Opinion
14617-17
12-20-2021
Johnny H. Brown, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
James S. Halpern Judge
Respondent has determined deficiencies in, and additions to, petitioner's Federal income tax for 1996 through 2001 (audit years). One of those additions is an addition for each year under section 6651(a) and (f) (together, section 6651(f)) for fraudulent failure to file income tax returns. Respondent has moved for partial summary judgment (summary judgment motion) in his favor with respect to three issues, including the section 6651(f) additions to tax. Respondent supports the summary judgment motion with the declaration of Gillian B. Rhyu (declaration). Mr. Rhyu is the Revenue Agent who carried out the examination of petitioner for the audit years. Petitioner objects to our granting the summary judgment motion. For the reasons stated, we will deny the summary judgment motion.
All section references are to the Internal Revenue Code of 1986, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.
Background
Deficiency Notice
Included with the statutory notice of deficiency that respondent sent to petitioner was an Internal Revenue Service (IRS) Form 5278, Statement - Income Tax Changes, showing respondent's adjustments to petitioner's income for each of the years at issue along with the additions to tax. Respondent made adjustments for 1996 through 2000 with respect to "Kirby Distributorship", petitioner's vacuum cleaner sales business. He made positive adjustments for gross receipts of the business and made negative adjustment for cost-of-goods-sold and for other expenses of the business. For 1997 through 2001, he also made positive adjustments ("Other Income") for amounts allegedly deposited to petitioner's bank accounts. Respondent determined deficiencies in tax for the audit year of $16,801,157.
Block 24 of the Form 5278 is entitled "Penalties and/or Additions to Tax". One line is labeled "Fraud Penalty IRC 6651(f)" and shows additions to tax for the audit years totaling $12,180,839.
Amended Petition
Petitioner filed both a petition and an amended petition. Petitioner attached to the amended petition six pages describing (1) his disagreement with the amounts shown on the Form 5278 and (2) the facts upon which he relies to support his disagreement. Among other disagreements, petitioner disagrees with the amounts shown on the Form 5278 for the Schedule C gross of the Kirby Distributorship and for "Other Income". With respect to the Schedule C gross receipts, petitioner avers that respondent mistakenly assumed that the majority of Kirby Distributorship's sales had been retail when, in fact, they had been wholesale (at markedly lower prices). With respect to "Other Income", petitioner avers that bank deposits reflected in those adjustments represent repetitive cash deposits of short-term loan proceeds (amounts borrowed, repaid, and borrowed again) and not deposits of separate items of gross income. Petitioner describes his disagreement with the Form 5278, block 24, addition "Fraud Penalty IRC 6651(f)" as follows:
Line 24 Penalties and/or Additions to Tax[, ] specifically * * * Fraud Penalty IRC 6651(f)": "Brown disagrees with * * * [the] Additions to Tax as they are * * * calculated on the basis of the * * * [deficiencies] being correct which * * * [they] are not."
Answer
Respondent answered the amended petition, and, in support of the section 6651(f) fraud additions, he alleges that petitioner is collaterally estopped from challenging those additions. In particular, he alleges that
Petitioner Johnny H. Brown is the same person who was the defendant in the criminal case of United States v. Johhny "Mickey" Brown, * * * [No. 3:06-cr--000385-Kl-1], in the United States District Court for the District of Oregon.
Petitioner was convicted of income tax evasion under 26 U.S.C. sec. 7201 for 1996, 1997, 1998, 1999, 2000, and 2001 tax years.
One of the issues in the instant case is whether the addition to the tax imposed by I.R.C. § 6651(f) should be imposed against petitioner for the 1996, 1997, 1998, 1999, 2000, and 2001 tax years.
Petitioner was convicted by the District Court of 14 counts of wire fraud, making false statements to a financial institution, and tax evasion; he was given a 130-month sentence and ordered to make $6.2 million dollars of restitution. The conviction, sentence, and restitution order were affirmed. See United States v. Brown, 601 Fed.Appx. 565 (9th Cir. 2015).
Therefore, respondent concludes, "petitioner is * * * estopped * * * under the doctrine of collateral estoppel * * * from denying that he fraudulently failed to file income tax returns for the 1996 through 2001 tax years with intent to evade and defeat * * * the income tax due."
