Lead Opinion
OPINION
Respondent determined a deficiency in the amount of $6,947.50 in petitioner’s Federal income tax for 1976 and an addition to tax for fraud under section 6653(b)
The petition herein sets forth the claim that petitioner is a duly ordained clergyman and pastor of the Freedom Church; that, because he has taken a vow of poverty, all the money he earned was contributed to further the missionary work of the church; that, by virtue of the Bill of Rights and First Amendment to the Constitution, religious and secular law were separated; and that, as a consequence, petitioner is not subject to tax on his earnings.
Respondent filed an answer in which he denied the substantive allegations of the petition and further alleged as follows:
7. Further Answering the petition, and in support of the determination that a part of the underpayment of tax required to be shown on the petitioner’s joint income tax return for the taxable year 1976 is due to fraud, the respondent alleges:
(a) During the taxable year 1976 the petitioner received dividend income in a total amount of $1,512.00.
(b) The petitioner failed to report any dividend income on his 1976 federal income tax return.
(c) On his 1976 federal income tax return the petitioner claimed a deduction of $22,833.00 for contributions to "The Freedom Church.”
(d) The petitioner did not make contributions to "The Freedom Church” during the taxable year 1976 in the amount of $22,833.00.
(e) "The Freedom Church” is not an organization entitled to receive deductible contributions under I.R.C. sec. 170(c)(2).
(f) On his 1976 federal income tax return, the petitioner understated his taxable income in the amount of $22,195.00.
(g) On his 1976 federal income tax return, the petitioner understated his income tax liability in the amount of $6,947.50.
(h) The petitioner, fraudulently, and with intent to evade tax, omitted taxable income of $22,195.00 from his 1976 federal income tax return.
(i) A part of the underpayment of tax required to be shown on the petitioner’s 1976 federal income tax return is due to fraud with intent to evade tax.
Petitioner having failed to file a reply, respondent moved for entry of an order that the undenied allegations in the answer be deemed admitted. That motion was served upon petitioner together with a notice of hearing on the motion on December 10, 1980, in Washington, D.C. Petitioner did not appear at the hearing or otherwise respond to respondent’s motion, and the Court, on December 10, 1980, entered an order granting respondent’s motion and deeming admitted "the undenied affirmative allegations contained in paragraphs 7(a) to (i), inclusive, of respondent’s Answer.” A copy of that order was served upon petitioner on December 17,1980.
This case was noticed for trial at a trial session of the Court commencing on May 4, 1981, in Boston, Mass., and a copy of the notice setting the case for trial was served upon petitioner on January 29, 1981. Petitioner did not appear when the case was called from the calendar on May 4, 1981, nor again when it was called for trial on May 5, 1981.
As to the underlying deficiency, there is no question that respondent should prevail, either on the ground that the petitioner has defaulted by virtue of his nonappearance at trial and/or has failed to carry his burden of proof. Gilday v. Commissioner,
As to the addition to tax for fraud, the burden of proof is on the respondent (sec. 7454(a); Rule 142(b)), and he must carry that proof by clear and convincing evidence (see Grosshandler v. Commissioner,
It is clear from the foregoing that a petitioner cannot, by total and continued silence, ensure that he will not be considered as having, in effect, conceded his case. The fact that subparagraphs (h) and (i) are worded in conclusory language does not require a different conclusion. They were "specified allegations” within the meaning of Rule 37(c); in our judgment, their deemed admission more than satisfies the respondent’s burden of proof. Marcus v. Commissioner,
Nothing in Gordon v. Commissioner,
Decision will be entered for the respondent.
Reviewed by the Court.
Notes
Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect during the taxable year at issue, and any reference to "Rules” shall be deemed to refer to the Tax Court Rules of Practice and Procedure.
Indeed, since the filing of his petition, petitioner has never communicated with the Court.
