment due to fraud. 26 U.S.C. § 6653(b) (1989 & Supp.1990).
. As noted by the Smith majority, the "clear and convincing" standard of proof does not appear in 26 U.S.C. § 7454(a); nor does the legislative history of that section or its predecessor discuss any such standard. H.Rept. 1337, 83d Cong., 2d Sess. A 433 (1954); S.Rept. 1662, 83d Cong., 2d Sess. 612 (1954); S.Rept. 960 (Conf.), 70th Cong., 1st Sess. 38 (1928), 1939-1 C.B. (Part 2) 409, 436; H.Rept. 1882 (Cong.), 70th Cong., 1st Sess. 21 (1928), 1939-1 C.B. (Part 2) 444, 452. The standard is one of judicial creation. It first appears in Rickard v. Commissioner, 15 B.T.A. 316, 317 (1929), without separate discussion. See Smith v. Commissioner, 91 T.C. at 1053 n. 3. The "clear and convincing” standard is contained in Tax Ct.R. 142(b), however.
.In 1924, Congress created the Board of Tax Appeals, an independent agency of the Executive Branch, with jurisdiction to entertain petitions for review of deficiency assessments. In 1942, the Board of Tax Appeals was renamed the Tax Court of the United States. 9 J. Moore, B. Ward, J. Lucas, Moore's Federal Practice ¶ 213.02[1] (2d ed 1990).
. Tax Ct.R. 123(a) provides: (a) Default:
. In cases where the taxpayer’s failure to follow procedure has resulted in deemed admissions under 37(c) (failure to reply), 90(f) (failure to respond to requests for deemed admissions) or 91(f) (failure to make stipulations for trial), the tax court has relieved the Commissioner of the burden of putting on his case for the addition to tax for fraud. See, e.g,, Marshall v. Commissioner, 85 T.C. 267 (1985) (summary judgment as to deficiency and fraud penalty brought deemed admissions under Rule 90(c) where taxpayer failed to respond to requests for
Further, Tax Ct.R. 104 contains sanctions for failure to obey certain discovery orders. For example, pursuant to Rule 104(c)(3), the tax court may order that matters regarding which the order was made be taken to be established, enter a dismissal or a default judgment as a sanction for failure to obey discovery orders entered with respect to Rule 71 (interrogatories), 72 (production of documents and things), 73 (examination by transferees), 74, 81, 82, 83 and 84 (depositions) or 90 (requests for admission). With respect to such violations the tax court has also relieved the Commissioner of his burden and entered judgments as to the deficiency and fraud penalty. See, e.g., Steinbrecher v. Commissioner, 712 F.2d 195, 197 (5th Cir.1983) (upholding tax court's grant of default judgment as to deficiency amounts and fraud penalties as a sanction under Tax Ct.R. 104(c)(3) for taxpayers’ failure to comply with discovery, including a Rule 72 order to produce documents); McCoy v. Commissioner, 76 T.C. 1027 (1981) aff'd, 696 F.2d 1234 (9th Cir.1983) (default sanction granting fraud penalties under Tax Ct.R. 104(c)(3) where taxpayer violated order to answer interrogatories and produce documents); Rechtzigel v. Commissioner, 79 T.C. 132 (1982), aff’d, 703 F.2d 1063 (8th Cir.1983) (default judgment granting deficiency and fraud penalty amounts as Rule 104(c)(3) sanction for refusal to comply with order to produce documents); Marcus v. Commissioner, 70 T.C. 562 (1978), aff’d, 621 F.2d 439 (5th Cir.1980) (default sanction granting fraud penalties under Rule 104(c)(3) where taxpayer failed to answer interrogatories or respond to requests for admissions).
. 26 U.S.C. § 6662 was the applicable rule in effect at the time this case was decided by the tax court. Pursuant to Pub.L. 101-239, Title VII § 7721(a), December 19, 1989, 803 Stat. 2397, section 6662 was omitted in the general revision of accuracy related penalties. It is now found in substantially similar form at 26 U.S.C. § 6665 (1990),
. Rule 55(a) of the Federal Rules of Civil Procedure provides in part: "When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by those rules ... the clerk shall enter the parties default (emphasis added).” Fed.R. Civ.P. 55(a).
. Judge Shields quoted the following passage from C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure, sec. 2682 at 409-10 (2d ed 1983) (footnotes omitted):
The words "otherwise defend” refer to the interposition of various challenges to such matters as service, venue, and the sufficiency of the prior pleading, any of which might prevent a default if pursued in the absence of a responsive pleading.
Id. But as acknowledged by Judge Shields, there is authority for treating “failure to defend” as used in Rule 55(a) as the reverse side of "failure to prosecute" as used in Fed.R.Civ.P. 41. See Au Bon Pain Corp. v. Artect Inc., 653 F.2d 61 (2d Cir.1981) (the court found that a defendant's nonappearance at a deposition, dismissal of counsel, vague and unresponsive answers to interrogatories, and failure to appear at trial were sufficient to support a finding that he had "failed to plead or otherwise defend" under rule 55).
Dissenting Opinion
dissenting.
