OPINION
WELLS, Judge:
Respondent determined the following deficiencies in, and additions to, petitioner's Federal income taxes:
Addition to tax
Taxable year Deficiency sec. 6653(b)
1972 $3,866.78 $1,933.39
1973 4,962.84 2,481.42
Respondent has moved that we hold petitioner in default under Rule 123(a) and enter a decision against him for the deficiencies in and additions to tax determined by respondent, including the addition to tax for fraud.
Petitioner was incarcerated in the Federal Penitentiary in Lewisburg, Pennsylvania, at the time he filed his petition. The form petition only stated petitioner's reasons for disagreement with the notice of deficiency as follows: "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 had resided in Ohio prior to being incarcerated.
Respondent's answer denied the substantive allegations of the petition and further alleged:
6. FURTHER ANSWERING the petitioner, and in support of the determination that part of the underpayments of tax required to be shown on the petitioner's income tax returns for the taxable years 1972 and 1973 are due to fraud, the respondent alleges:
(a) During the taxable years 1972 and 1973, petitioner derived taxable income from various sources, including, but not limited to, the following:
(1) Receipts from employment as a production worker with the Goodyear Tire and Rubber Company, Akron, Ohio;
(2) Supplemental unemployment benefits from the Goodyear Tire and Rubber Company, Akron, Ohio;
(3) Receipts from miscellaneous "odd jobs";
(4) Receipts in respect of real property located at 492 Brittain Road, Akron, Ohio, 496 Brittain Road, Akron, Ohio, 1686 Oakwood Avenue, Akron, Ohio, 2924 Pressler Road, Uniontown, Ohio, and 2916 Pressler Road, Uniontown, Ohio;
(5) Receipts from wagering; and
(6) Receipts from narcotics trafficking.
(b) Petitioner failed to maintain, or to submit for examination by respondent, complete and adequate books of account and records of income as required by the applicable provisions of the Int. Rev. Code of 1954 and the regulations promulgated thereunder.
(1) During the taxable years 1972 and 1973, the petitioner, with intent to evade and defeat taxes, failed to maintain complete and accurate books of account and records of income as required by the applicable provisions of the Int. Rev. Code of 1954 and the regulations promulgated thereunder.
(c) In the absence of complete and adequate books of account and records of income, respondent has determined petitioner's correct taxable income for each of the taxable years 1972 and 1973 on the basis of the net worth method.
(t) On December 9, 1974, petitioner pleaded guilty in the United States District Court for the Northern District of Ohio of possessing and distributing 40,000 LSD tablets.
Respondent'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 taxable years in issue, specific expenditures by petitioner for personal living expenses during the years in issue, and specific nontaxable receipts of petitioner during the years in issue. The net worth computation showed 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 filed with the Court a document entitled "Rebuttal to Respondent's Answer," which made various accusations against respondent and demands over which this Court has no jurisdiction. That document was filed by the Court as petitioner's reply, and only generally disputed the allegations contained in respondent's answer. Respondent did not file with the Court any request for admissions; nevertheless, petitioner filed a "Response to Respondent's First request for Admissions" on April 13, 1978. That response also did not deny specifically any of the allegations in respondent's answer.
On July 1, 1977, respondent filed a motion to change the place of trial from Philadelphia to Cleveland, and petitioner filed a response in opposition to that motion. On August 14, 1977, a hearing on that motion was attended by petitioner, and the motion was denied. On March 5, 1981, petitioner's address was changed on all Court records to the Federal Correctional Institute, Oxford, Wisconsin (the Oxford, Wisconsin, address). On June 2, 1987, the Court issued a trial notice setting the case for trial on November 2, 1987, in Philadelphia. That notice was mailed to the Oxford, Wisconsin, address and read in pertinent part as follows:
The calendar for that Session will be called at 10:00 a.m. on that date and 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.
Your attention is called to the Court's requirement that, if the case cannot be settled on a mutually satisfactory basis, the parties, before trial, must agree in writing to all facts and all documents about which there should be no disagreement. Therefore, the parties should contact each other promptly and cooperate fully so that the necessary steps can be taken to comply with this requirement. YOUR FAILURE TO COOPERATE MAY ALSO RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST YOU.