See also Rule 90, Tax Court Rules of Practice and Procedure, providing for requests for admission, and rule 36, Fed. R. Civ. P., upon which Rule 90 was patterned, which also serves the purpose of narrowing the issues to be tried. See Note to Rule 90,
We note that pars: 7(h) and 7(i) of respondent’s answer allege intent to evade tax (emphasis added), which is clearly an allegation of fact. See Stratton v. Commissioner,
Indeed, we suggested that, in light of developments in the procedural rules of this Court and the Federal Rules of Civil Procedure subsequent to Miller-Pocahontas Coal Co. v. Commissioner, that case may well have been sapped of most, if not all, of its vitality. See Gordon v. Commissioner,
Concurrence Opinion
concurring: While I concur in the result reached by the majority, I am troubled by the method used to resolve the issue of the imposition of the fraud penalty.
The majority holds that paragraphs 7(h) and 7(i) of respondent’s answer which were deemed admitted under Rule 37(c) satisfy respondent’s burden of proving petitioner’s fraudulent intent. In my view, that burden was met by the allegations of paragraphs 7(a) through 7(g) of respondent’s answer, which were similarly deemed admitted.
I agree with the majority’s statement that nothing in Gordon v. Commissioner,
In Gilday, the taxpayer did not appear at trial and the case contesting the basic deficiency was dismissed for lack of prosecution. Respondent also moved for judgment on the fraud issue raised therein and relied on the facts deemed admitted under then Rule 18(c) (now Rule 37(c)) to satisfy his burden of proof. After reviewing the substance of respondent’s allegations,
At first glance, the majority herein appears to be following the guidelines set forth in Gilday. Yet the majority departs from, those guidelines by characterizing respondent’s concluso-ry statements that petitioner fraudulently omitted taxable income and that a part of the underpayment of tax was due to fraud as "more than [satisfying] the respondent’s burden of proof.”. Thus, while I believe that subparagraphs (a) through (g) of respondent’s answer provide a sufficient basis for imposition of the fraud penalty, and, accordingly, I concur in the result reached by the majority, I believe its reliance on respondent’s ultimate finding of fraud (whether characterized as an ultimate fact, the application of law to facts, or a conclusion of . law) runs counter to our holding in Gilday. In Gilday we weighed the facts deemed admitted to determine if fraud existed. In the instant case, the majority accepts respondent’s judgment that the facts necessarily establish the existence of fraud.
The effect of the majority’s approach on future cases is unclear. This Court, on the one hand, might, hopefully, limit today’s holding to rely on respondent’s allegation of the ultimate finding of fraud only when egregious facts such as those presented in subparagraphs (a) through (g) are also deemed admitted.
On the other hand, the manner in which the majority holds against petitioner on the fraud issue, although couched in terms of a judgment that respondent has carried his burden of proof, could easily be construed as equivalent to a judgment of default against petitioner. Indeed, in a footnote, the majority indicates that we suggested in Gordon v. Commissioner,
I am not convinced that Gordon announced the demise of Miller-Pocahontas Coal Co. While we questioned its continued vitality in light of the then-recently adopted Rule 123(a) and case law that developed under rule 55, Federal Rules of Civil Procedure, we stated only that "it may be arguable” that Rule 123(a) and case law would permit default on the fraud issue. Furthermore, we added a footnote of warning in Gordon
My concern is that the majority opinion may sap Miller-Pocahontas Coal Co. and other cases (Marcus v. Commissioner, supra; Gilday v. Commissioner, supra) which required affirmative proof of fraud. Such a result is undesirable in view of the ease with which respondent could then impose the fraud penalty on inattentive but innocent taxpayers.
In summary, I agree with the majority that the fraud penalty should be imposed herein. However, that holding should .be based on our finding of fraud after weighing the deemed admitted facts contained in paragraphs 7(a) through 7(g) of respondent’s answer. I oppose the majority’s acceptance of respondent’s finding of an ultimate fact as evidence sufficient to carry his burden of proof. Such acceptance is tantamount to an abdication of the decision-making role of this Court.
Thus, in my opinion, even if the Court had denied respondent’s Rule 37(c) motion as to pars. 7(h) and 7(i) on the ground that they are ultimate facts or conclusions of law, the imposition of the fraud penalty would still be appropriate because the fraudulent intent can be inferred from the deemed admitted facts contained in pars. 7(a) through 7(g).
