                              T.C. Memo. 2013-185


                        UNITED STATES TAX COURT



                 MICHAEL SCHLUSSEL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12401-12.                        Filed August 14, 2013.



      Michael Schlussel, for himself.

      Patrick F. Gallagher, for respondent.



                          MEMORANDUM OPINION


      GUSTAFSON, Judge: The Internal Revenue Service (“IRS”) determined

deficiencies of Federal income tax for 2006 and 2007 (along with additions to tax
                                         -2-

[*2] and penalties) of petitioner, Michael Schlussel, pursuant to section 6213.1

The matter is currently before the Court on a motion for summary judgment filed

pursuant to Rule 121 by respondent, the Commissioner of the IRS. The issues for

decision are: (1) whether Mr. Schlussel is liable for the income tax deficiencies

that the IRS determined; and (2) whether he is liable for the fraudulent failure-to-

file addition to tax under section 6651(f), the failure-to-pay addition to tax under

section 6651(a)(2), and the failure-to-pay-estimated-tax addition to tax under

section 6654. We hold that he is liable in all respects, and we will grant summary

judgment in the Commissioner’s favor.

                                    Background

      The Commissioner has made a showing of the following facts. That

showing is supported principally by deemed admissions resulting from

Mr. Schlussel’s failure to file a reply to the Commissioner’s answer, as discussed

below, and Mr. Schlussel has not disputed the Commissioner’s asserted facts.

The false invoicing scheme

      In the years 2006 and 2007, Mr. Schlussel participated in a criminal scheme

by which he sent false invoices, in the names of various shell companies, for

      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986 (26 U.S.C.) in effect for the years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                        -3-

[*3] goods that were never delivered and were never in existence. Unwitting

payors paid the invoices, supposing they were legitimate. By this means Mr.

Schlussel received checks in the aggregate amounts of $129,350 in 2006 and

$369,370 in 2007.

       As a result of the false invoicing scheme, in March 2009 Mr. Schlussel was

found guilty of two criminal counts--mail fraud and conspiracy to commit mail

fraud. He received concurrent sentences of nine years in prison on each count.

Non-compliance with filing and paying requirements

       Although Mr. Schlussel had filed tax returns for prior years, he filed none

for the pre-suit year 2005 nor for the years at issue, 2006 and 2007. His failure to

file was knowing and fraudulent. He kept no books or records of his false

invoicing activity. Mr. Schlussel failed to make estimated tax payments for 2006

or 2007 or payments of tax for either year, and he had no reasonable cause for his

failure.

Administrative proceedings

       On February 14, 2012, the IRS issued to Mr. Schlussel a notice of

deficiency pursuant to section 6213(a), determining for 2006 and 2007 the

following deficiencies:
                                       -4-

[*4]                                              Additions to tax
       Year      Deficiency        Sec. 6651(f)   Sec. 6651(a)(2)     Sec. 6654

       2006       $33,839          $24,529.65         $8,458.50       $1,601.12
       2007       113,535           82,309.25          [TBD]           5,167.06

On February 20, 2012, the IRS prepared for Mr. Schlussel corresponding

Forms 13496, “IRC Section 6020(b) Certification”, as substitutes for returns

(“SFRs”). On those SFRs the IRS included the income from the false invoicing

scheme, along with relatively small amounts of other income.

Tax Court proceedings

       On May 12, 2012, Mr. Schlussel timely mailed his petition to this Court. At

that time he resided in Massachusetts, where he is incarcerated. The petition

alleges:

       I DISAGREE WITH THE IRS DETERMINATION, BECAUSE I
       DID NOT MAKE THE MONEY THEY CLAIM I MADE. THEIR
       FIGURES ARE ERRONEOUS, AND INCORRECT. I DON’T
       KNOW HOW THEY DERIVED AT THEIR FIGURES. I AM
       UNDER THE IMPRESSION THAT THEY TOOK THE FIGURES
       FROM THE FUNDS THAT WERE MENTIONED AT MY TRIAL,
       BUT IF THEY REVIEW THE RECORDS PROPERLY, AND THEY
       WOULD GO OVER THE DISCOVERY INFO PROVIDED BY THE
       GOVERNMENT, THEY WILL NOTICE THAT THE CHECKS
       WAS LEGALLY DEPOSITED BY THE COLLECTION
       COMPANY, A VALID NEW YORK CORPORATION, AND THAT
       THE COMPANY, USED IT, TO PAY EMPLOYEES WAGES,
       TAXES, 941s, FICA, RENT, PRINTING, POSTAGE, TELEPHONE
       CHARGES, ETC. ALL IN THE NORMAL DAY TO DAY
       OPERATIONS OF A BUSINESS. THE FUNDS WERE USED
                                         -5-