Respondent further alleges that, during the audit years, petitioner operated a Schedule C business selling vacuum cleaners (i.e., the "Kirby Distributorship") and that, in each of 1996 through 2000, he sold a given number of vacuum cleaners at an average unit price of $1,186 and, for each year, earned Schedule C gross receipts equal to the product of those two numbers (the amounts of Schedule C gross receipts alleged being identical to the amounts shown as the Kirby-Distributorship Schedule C gross receipts on the Form 5278). Those Schedule C gross receipts, respondent alleges, "[p]etitioner fraudulently, and with intent to evade tax, failed to report".
He also alleges that, during each of 1997 through 2001, there was deposited to bank accounts that petitioner owned and controlled "taxable income" that he should have reported as "other income" on Federal income tax returns for those years (in amounts identical to the "Other Income" adjustments on the Form 5278) and that he "fraudulently and with intent to evade tax failed to report."
Rule 37(c) Motion
Petitioner did not reply to the answer, and respondent moved under Rule 37(c) that we enter an order that his affirmative allegations in the answer be deemed admitted (Rule 37(c) motion). We ordered petitioner to file a reply to the answer, but he failed to do so, and, by subsequent order, dated February 22, 2018, we granted the Rule 37(c) motion, deeming admitted respondent's affirmative allegations (deemed admissions).
The Summary Judgment Motion
By the summary judgment motion, respondent asks for summary adjudication of the following three issues:
(1) Whether petitioner is liable for section 6651(f) additions to tax for the audit years.
(2) The amount of his Schedule C gross receipts "for the 1996 through 2001 tax years".
(3) The amount of his other "unreported * * * taxable income" for 1997 through 2001.
By the declaration and attachments from respondent's administrative records, respondent seeks to establish that petitioner filed no returns for any of the audit years. Two other attachments to the declaration are (1) the Fourth Superseding Indictment filed by the Government in petitioner's criminal case (indictment) and (2) the District Court's Second Amended Judgment in that case (judgment). Respondent relies on the indictment to show that petitioner "was [sic] indicted for several criminal charges, including income tax evasion under I.R.C. sec. 7201 for the years 1996 through 2001". He relies on the judgment to show that petitioner was convicted of same.
Respondent argues that petitioner's fraudulent intent in not filing returns for the audit years is established on two separate grounds, viz, (1) that petitioner failed to raise the issue in the petition, and (2) that he is estopped from disputing the issue on account of his prior criminal conviction.
Respondent argues that the deemed admissions also establish "specific amounts of unreported taxable income for each tax year." Nevertheless, he concedes that, if the summary judgment motion is granted, the issue will remain "[w]hether petitioner is entitled to any deductions or expenses beyond those already allowed by respondent in the notice of determination [sic] for the years at issue."
Petitioner's Response
Petitioner objects to our granting the summary judgment motion. He believes that there is a genuine dispute as to material facts. With respect to the sale of vacuum cleaners, petitioner does not dispute the numbers of vacuum cleaners sold each year. He does dispute respondent's sales prices. He alleges that his business was primarily a wholesale business and that he did not sell vacuums at their full retail price. He disagrees with respondent's determination of other income resulting from bank deposits because, he claims, respondent does not understand how short-term revolving loans work.
Respondent's Supplement to the Summary Judgment Motion
In December 2020, we asked respondent for clarification of certain of the claims that he had made that were integral to his estoppel argument, viz, his averments that petitioner had been indicted for, and found guilty of, "several criminal charges, including income tax evasion under I.R.C. sec. 7201 for the years 1996 through 2001".
We asked for clarification because (1) count 14 of the indictment, which respondent relies on to claim that petitioner was indicted for and found guilty of income tax evasion under section 7201 for 1996 through 2001, refers only to calendar years 1992-1995 and (2) the judgment, which respondent relies on to show a conviction for tax evasion for 1996 through 2001, describes the tax evasion count as "26 USC sec. 7201, Evasion of Taxes", "Date Offense Concluded: From 1996 through 2003."
Respondent responded to our order requesting clarification with a supplement to the summary judgment motion (supplement). Conceding ambiguity as to whether the elements of section 6651(f) for the audit years were adjudicated in petitioner's criminal case, respondent withdrew his argument that petitioner is collaterally estopped from disputing his liability for the section 6651(f) additions to tax.
Nevertheless, respondent argues that, even though petitioner's criminal case does not support collateral estoppel, it does provide evidence (i.e., "badges of fraud") sufficient to carry respondent's burden that, with fraudulent intent, petitioner failed to file returns for the audit years.