On September 2, 1987, September 16, 1987, and October 13, 1987, respondent's counsel sent petitioner letters addressed to the Oxford, Wisconsin, address. The September 16, 1987, letter was forwarded to an address in Akron, Ohio (the Akron, Ohio, address) used by petitioner prior to the Oxford, Wisconsin, address. All three letters, however, were returned to respondent as undeliverable.
Respondent attempted to determine petitioner's address through respondent's computer records and found that petitioner had used the Akron, Ohio, address, for his 1985 and 1986 tax returns. In October of 1987, respondent was informed by the Federal Inmate Locator Service that petitioner was released on parole from a halfway house in Ohio on May 9, 1984. On October 26, 1987, respondent sent petitioner another letter along with a copy of respondent's trial memorandum by express mail to the Akron, Ohio, address. Respondent received no reply.
Petitioner failed to appear at the call of the instant case from the calendar on November 2, 1987. Respondent filed a written motion to hold petitioner in default and to enter a decision against petitioner for the deficiencies in and additions to tax determined by respondent, including the additions to tax for fraud. The Court served a copy of the motion on petitioner at both the Oxford, Wisconsin, address and the Akron, Ohio, address.
Respondent must prevail on the underlying deficiencies on the ground either that petitioner has defaulted by not appearing at trial or that he has failed to carry his burden of proof. Doncaster v. Commissioner, 77 T.C. 334, 336 (1981).
Respondent, however, bears the burden of proving by clear and convincing evidence that petitioner is liable for the additions to tax for fraud. Sec. 7454(a); Rule 142(b). See Grosshandler v. Commissioner, 75 T.C. 1, 19 (1980).
We have held that the Commissioner may satisfy his burden of proving liability for the addition to tax for fraud with deemed admissions (see Marshall v. Commissioner, 85 T.C. 267 (1985); Doncaster v. Commissioner, supra; Gilday v. Commissioner, 62 T.C. 260 (1974)), as a consequence of imposed sanctions (see Rechtzigel v. Commissioner, 79 T.C. 132 (1982), affd. on another issue 703 F.2d 1063 (8th Cir. 1983); Marcus v. Commissioner, 70 T.C. 562 (1978), affd. in an unpublished opinion 621 F.2d 439 (5th Cir. 1980)), or by a clear indication on the part of the taxpayer that he no longer would contest the fraud issue (see, e.g., Simmons v. Commissioner, 73 T.C. 1009 (1980); Gordon v. Commissioner, 73 T.C. 736 (1980)).
None of those elements, however, are present in the instant case. We thus are faced squarely with the issue of whether a taxpayer who does not appear at trial can be held hable for an addition to tax for fraud without the introduction into the record of evidence of fraud sufficient to carry respondent's burden of proof. In Miller-Pocahontas Coal Co. v. Commissioner, 21 B.T.A. 1360 (1931), we held that a taxpayer could not be held hable for an addition to tax for fraud absent such evidence. The question then is whether Miller-Pocahontas Coal Co. precludes the grant of respondent's motion in the instant case.
As a threshold matter, it is important to note that a charge of fraud is a serious matter that must be proved by clear and convincing evidence. Kerbaugh v. Commissioner, 29 B.T.A. 1014, 1016 (1934), affd. per curiam 74 F.2d 749 (1st Cir. 1935). The fact remains, however, that the addition to tax for fraud is a civil rather than a criminal provision, enacted "primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud." Helvering v. Mitchell, 303 U.S. 391, 401-402 (1938).
The Board of Tax Appeals held in Miller-Pocahontas Coal Co. v. Commissioner, 21 B.T.A. at 1361, that deficiencies in tax and additions to tax were separate items 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." The Board thus concluded that it lacked the capacity to default a taxpayer on the fraud issue. Recognizing that the burden of proving fraud is on the Commissioner, the Board also observed, "Congress, knowing that the presumption [of correctness] is generally with the Commissioner, took it from him when he determined a fraud penalty and announced that, in any proceedings before the Board, the taxpayer should be regarded as free from such fraud until respondent has supported his determination by sufficient evidence." Miller-Pocahontas Coal Co. v. Commissioner, supra at 1361.