The deemed admitted facts in Gilday v. Commissioner,
In a technical sense, it might be argued that the majority has weighed the evidence before it by considering subpars. (h) and (i) and then declaring that respondent has satisfied his burden of proof on the fraud issue. But clearly, this is sleight of hand as in essence the majority, by stating that it accepts subpars. (h) and (i), in effect finds fraud because respondent has so found in his ultimate allegation of fraud (which is a routine part of respondent’s pleadings in fraud cases and Rule 37(c) motions).
Although the majority adds a caveat stating that the facts contained in subpars. (a) through (g) are also "of importance” because they prove the facts necessary to show an underpayment, this also is illusion as subpars. (h) and (i) conclude both that an underpayment exists and that there was a fraudulent intent. Therefore, subpars. (a) through (g) are rendered superfluous.
Rule 36(b) requires that respondent’s answer include the facts supporting the assertion of fraud. Thus, if a Rule 37(c) motion were to follow, we would always be presented with factual allegations deemed admitted in addition to the ultimate fraud allegation. The question then posed would be whether those supporting facts, alone, were sufficient for us to reach the ultimate finding of fraud.
However, if today’s holding also extends to requests for admission under Rule 90, the protection provided a petitioner by the Court’s participation will not exist. Under Rule 90, a matter is deemed admitted unless the party to whom the request is directed answers the request for admission or objects to it. No motion is required as "a party’s failure to respond to a request will result automatically in the admission of the statements in the request without the necessity of a confirming order.” Freedson v. Commissioner,
It is unclear whether the majority would have found fraud solely from pars. 7(a) through 7(g). As I have stated, I would have inferred a fraudulent intent from those deemed admitted facts. If the majority would not have so found, then the fraud penalty should not have been imposed.
Concurrence Opinion
concurring: The majority opinion provides an unnecessarily conservative procedure for disposing of the increasing number of cases where petitioners decline'to participate in any pretrial or trial proceeding after filing their petitions.
I would go further and default the petitioner in cases like the one before us. When a taxpayer files a petition and then does no more, when he repeatedly declines to participate in pretrial preparations at any stage, when he refuses, after notice, to appear at trial or otherwise argue the merits of his case, we should uphold respondent’s determination in full without examining the merits of the controversy. That is precisely what we do with regard to the underlying deficiency, and I see no good reason for treating the fraud penalty differently. If a taxpayer persistently refuses to participate in our proceedings, then the proceedings should end — it is as simple as that.
Our Rules explicitly provide for a termination of the proceeding when a taxpayer refuses to participate in the prosecution of his case. Rule 123(a) and (b). In such a case, a decision is entered in favor of respondent which "[operates] as an adjudication on the merits.” Rule 123(d) supra. While we have not hesitated to enforce this Rule with respect to respondent’s deficiency determinations, we have held that respondent must prove his entitlement to the fraud penalty even if this results in a trial in absentia. Miller-Pocahontas Coal Co. v. Commissioner,
Our reluctance to default a taxpayer stems from Miller-Pocahontas Coal Co. v. Commissioner, supra at 1361, where we held that we lacked authority to award respondent the statutory fraud penalty when w& dismissed a taxpayer’s suit for want of proper prosecution. Our decision was based on the congressional specification that "a decision of the Board [of Tax Appeals] dismissing the proceeding shall be considered as its decision that the deficiency is the amount determined by the Commissioner.” See sec. 601(c), Revenue Act of 1928, Pub. L. 562, 45 Stat. 871 (emphasis added). We then observed, as the Internal Revenue Code now makes clear, that an addition to tax such as the fraud penalty is technically not part of the "deficiency.” See sec. 6211(a).