Since I believe that, under the circumstances presented by this ease, it was an abuse of discretion to deny a timely motion to set aside a default judgment that resulted in penalties for fraud, I respectfully dissent. As the majority noted, this Court has indicated that a “glaring abuse” of discretion is not required for reversal of the harsh sanction of default. United Coin Meter v. Seaboard Coastline R.R., 705 F.2d 839, 846 (6th Cir.1983). That case articulated the following factors to be considered in determining whether to set aside default: 1) whether the culpable conduct of the defendant led to the default; 2) whether the nondefaulting party will be prejudiced; and 3) whether the defendant has a meritorious defense. Id. at 845. This court in Shepard Claims Serv. Inc. v. William Darrah & Assoc., 796 F.2d 190 (6th Cir.1986), noted that “[wjhere the defaulting party and counsel have not shown disrespect for the court, or have given evidence of respect for the court’s process by their haste in acting to set aside the default, the courts have been inclined toward leniency.” Id. at 194.
As the majority recognizes, the tax court in the instant case found that there was no indication in the record that petitioner had acted willfully or in bad faith with respect to the default. He moved to vacate the default judgment immediately upon learning from a newspaper article of the entry of such judgment against him. The decision by the tax court was entered on December 21, 1988, the article appeared on January 4, 1989, and the petitioner filed a motion to vacate on January 13, 1989.
While the taxpayer has the responsibility to keep the court informed of his or her address and to prosecute the case, from the point of view of this pro se taxpayer, he had answered the most recent questions of the Commissioner concerning his taxes and had not had anything further requested from him. Procedurally, the taxpayer is the petitioner in a request for the court to determine the deficiency, and therefore has the obligation to prosecute the case. This petition, however, is the taxpayer’s response to the Commissioner pursuing him for a deficiency in tax. It is thus understandable that this pro se taxpayer would fail to understand that he is responsible for prosecuting a case. In fact, the taxpayer must show that he does not owe the amount alleged, rather than the Commissioner being responsible to pursue the claim of money owed. The Commissioner let the case sit dormant for nine years. There were no further requests for payment or information from the taxpayer. He explains that he mistakenly understood the issue had been resolved in 1978. Internal Revenue Service agents apparently told the taxpayer in a 1978 meeting that they were not going to pursue the claim since it was deemed uncollectible based on taxpayer’s inability to pay. There admittedly is some culpability in the failure to inform the court of a change of address and to prosecute the case, but in view of the surrounding facts, the pro se taxpayer, who was imprisoned for much of the time at issue, acted reasonably.
The second factor is prejudice to the government. The majority indicates no finding on this issue other than to note that the tax court had concluded that there would be prejudice. The tax court merely held that the same factors which appeared in Brooks v. Commissioner, 82 T.C. 413, 429 (1984), applied to the current case. In fact, Brooks is readily distinguishable. In Brooks, the court noted that respondent’s agents had spent many years developing and preparing the case and witnesses had traveled substantial distances to be present. The case had been twice set for trial and continued at petitioner’s request.
There is no evidence in the instant case of resources lost as a result of the delay. Mere delay is not sufficient basis for establishing prejudice. The party must show that the delay will result in the loss of evidence, increased difficulties in discovery, or greater opportunities for fraud and collusion. INVST Fin. Group, Inc. v. Chem-Nuclear Sys., Inc., 815 F.2d 391, 398 (6th Cir.), cert. denied, 484 U.S. 927, 108 S.Ct. 291, 98 L.Ed.2d 251 (1987). None of these detriments has been presented in the instant case.
The last element of the test for vacating default is the demonstration of a meritorious defense. All the taxpayer must show, however, is a “hint of a suggestion” creating “some possibility that the outcome of trial will be contrary to the result achieved by the default.” INVST Fin. Group, Inc., 815 F.2d at 399. The majority finds that this requirement was met since there was no evidence submitted to support the taxpayer’s computation. This does not apply, however, to the fraud charges. The government has the burden of demonstrating the taxpayer’s fraud by clear and convincing evidence. Tax Ct.R. 142(b). This burden was only met in the instant case by the fact that the allegations of the Commissioner were not disputed. There is no evidence in the record to indicate that the Commissioner would be able to meet his burden on the merits, if the merits were reached in a hearing. Based on these facts, I conclude that there was a hint of a suggestion that, were a hearing held, the taxpayer might be successful on the merits. Thus this last element to vacate default is clearly met.
The taxpayer demonstrated all three elements necessary to vacate a default judgment. Even if one of the elements is weak, this is not fatal to the motion. This court held in Berthelsen v. Kane, 907 F.2d 617 (6th Cir.1990) (per curiam), that a default judgment may be vacated even if fewer than all three factors weigh in favor of the moving party. The Berthelsen court held that the judgment must be set aside despite the moving party’s culpable behavior. Id. at 622. The culpable conduct in Berthelsen was much more severe, actively evading service of process. Here, any culpability resulted from the defendant’s alleged negligence in failing to prosecute his case.
For the foregoing reasons, I would reverse the denial of the motion to set aside the default judgment.