[*5] LEGALLY, AND AT NO TIME DID I DEPOSIT THE FUNDS
     INTO MY PERSONAL ACCOUNT, NOR DID I DRAW ON THE
     FUNDS. I IN FACT DID NOT MAKE ANY INCOME, IN YEAR
     2006, AND 2007. I WAS HOSPITALIZED, AND
     SUBSEQUENTLY TAKEN CARE OF BY MY GIRL FRIEND
     WHO EARNED HER SALARY LEGALLY AS WELL. I AM
     PRESENTLY INCARCERATED ON A NINE YEAR SENTENCE
     AND AM 59+ YEARS OLD. I IN FACT SUFFERED MULTIPLE
     CAPITAL LOSES FROM THE FORCED SALE OF MY HOUSE,
     CARS, AND ALL MY PERSONAL PROPERTY. ALL MY
     PERSONAL FUNDS WERE EXHAUSTED OR STOLEN FROM
     ME.

      I THEREFORE WANT THE CHARGES EXPUNGED FROM
      TAXES AT THE EARLIEST POSSIBLE.

The Commissioner filed his answer to the petition on July 9, 2012; and that

answer not only denied Mr. Schlussel’s allegations but also made its own

“affirmative allegations” in paragraph 8, recounting the criminal scheme,

Mr. Schlussel’s profit derived from it, and his fraudulent failure to file tax returns.

Mr. Schlussel filed no reply; so on September 26, 2012, the Commissioner filed a

motion under Rule 37(c) requiring him to do so. By order of October 1, 2012, the

Court directed Mr. Schlussel as follows:

      Under Rule 37(a), Mr. Schlussel is required to file a reply either
      admitting or denying the IRS’s affirmative allegations, but he did not
      do so. Therefore, on September 26, 2012, the IRS filed a motion
      under Rule 37(c), asking the Court to issue an order stating that the
      allegations in the answer that Mr. Schlussel did not deny should be
      deemed admitted by Mr. Schlussel. Upon due consideration, it is
                                        -6-

[*6]           ORDERED that, on or before October 17, Mr. Schlussel shall
       file a reply as required by Rule 37(a) and (b) of the Tax Court Rules
       of Practice and Procedure. If Mr. Schlussel does not file a reply as
       directed herein, then the Court will grant the IRS’s motion and will
       deem for purposes of this case that Mr. Schlussel has admitted the
       affirmative allegations set forth in the answer. [Emphasis added.]

Mr. Schlussel filed no reply, and in its order of October 31, 2012, the Court stated:

             As of this date the Court has received no reply from Mr.
       Schlussel. Upon due consideration and for cause, it is

              ORDERED that the IRS’s motion for entry of order that the
       undenied allegations in paragraph 8 of its answer be deemed admitted
       as set forth, is granted. Those affirmative allegations in the IRS’s
       answer are deemed admitted by Mr. Schlussel.

       On November 23, 2012, the Commissioner filed his motion for summary

judgment (making factual assertions on the basis of Mr. Schlussel’s deemed

admissions); and on that same date the Court ordered as follows:

             This case is scheduled to be tried at the Court’s session in
       Boston, beginning February 4, 2013. However, on November 23,
       2012, respondent (the IRS) filed a motion for summary judgment.
       The IRS’s motion asserts that no trial is necessary in this case,
       because (the IRS says) no relevant facts are in dispute. The motion
       contends that, on the basis of the undisputed facts, the case can be
       decided in the IRS’s favor. The Court will order petitioner Michael
       Schlussel to file a response to the IRS’s motion.