. As a matter of statutory construction, our decision in Miller-Pocahontas has always been open to criticism. Our jurisdiction to determine whether a taxpayer is liable for an addition to tax was inferred from our authority to determine the correctness of respondent’s asserted deficiencies (see Gutterman Strauss Co. v. Commissioner,
Miller-Pocahontas Coal Co. v. Commissioner also suggested (
Our Rule 123(a) permits a default "When any party has failed to plead dr otherwise proceed.” Similarly, Rule 123(b) permits a dismissal "For failure of a petitioner properly to prosecute or to comply with these Rules.” Both are based upon the Federal Rules of Civil Procedure, rules 55 and 41, see Notes,
Our resources are strained to their limits, and this Court’s docket is ever burgeoning. When a taxpayer is so indifferent to the outcome of his case that he cannot be bothered to participate, we rightly should make short shrift of his suit. The majority opinion paves the way for us to do just that: I would prefer to do so more forthrightly, and overrule Miller-Pocahontas Coal Co. v. Commissioner, supra.
The majority states (p. 338 supra ) that the respondent "has the burden of proving the facts necessary to show an underpayment (to which the addition to tax for fraud attaches) and may not rely upon petitioner’s failure to produce evidence in order to carry his (respondent’s) burden in that respect.” As I read this language, if the petitioner is defaulted as to the basic deficiency, it may still be necessary to have a trial at which respondent must demonstrate a deficiency (underpayment) exists to which the fraud penalty attaches. These time-consuming legal anomalies must be amusing to the growing number of "protesters” who file petitions simply to throw sand in the gears of Government.
Our Rule 123(b) is adopted from rule 41(b), Fed. R. Civ. P. It has been said that "It is apparent on the face of the rule that rule 41(b) is solely a defendant’s remedy, though it may be invoked by a plaintiff who is defending against a counterclaim.” C. Wright & A. Miller, Federal Practice and Procedure: Civil, sec. 2369, p. 191 (1971). Nevertheless, our Rule 123(b) is broader than rule 41(b), providing that the Court "may dismiss a case at any time and enter a decision against the petitioner” where the petitioner fails to "properly prosecute or to comply with these Rules or any order of the Court or for other causes which the Court deems sufficient.” This language clearly appears to encompass the circumstances before us. However, even assuming arguendo our Rule 123(b) is inapplicable, it is clear that the petitioner may be defaulted under Rule 123(a) which is adopted from rule 55, Fed. R. Civ. P. See United States v. Roslyn Construction Co.,
Concurrence Opinion
concurring: I concur both in the result of this case and in the analysis of the majority opinion. I disagree with the dissent that the Court’s holding will operate as a trap for "unwary taxpayers” against whom the fraud penalty has been alleged by the Commissioner. I think our Rules preclude the possibility that the addition to tax for fraud will be imposed by default against a petitioner who indicates, however inartfully, that respondent should be put to his proof.
Under Rule 37(c), respondent’s affirmative allegations of fraud are deemed denied in the absence of a reply. The petitioner is thus protected against his or her own inaction. However, respondent can move for an order that the undenied allegations be deemed admitted. Under Rule 21(a), such a motion must be served on the petitioner. The usual Rule 37(c) motion is not incomprehensible to the average petitioner. At the very least, it intuitively alerts him to the fact that respondent contemplates action adverse to his interest. Such alert should elicit some protective response. In any event, the Court does not automatically grant a Rule 37(c) motion but sends the petitioner a notice setting it for hearing. The notice expressly provides that respondent’s motion will be denied if a reply is filed on or before the hearing date. The petitioner who chooses not to do so can still protect his interest by appearing at the hearing. If this is inconvenient, Rule 50(c) provides for the submission of a written statement. The petitioner is clearly advised of this provision in the notice setting the motion for hearing.
Thus far, the petitioner has been given a number of opportunities to deny respondent’s affirmative allegations. The simplicity of so doing, and thereby putting respondent to his proof of fraud at a later stage of the case, cannot be overstated. All the petitioner needs to do is deny those allegations.
Even the granting of a Rule 37(c) motion does not mean that the fraud penalty will be automatically imposed on the petitioner. Respondent must still affirmatively move for judgment, either by written motion before trial or orally at trial, with respect thereto. Again the petitioner is given notice and the opportunity to be heard. If he wanted to deny fraud at that juncture, the Court could, if justice required, exercisé its discretion by vacating the Rule 37(c) order and permit a belated reply.