As we look forward from 1931, however, we find that the present-day vitality of Miller-Pocahontas Coal Co. has been eroded by several developments. First, section 6662 (formerly 6659) provides that additions to tax are to be treated as part of the "tax" and assessed and collected in the same manner as taxes. That provision is clearly intended to cover the deficiency procedures, including proceedings in this Court. See H. Rept. 1337, 83d Cong., 2d Sess. A420 (1954); S. Rept. 1622, 83d Cong., 2d Sess. 595 (1954). See also H. Rept. 1217, 86th Cong., 2d Sess. 2 (1960), 1960-1 C.B. 840; S. Rept. 1098, 86th Cong., 2d Sess. 2 (1960), 1960-1 C.B. 843. Thus, the "deficiency" rationale of Miller-Pocahontas Coal Co. no longer has any validity. See, e.g., Eisele v. Commissioner, 580 F.2d 805 (5th Cir. 1978), affg. an unpublished order of this Court; McCoy v. Commissioner, 76 T.C. 1027 (1981), affd. 696 F.2d 1234 (9th Cir. 1983), where taxpayers' petitions have been dismissed and the Commissioner's determinations of deficiencies and additions to tax upheld. See also Rechtzigel v. Commissioner, 79 T.C. at 141 n. 7; Doncaster v. Commissioner, 77 T.C. at 346-347 (Wilbur, J., concurring). Compare Estate of Di Rezza v. Commissioner, 78 T.C. 19 (1982).
Second, the continued vitality of Miller-Pocahontas Coal Co. has been questioned in recent years. In Doncaster v. Commissioner, supra at 345, Judge Wilbur noted in a concurring opinion that:
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, 1 B.T.A. 243, 247-249 (1924)), and is supported by the congressional declarations that "additions to tax shall be assessed, collected, and paid in the same manner as taxes" and that "Any reference to 'tax' shall be deemed also to refer to the additions to the tax." Sec. 6659(a); compare id. with sec. 275(b), Revenue Act of 1924, Pub. L. 176, 43 Stat. 298.
See also Rechtzigel v. Commissioner, 79 T.C. at 140-142; Gordon v. Commissioner 73 T.C. at 742.
Third, in numerous cases we have relieved the Commissioner of the burden of putting on his case for the addition to tax for fraud where deemed admissions have resulted from the taxpayer's failure to respond to certain procedural devices contained in our rules. Those cases have involved requests for admissions (Rule 90(c)), motions to have affirmative allegations of answers deemed admitted (Rule 37(c)), or motions to have facts in proposed stipulations deemed admitted (Rule 91(f)). See, e.g., Marshall v. Commissioner, supra; Doncaster v. Commissioner, supra; Gilday v. Commissioner, supra. We also have relieved the Commissioner of his burden where taxpayers have acted in such a manner that sanctions have been imposed on them. See, e.g., Rechtzigel v. Commissioner, supra, and the cases cited therein at n. 8; Marcus v. Commissioner, supra. Consequently, the Commissioner's requirement to adduce evidence sufficient to carry his burden of proof may now be relieved by the failure of a taxpayer to respond to the Commissioner's procedural attempts to have allegations of fact deemed admitted. 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 Commis sioner 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. As we will discuss below, we think that distinction to be superannuated and without relevance in present-day proceedings in this Court.
Fourth, the Court adopted Rule 123(a), effective January 1, 1974, which provides that a party may be held in default when he "has failed to plead or otherwise proceed as provided by these Rules or as required by the Court." See Note to Rule 123(a), 60 T.C. 1129. The action or non-action on the part of a taxpayer that constitutes sufficient grounds to apply Rule 123(a) in proceedings before us is a matter for us to determine in our discretion. In this connection, we note that it is possible to conclude that petitioner's inaction in the instant case constitutes an abandonment. Cf. Simmons v. Commissioner, 73 T.C. 1009 (1980); Gordon v. Commissioner, 73 T.C. 736 (1980). In any event, Rule 123(a) was not in existence at the time Miller-Pocahontas Coal Co. was decided. Given the statement in Rule 123(a) that the Court "in its discretion" may require that evidence be adduced prior to the entry of decision following default, an argument thus could be made that the adoption of Rule 123(a) effectively overruled Miller-Pocahontas Coal Co. to the extent that case adopts a per se rule requiring such evidence in every fraud case.