Petitioner's Response to the Supplement
We offered petitioner the opportunity to respond to the supplement, and he did so. He argues that his criminal case does not provide evidence sufficient to carry respondent's burden to show that he (petitioner) fraudulently failed to file tax returns for the audit years. He claims that that there was reasonable cause for, and he was not willfully neglectful in, failing to file returns for the audit years. He claims that, as a result of his criminal case, he was unsure of what to report on future returns, he was in bankruptcy, and counsel advised him not to file "at that time."
Discussion
I. Introduction
Section 6651(a) provides for an addition to tax in the case of any failure to file a return by the prescribed filing date unless the taxpayer shows that the delinquency is due to reasonable cause and not due to willful neglect. In the case of a fraudulent failure to file, the addition equals 15% of the amount required to be shown on the delinquent return (reduced by section 6651(b)(1) for any prepayments or credits) for each month or fraction therefore during which the delinquency continues, not exceeding 75 percent in the aggregate. See sec. 6651(f). The Commissioner must prove fraud by clear and convincing evidence. See sec. 7454(a); Mohamed v. Commissioner, T.C. Memo. 2013-255, at *18; Rule 142(b).
Summary judgment is appropriate "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." Rule 121(b).
II. Analysis
A. Section 6651(f) Additions to Tax
1. Introduction
Originally, respondent asked us to summarily determine that petitioner is liable for the section 6651(f) additions to tax because petitioner failed to assign error to those additions in the petition and, even if he did (or is deemed to have done so), he is estopped by his criminal conviction from denying his fraudulent intent in failing to file returns for the audit years. Respondent has since withdrawn his estoppel argument. Instead, he argues that, by failure fully to assign error to the section 6651(f) additions to tax, petitioner has conceded the additions and, alternatively, if we reject that argument, there are sufficient facts deemed to be true that we should find petitioner liable for section 6651(f) additions to tax for each of the audit years. See, e.g., Doncaster v. Commissioner, 77 T.C. 334, 336 (1981).
2. Failure To Assign Error
Rule 34(b)(4) provides that the petition shall contain clear and concise assignments of the errors the petitioner alleges to have been committed by the Commissioner and further provides that "[a]ny issue not raised in the assignments of error shall be deemed to be conceded."
Petitioner did in the amended petition assign error to respondent's section 6651(f) additions to tax. He referred to block 24 on the Form 5278 and disagreed with the calculation of the section 6651(f) additions. In his response to the supplement, he claims that respondent erred in attributing to him fraudulent intent in failing to file returns for the audit years. Relying on the fact that no section 6651(a) delinquency addition will apply if the delinquent taxpayer can show that his delinquency is due to reasonable cause and not due to willful neglect, he avers what he believes are reasonable causes (e.g., reliance on counsel) for his delinquencies.
"All claims in a petition should be broadly construed so as to do substantial justice, and a petition filed by a pro se litigant should be liberally construed." Gray v. Commissioner, 138 T.C. 295, 298 (2012); see also Rule 31(d). Petitioner's response to the supplement indicates that he intended to assign error to all aspects of respondent's determinations of additions to tax under section 6651(f), and we construe it accordingly. See also Rule 41(a) (providing that leave to amend a pleading shall be freely given when justice so requires). We will not grant respondent's motion for summary adjudication that any delinquency by petitioner in filing returns for the audit years was with fraudulent intent on the basis of respondent's argument that petitioner failed to controvert that claim in the amended petition.
3. Declaration and Deemed Admissions
Petitioner does not deny that he was convicted of tax evasion under section 7201 as alleged in count 14 of the indictment, nor does he deny that he failed to file tax returns for the audit years. And while a conviction under section 7201 for tax evasion for a particular year or years collaterally estops the convicted felon from denying fraudulent intent for purposes of section 6651(f) for those years, see, e.g., Madge v. Commissioner, T.C. Memo. 2000-370, 2000 WL 1800520, at *3, aff'd, 23 Fed.Appx. 604 (8th Cir. 2001), respondent concedes that there is no estoppel here. He relies principally on the particulars of the conviction and on the deemed admissions to make his case.
Respondent wants partial summary judgment that petitioner is liable for additions to tax for fraudulent failure to file returns, although he is not sure of the amounts of those additions because, as he concedes, were we to grant the motion, the issue would remain whether petitioner is entitled to deductions or expenses beyond those already allowed by respondent in the deficiency notice.