              If Mr. Schlussel disagrees with the facts set out in the IRS’s
       motion, then his response should point out the specific facts in
       dispute. If he disagrees with the IRS’s argument as to the law, then
       his response should also set out his position on the disputed legal
       issues. Q&As that the Court has prepared on the subject “What is a
       motion for summary judgment? How should I respond to one?”
                                       -7-

[*7] are available at ustaxcourt.gov/taxpayer_info_start.htm#START40
     and are printed on the page attached to this order.

             Mr. Schlussel should note that Tax Court Rule 121(d) provides,
      “If the adverse party [i.e., Mr. Schlussel] does not so respond [to a
      motion for summary judgment], then a decision, if appropriate, may
      be entered against such party”--i.e., against Mr. Schlussel.

            To resolve the IRS’s motion for summary judgment, it is

            ORDERED that, no later than December 21, 2012,
      Mr. Schlussel shall file with the Court and serve on the IRS a
      response to the IRS’s motion for summary judgment.

      On December 10, 2012, Mr. Schlussel filed a motion for a 180-day

extension. The motion stated:

           I AM REQUESTING THE COURT TO ALLOW ME
      180 DAYS ADJOURNMENT, DUE TO THE FACT THAT I HAVE
      BEEN STRICKEN BY A STROKE, AND SUBSEQUENTLY HAD
      A SEIZURE, WHERE MY HEART STOPPED BEATING, AND,
      DUE TO THE PROXIMITY OF COMPETENT MEDICAL STAFF, I
      WAS PROMPTLY REVIVED BACK TO LIFE.

           I HAVE BEEN FITTED, WITH A PACEMAKER WHICH
      WAS FINALLY IMPLANTED INTO MY CHEST TO KEEP ME
      ALIVE. I HAVE HAD A FEW SEIZURES IN THE MIDDLE OF
      THE NIGHT, WHERE I FELL OUT OF BED ON A CONCRETE
      FLOOR.

          I AM PRESENTLY ATTEMPTING TO GET BACK TO
      FULL HEALTH. I WANT YOU TO KNOW THAT I DO NOT
      HAVE ANY OF MY TAX RECORDS WITH ME AT THIS
      MEDICAL CTR.
                                        -8-

[*8]        ITS FOR THAT REASON, THAT I AM REQUESTING A
       CONTINUANCE OF THIS CASE FOR AT LEAST 180 DAYS,
       JUST SO THAT I CAN GET BACK TO HEALTH, AND BE ABLE
       TO REPRESENT MYSELF COMPETENTLY.

           I THANK YOU IN ADVANCE FOR PROMPT REPLY TO
       MY REQUEST.

       By order of December 21, 2012, we granted Mr. Schlussel’s request, and we

stated as follows:

              The Court will grant Mr. Schlussel’s motion, even though
       doing so will require taking this case off of the upcoming calendar
       and may complicate further proceedings, and even though an
       extension of 180 days (i.e., six months) is an extraordinary extension.
       Even for persons who are incarcerated and who are sick, the IRS is
       required to perform its duties imposed by law, and the Court is
       obliged to process the cases on its docket. Sick or incarcerated
       persons are entitled to reasonable accommodations, but they are not
       entitled to indefinite exemption from the tax laws. Six months should
       certainly suffice, and Mr. Schlussel is warned that he should not
       expect any further extension. He should immediately begin to obtain
       his records; and if fortunate circumstances allow him to respond
       earlier, he should certainly do so, rather than risk an adverse turn of
       events and find himself unable to act in June 2013. If Mr. Schlussel
       were unable to obtain his records and to prepare his response in that
       six-month period, then it would be hard to assume that any further
       extension would actually facilitate a response, rather than just
       delaying the case indefinitely, which the Court would not do. It is
       therefore

              ORDERED that Mr. Schlussel’s motion for an extension is
       granted, and that he shall file a response to respondent's motion no
       later than June 21, 2013.