Last, in our recent case of Bosurgi v. Commissioner, 87 T.C. 1403 (1986), we held that a default could be entered against the taxpayer even though the Commissioner had the burden of proof. In Bosurgi, the taxpayer was a transferee of certain assets of an estate. There we held that "the entry of a default has the effect of admitting all well-pleaded facts in respondent's answer, and a default judgment must be supported by respondent's well-pleaded facts." Bosurgi v. Commissioner, 87 T.C. at 1409. While noting that the issue of fraud was not involved, we stated in Bosurgi (87 T.C. at 1408):
If 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.
In a transferee case such as Bosurgi, the Commissioner has the burden of proof, as he does where the fraud addition has been determined. The fact that the Commissioner's burden to prove fraud by clear and convincing evidence is greater than his burden to prove transferee liability by a preponderance of the evidence, however, is not a sufficient distinction to prohibit defaulting a taxpayer who fails to appear for trial. We believe, rather, that the greater standard of proof only affects the sufficiency and adequacy of the facts required to meet the burden. In numerous cases where the Commissioner relies on deemed admissions, we have sustained the fraud addition. E.g., Marshall v. Commissioner, supra; Doncaster v. Commissioner, supra; Gilday v. Commissioner, supra. We have not been reluctant to hold that the Commissioner has satisfied his burden of proof on a clear and convincing basis where only deemed admissions of facts support the assertion of fraud. In such cases, we do not require the Commissioner to adduce evidence beyond those deemed admissions. Because the effect of a default is to establish the well-pleaded facts of the nondefaulting party, the establishment of such facts through a default is no different than establishing such facts through deemed admissions. The establishment of facts through deemed admissions is now a well-settled means of proving fraud and in effect has undermined any continued vitality of Miller-Pocahontas Coal Co. in light of our opinion in Bosurgi. When a taxpayer refuses to cooperate with the Commissioner and with the Court, it is patently absurd, as Judge Wilbur noted in his concurring opinion in Doncaster v. Commissioner, 77 T.C. at 344-345, 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. See, e.g., Brown v. Commissioner, T.C. Memo. 1981-294. 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.
Thus, to complete the process of giving Miller-Pocahontas Coal Co. its proper burial, the only formality remaining is for us to overrule it explicitly by uttering the words "Miller-Pocahontas Coal Co. is overruled." In overruling Miller-Pocahontas Coal Co., however, we leave this admonition: 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. We believe such a safeguard is necessary as a deterrent against the automatic imposition of the fraud addition on unwary taxpayers.
Turning to the instant case, it is clear to us that petitioner "has failed to plead or otherwise proceed." Rule 123(a). Petitioner has failed to communicate with the Court (not having apprised the Court of any change of address since 1981); he has failed to appear at the trial (of which he was given more than sufficient advance notice); and he has failed to participate in the preparation of the case for trial. In particular, he did not comply with the requirements of Rule 91(a) with regard to the preparation of a stipulation of facts, in spite of the Court's warning in its notice setting case for trial and its pretrial order. See Miller v. Commissioner, 654 F.2d 519, 521 (8th Cir. 1981), affg. per curiam an unreported decision of this Court; Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974) ("For many years the bedrock of Tax Court practice has been the stipulation process, now embodied in Rule 91"). Entry of a default decision for the fraud addition in the instant case therefore is appropriate upon a determination in our "sound judicial discretion" that the pleadings set forth sufficient facts to support such a judgment. Cf. Bosurgi v. Commissioner, 87 T.C. at 1408.
We thus must decide whether respondent's specific allegations of fact in the instant case, if taken to be true by petitioner's default, are sufficient to establish the existence of fraud. The evidence of petitioner's unreported income consists of respondent's net worth analysis, which must be examined within the context of the standards enunciated in Holland v. United States, 348 U.S. 121, 132-138 (1954). The Holland standards require that the Commissioner establish, with reasonable certainty, an opening net worth, and that he either have conducted a reasonable investigation of leads negating possible sources of nontaxable income or have established a likely source of unreported taxable income. Brooks v. Commissioner, 82 T.C. 413, 431-432 (1984), affd. without published opinion 772 F.2d 910 (9th Cir. 1985).
