                           T.C. Memo. 2004-60



                      UNITED STATES TAX COURT



                  EDWARD D. TONITIS, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14225-01.              Filed March 10, 2004.



     William Randolph Klein, for petitioner.

     Lorianne D. Masano, for respondent.



                           MEMORANDUM OPINION


     COHEN, Judge:   Respondent determined deficiencies and

additions to tax as follows:

                                    Additions to Tax, I.R.C.
     Year       Deficiency        Sec. 6651(f)       Sec. 6654

     1996         $9,058            $5,844.75            --
     1997         13,485            10,053.75         $716.70
     1998         20,731            14,001.75          843.80
     1999          5,844             4,287.75          275.97
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After concessions, the issue for decision is whether petitioner’s

failure to file tax returns was due to fraud.    Unless otherwise

indicated, all section references are to the Internal Revenue

Code in effect for the years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

                             Background

     Petitioner resided in Sarasota, Florida, at the time that he

filed his petition in this case.    The petition was filed by

petitioner, pro se, and set forth various frivolous tax protester

arguments.   It was followed by frivolous motions.   After the case

was set for trial, petitioner employed counsel and filed

delinquent Federal income tax returns for the years in issue.

Petitioner, through counsel, also entered into a Stipulation of

Settlement in which the parties agreed to reduced deficiencies

and additions to tax under section 6654.

     In the answer to the petition, respondent alleged various

facts in support of the determination that petitioner’s failure

to file tax returns and underpayment of tax for the years in

issue was due to fraud.    Petitioner failed to file a reply

notwithstanding a motion by respondent under Rule 37(c), and the

matters set forth in respondent’s answer are deemed admitted for

purposes of this case.    Respondent then filed a motion for

summary judgment, which was set for hearing at the time of trial.

Petitioner was permitted to testify with respect to the claim of
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fraud and was, at his counsel’s request, provided an opportunity

to file a brief.   He failed to file a brief.   The facts set forth

below are based on the matters deemed admitted and petitioner’s

testimony at trial.

     Petitioner received a degree in finance in 1994 from the

University of South Florida.   After receiving his degree, he

worked as a loan officer or mortgage banker at various companies.

Eventually, he started his own mortgage brokerage business known

as Colonial Mortgage Corp.

     Prior to 1996, petitioner filed individual Federal income

tax returns prepared by a certified public accountant.   In 1995,

petitioner purchased two Unincorporated Business Trust

Organizations (UBTOs) from abusive trust promoter Joseph Nelson

Sweet.   The two UBTOs never filed income tax returns.

     Petitioner did not maintain a personal checking account

during the years in issue.   He deposited his personal income into

a bank account opened in the name of one of the UBTOs.

Petitioner was the sole signatory on the bank account.

     During the years in issue, petitioner received unreported

income as follows:
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                        1996              1997      1998        1999

Wages                $16,665.00    $66,697.00    $60,904.00    $35,398
Nonemployee income    22,274.10      6,830.47     15,468.88       --
Dividends                253.00           1.00          2.00      --
“Funder” fee           2,931.00        --            --           --
Rents                    --            --          2,400.00       --
S corp. income           --            --         16,867.00     10,349

Petitioner received multiple Forms W-2, Wage and Tax Statement,

and Forms 1099 from various payers for the years in issue.

     Petitioner failed to maintain, or to submit to the Internal

Revenue Service (IRS) for examination, complete and adequate

books and accounts of his income-producing activities for each of

the years in issue as required by the applicable provisions of

the Internal Revenue Code and the regulations promulgated

thereunder.   When the IRS requested the records and thereafter

issued a summons for them, petitioner sent letters containing

frivolous tax-avoidance arguments and filed a motion in a Florida

State court to quash the summons.

     In the absence of adequate records, the IRS computed

petitioner’s taxable income for the years in issue by reference

to bank deposits, information returns, and information obtained

from third-party contacts.

     Petitioner was the 100-percent shareholder of Colonial

Mortgage Corp. for 1998 and 1999.     Colonial Mortgage Corp. was

formed on November 18, 1998, and made an S election on

February 1, 1999, effective November 18, 1998.       Colonial Mortgage

Corp. filed corporate income tax returns and the related
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Schedules K-1, Shareholder’s Share of Income, Credits,

Deductions, etc., for 1998 and 1999.

       Petitioner’s failure to report the various items of income

that he received during the years in issue, his use of sham

trusts to conceal income, his failure to cooperate in determining

his tax liability, his submission of correspondence to the IRS

espousing frivolous tax-avoidance arguments, and his 4-year

pattern of failing to file Federal income tax returns were all

done with the intent to evade tax.

                             Discussion

       Petitioner never moved to set aside the matters deemed

admitted as a result of his failure to file a reply even when

reminded to do so under Rule 37.    He has not contradicted in any

way the material facts set forth in the answer, upon which

respondent relies in support of the determination that

petitioner’s failure to file was due to fraud.    He did not file

an affidavit in opposition to the motion for summary judgment.

However, petitioner was permitted to testify.    See Rule 121(b),

(d).    He denied that he intended to defraud the United States and

testified:

       I relied on the advice of David Simmons, Joseph Sweet,
       David Swanson, amongst others, that, you know, as far
       as not filing was okay. I’ve seen what they’ve done,
       you know, over the years for the last seven, eight
       years, promoting and telling people not to do this, and
       they’re out there doing it.
                              - 6 -

Petitioner did not provide any information about the professional

qualifications of the named individuals.

     Section 6651(f) provides a penalty of 75 percent of the

amount required to be shown as tax on unfiled returns if the

failure to file the returns is fraudulent.    Under section

6651(f), as in any other case involving the issue of fraud with

intent to evade tax, the burden of proof with respect to that

issue is on the Commissioner, and that burden of proof is to be

carried by clear and convincing evidence.    Sec. 7454(a); Rule

142(b); Clayton v. Commissioner, 102 T.C. 632, 646-653 (1994).

Badges of fraud, such as a pattern of unreported income, failing

to file returns, concealment of assets by purporting to convey

them to a trust, failure to maintain or produce records or

otherwise cooperate with the IRS, and submission of frivolous

arguments may be established as matters deemed admitted.      See,

e.g., Doncaster v. Commissioner, 77 T.C. 334 (1981); Houser v.

Commissioner, T.C. Memo. 2000-111; Newton v. Commissioner, T.C.

Memo. 1998-422; Campbell v. Commissioner, T.C. Memo. 1997-415;

Collins v. Commissioner, T.C. Memo. 1997-291; Devlin v.

Commissioner, T.C. Memo. 1997-256.

     Even if we were to disregard the conclusory allegations of

fraudulent intent to which petitioner admitted by failing to file

a reply, the undisputed facts would constitute clear and

convincing evidence of fraud in this case.    We have considered
                                - 7 -

petitioner’s testimony and his denial of fraudulent intent.

Petitioner acknowledged that he continued failing to file tax

returns until the eve of trial of this case.      The thrust of his

testimony is that petitioner and others pursued their course of

tax protest as long as they could get away with it.      See

Niedringhaus v. Commissioner, 99 T.C. 202, 218-219 (1992).

       On consideration of the facts deemed admitted and

petitioner’s testimony in opposition to the motion for summary

judgment, we conclude that there is no genuine issue as to any

material fact and that a decision may be rendered as a matter of

law.

       Respondent’s motion for summary judgment, as modified in the

stipulation of settled issues, will be granted.


                                             An appropriate order and

                                        decision will be entered.