The petitioner, here, was afforded several opportunities to be heard. All he had to do was to say in so many words: "I deny respondent’s affirmative allegations of fraud.” This would have been sufficient to put respondent to his proof with respect to fraud. Instead, he repeatedly chose to remain silent.
Finally, I do not share the dissent’s concern that our holding may encourage respondent to more freely allege fraud or to plead it with less particularity. Given the ease with which a petitioner can deny respondent’s affirmative allegations, and thus put him to his proof, respondent would be ill advised to allege fraud with the hope that a petitioner would default. Similarly, if respondent attempted to plead fraud only in a conclusory manner, the Court would probably look favorably on a petitioner’s motion for a more definite statement or a motion dispositive of the fraud issue.
Under Rule 31(b), no technical form of pleading is required, and under Rule 31(d), all pleadings are to be construed as to do substantial justice.
I do not know why petitioner chose this course of action. However, I seriously doubt that he was either intimidated by being before this Court or without some knowledge of the judicial process, because an aspect of this matter involving the enforcement of an administrative summons was previously litigated in the U.S. District Court and the Court of Appeals. See United States v. Freedom Church,
Dissenting Opinion
dissenting: I respectfully dissent. I would not apply such a broad construction to the Court’s Rules so as to automatically impose the fraud penalty on unwary taxpayers.
While I do not favor applying our Rules in pro se cases differently than in cases where the taxpayers are represented, I feel that the lack of knowledge and understanding of our Rules by pro se taxpayers is so widespread that we are compelled to extend ourselves to protect the rights of all petitioners, whether represented or not, even if it might be more judicially efficient not to do so.
At the outset, let me say that I do not champion the cause of a taxpayer who files a petition in this Court and then fails to respond to any request for admissions, interrogatories, notice to produce, or other discovery method. Whether ignorant of the Rules or not, a taxpayer should make a goo;d-faith effort to cooperate with respondent and the Court. Thé opinion of the majority will, however, result in the imposition of the fraud penalty against taxpayers who have never seen a copy of our Rules and taxpayers who have seen them but do not understand them.
Petitioner plunged into the procedural pitfall in this case by his failure to object to respondent’s motion that the allegations of fraud in the answer be deemed admitted and because of petitioner’s failure to file a reply denying thbse allegations. The order setting respondent’s motion for hearing indicated the hearing would be in Washington, D.C. (petitioner presumably resides in the Boston, Mass., area where the case was set for trial). Respondent’s motion was expressed in the usual "legalese” which is not very informative to a layman, i.e., "that the undenied allegations in paragraph 7(a) through 7(i) of the answer be deemed admitted.”
The majority also refers to Rule 90 which provides for "Request for Admissions.” A request for admissions (as well as a notice to produce and request for interrogatories) is initiated by respondent independently of the Court. Upon the failure of petitioner to respond, the Court is asked to get into the act. Again, a pro se taxpayer might naturally be wary of such a procedure without a full understanding of our Rules and their objectives.
I would limit the application of our Rules to admissions of fact only. Subparagraphs (h) and (i) of paragraph 7 of respondent’s answer were not allegations of fact but, instead, were allegations of ultimate facts which are mixed questions of law and fact. Pure questions of fact, as distinguished from ultimate facts or mixed questions of law and fact, are accorded different standards of review on appeal. See Edwards v. Commissioner,
The holding of the majority may encourage some of the Commissioner’s agents to adopt an overly relaxed attitude toward the amount of factual foundation which ought to be included in the fraud allegations to which a petitioner is required to reply under our Rules. I would prefer to require the Commissioner to prove fraud in all cases. If sufficient facts (basic facts not ultimate facts) are not admitted by the pleadings, there is no great expenditure of time involved in presenting respondent’s evidence to the Court.
I conclude that we should continue to protect the rights of all taxpayers in fraud cases by weighing all of the evidentiary facts adduced to prove fraud instead of permitting the fraud penalty to be imposed by default.