Petitioner did not appear for the trial of this case to dispute respondent's allegations. We therefore find that the opening net worth of respondent's net worth analysis is correct and that petitioner's sources of unreported taxable income are as alleged by respondent; thus, the Holland standards are satisfied.
Respondent's net worth analysis establishes a pattern of underreporting of substantial amounts of income by petitioner during the taxable years in issue. Petitioner's pattern of acquiring substantial assets while reporting nominal income on his returns is evidence that petitioner knew that he substantially had understated his income and substantially underpaid his tax. Brooks v. Commissioner, 82 T.C. at 432. Petitioner's failure to keep records is also a badge of fraud. Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. a Memorandum Opinion of this Court. Moreover, petitioner's plea of guilty to engaging in an illegal activity, distribution of LSD, is another of the indicia of fraud. Bradford v. Commissioner, supra; Meier v. Commissioner, 91 T.C. 273, 298 (1988). Last, petitioner failed to appear for trial — an additional indication of a deliberate effort by petitioner to conceal the true facts concerning his tax liability.
Our review of the entire record in this case, including the well-pleaded facts contained in respondent's answer, satisfies us that the additions to tax for fraud should be sustained by entry of a default against petitioner and the dismissal of his case on the merits pursuant to Rule 123(a).
In the instant case, petitioner filed a petition; a request for trial at Philadelphia, Pennsylvania; a reply; a response to respondent's motion to change place of trial; and another response document. Thereafter, it has been several years since the Court has received any communication from petitioner. Petitioner appears to have abandoned his case, and we believe it appropriate to exercise our discretion to enter a default against petitioner, including the addition to tax for fraud.
Respondent's motion will be granted, and decision will be entered for the respondent.
Reviewed by the Court.
Nims, Parker, Whitaker, Korner, Clapp, Swift, Jacobs, Gerber, Ruwe, and Colvin, JJ., agree with the majority opinion.
Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue, and all references to Rules are to the Tax Court Rules of Practice and Procedure.
There is no indication in the Court's records that petitioner did not receive either the notice setting case for trial or respondent's motion to hold petitioner in default. Rule 21(b)(4) requires parties to notify the Court of any change of mailing address.
The standard of proof requiring clear and convincing evidence does not appear in sec. 7454(a). The legislative history of sec. 7454(a) and its predecessor does not reveal any indication of any such standard. H. Rept. 1337, 83d Cong., 2d Sess. A433 (1954); S. Rept. 1622, 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 (Conf.), 70th Cong., 1st Sess. 21 (1928), 1939-1 C.B. (Part 2) 444, 452. The standard has been judicially developed. See Rickard v. Commissioner, 15 B.T.A. 316, 317 (1929), which appears to be the seminal case and establishes the standard without discussion. See also Gano v. Commissioner, 19 B.T.A. 518, 533 (1930).
Sec. 6662 provides:
Sec. 6662(a). Additions Treated as Tax. — Except as otherwise provided in this title—
(1) The additions to the tax, additional amounts, and penalties provided by this chapter shall be paid upon notice and demand and shall be assessed, collected, and paid in the same manner as taxes;
(2) Any reference in this title to "tax" imposed by this title shall be deemed also to refer to the additions to tax, additional amounts, and penalties provided by this chapter.
Rule 123(a) provides:
(a) Default: 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.
We subsequently have applied Bosurgi to default a taxpayer on delinquency and negligence additions under secs. 6651(a)(1) and 6653(a), respectively, where the Commissioner had the burden of proof because he raised the additions for the first time in his answer. Martin v. Commissioner, 89 T.C. 894 (1987).
Such an activity also supports respondent's pleading that narcotics trafficking is a likely source of unreported taxable income to petitioner.
See Bierschbach v. Commissioner, T.C. Memo. 1988-199; Baldwin v. Commissioner, T.C. Memo. 1984-119.