The elements necessary to prove a section 6651(f) addition to tax for a taxable year are that the taxpayer was delinquent in filing his return for the year, his tax liability for the year exceeded his prepayment credits, and his delinquency was with fraudulent intent. See, e.g., Christianson v. Commissioner, T.C. Memo. 1999-99, 1999 WL 171434, at *7, rev'd on other grounds, 1 Fed.Appx. 704 (9th Cir. 2001).
Petitioner filed no returns for any of the audit years. That satisfies the first element. As to the second element, respondent's concession as to the unsettled amounts of petitioner's deductions and expenses means that, at least in theory, petitioner's deductions and expenses could reduce his taxable income to zero, in which case petitioner would owe neither tax nor any addition to tax for a delinquent return. Because respondent has failed to satisfy the second element necessary to prove a section 6651(f) addition, we do not reach the third element. Respondent has failed to prove by clear and convincing evidence the elements necessary to impose the section 6651(f) additions to tax that he determined.
4. Conclusion
Respondent has failed to show that petitioner is liable for the section 6651(f) additions to tax for any of the audit years. We will deny the summary judgment motion to the extent that it asks us to summarily determine that petitioner is liable for section 6651(f) additions to tax for the audit years.
B. The Amounts of Petitioner's Schedule C Gross Receipts and Unreported Other Income
Respondent has also asked us to determine summarily (1) the amount of petitioner's Schedule C gross receipts for 1996 through 2001 and (2) the amount of his other "unreported * * * taxable income" for 1997 through 2001. Even though respondent has not convinced us that petitioner is liable for any section 6651(f) additions to tax, those additional determinations would likely be useful to respondent as the case continues. Respondent argues: "The deemed admissions are admissions of petitioner to very specific amounts of unreported taxable income for each tax year."
It is true that, because petitioner failed to reply to the answer, we have deemed him to admit that, from 1996 through 2001, he sold a given number of vacuum cleaners each year at an average unit price of $1,186, earning Schedule C gross receipts each year equal to the product of the two numbers. Petitioner did, however, address the proceeds from vacuum cleaner sales in both the amended petition and in his response to the summary judgment motion. He did not contest respondent's claim as to the numbers of vacuum cleaners sold, but he contests respondent's average unit price as not reflective of the fact that he had a wholesale business and did not sell vacuums at their full retail price (which we assume (although he does not explain it) respondent used in his calculations).
In the amended petition and in his response to the summary judgment motion, petitioner also contests that he had taxable bank deposits (other unreported taxable income) in the amounts claimed by respondent. He does not contest that deposits were made, but claims that, at least to some extent, the deposits represented recurring deposits of short-term loan proceeds.
Given petitioner's averments in the amended petition and in his response to the summary judgment motion, we do not know why petitioner did not ask us to reconsider our order granting the Rule 37(c) motion. Petitioner is representing himself and may not have understood the consequence of failing to reply to the answer when ordered to do so. In any event, we are not inclined to bind petitioner to his deemed admissions with respect to his Schedule C gross receipts and the nature of the bank deposits. Respondent has abjured his allegations concerning the years for which petitioner was convicted of tax evasion, which gives us pause as to the remainder of respondent's affirmative allegations. While Rule 37(c) does not permit the withdrawal of affirmative allegations deemed admitted, see New v. Commissioner, 92 T.C. 1146, 1147-1148 (1989), we have looked to Rule 90(f), permitting the withdrawal of deemed admissions, in considering whether to vacate a Rule 37(c) order, see id. at1148-1149. Petitioner has averred facts (as to the sales prices of vacuums and the nature of the bank deposits) tending to refute the relevant portions of the deemed admissions. We do not think that the prejudice to respondent would be significant were we to vacate our Rule 37(c) order. Respondent is free during preparation for trial to ask petitioner for admissions, to which, if he cannot admit the matters for which his admissions are requested, we encourage petitioner to reply.
We will vacate our Rule 37(c) order, which will deprive respondent of the deemed admissions underlying the summary judgment motion to the extent it asks us to determine summarily (1) the amount of petitioner's Schedule C gross receipts for 1996 through 2001 and (2) the amount of his other "unreported * * * taxable income" for 1997 through 2001.
Respondent's use of that date range appears to be in error because there is no affirmative allegation as to gross receipts from vacuum cleaner sales in 2001.
III. Conclusion
On the premises stated, it is
ORDERED that the summary judgment motion is denied. It is further
ORDERED that our order dated February 22, 2018, is vacated and set aside. It is further
ORDERED that respondent's Motion For Entry of Order That Undenied Allegations Be Deemed Admitted Pursuant to Rule 37(c) filed December 8, 2017, is denied.