As of this date, Mr. Schlussel has filed no response.
                                        -9-

[*9]                                Discussion

I.     Standard for summary judgment

       Under Rule 121 (the Tax Court’s analog to Rule 56 of the Federal Rules of

Civil Procedure) the Court may grant summary judgment where there is no

genuine dispute of any material fact and a decision may be rendered as a matter of

law. The moving party (here, the Commissioner) bears the burden of showing that

no genuine dispute of material fact exists,2 and the Court will view any factual

material and inferences in the light most favorable to the nonmoving party (here,

Mr. Schlussel). Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985); cf.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986) (same standard under

Fed. R. Civ. P. 56). “The opposing party [i.e., Mr. Schlussel] is to be afforded the

benefit of all reasonable doubt, and any inference to be drawn from the underlying

facts contained in the record must be viewed in a light most favorable to the party

opposing the motion for summary judgment.” Espinoza v. Commissioner, 78 T.C.

412, 416 (1982).



       2
        The Commissioner may carry his burden of proof as to fraud by relying on
a petitioner’s deemed admissions arising under Rule 37(c) as a result of the
petitioner’s failure to file a reply to specific allegations of fraud. Doncaster v.
Commissioner, 77 T.C. 334, 337 (1981). It therefore follows that a party moving
for summary judgment may rely on such deemed admissions to support the factual
predicate for his motion.
                                        - 10 -

[*10] However, the non-moving party may not sit on his hands. He is required

by Rule 121(d) to “set forth specific facts showing that there is a genuine dispute

for trial. If the adverse party does not so respond, then a decision, if appropriate,

may be entered against such party.” Despite having this requirement called to his

attention, Mr. Schlussel failed to make any response to the IRS’s motion for

summary judgment.

II.   Mr. Schlussel’s liability

      A.     Income tax

      Proceeds of a criminal activity are taxable income. The Supreme Court “has

given a liberal construction to the broad phraseology of the ‘gross income’

definition statutes in recognition of the intention of Congress to tax all gains

except those specifically exempted.” James v. United States, 366 U.S.

213, 219 (1961). In James, the Supreme Court held that “wrongful

appropriations” are includible in gross income. Id. at 219-220. The

Commissioner has shown (and Mr. Schlussel has not contradicted) that in 2006

and 2007 Mr. Schlussel received income from his criminal activity (and other

sources) for which he owes Federal income tax in the amounts determined in the

notice of deficiency.
                                         - 11 -

[*11] B.      Fraudulent failure-to-file addition to tax

       The Commissioner has also shown that Mr. Schlussel’s failure to file returns

for 2006 and 2007 was fraudulent. Section 6651(f) provides:

              SEC. 6651(f). Increase in Penalty for Fraudulent Failure to
       File.--If any failure to file any return is fraudulent, paragraph (1) of
       subsection (a) shall be applied--

                     (1) by substituting “15 percent” for “5 percent” each
              place it appears, and

                     (2) by substituting “75 percent” for “25 percent”.

The cross-referenced “paragraph (1) of subsection (a)” is section 6651(a)(1),

which provides:

       In case of failure--

              (1) to file any return required under authority of subchapter A
       of chapter 61 * * * on the date prescribed therefor (determined with
       regard to any extension of time for filing), unless it is shown that such
       failure is due to reasonable cause and not due to willful neglect, there
       shall be added to the amount required to be shown as tax on such
       return 5 percent of the amount of such tax if the failure is for not
       more than 1 month, with an additional 5 percent for each additional
       month or fraction thereof during which such failure continues, not
       exceeding 25 percent in the aggregate * * *. [Emphasis added.]

Thus, for the period of Mr. Schlussel’s non-filing he owes an additional 15% per

month up to a total of 75%. Mr. Schlussel has not made any defense, and he is

liable for this addition to tax.
                                        - 12 -

[*12] C.     Failure to pay

      Section 6651(a)(2) imposes an addition to tax for failure to pay the amount

of tax shown on a return, and the Commissioner contends that Mr. Schlussel is

liable for this addition for the two years at issue. The addition to tax under section

6651(a)(2) applies only when an amount of tax is shown on a return, Cabirac v.

Commissioner, 120 T.C. 163, 170 (2003), and the Commissioner has the burden of

production to show the filing of a return, i.e., to show an “amount shown as tax on

* * * [a] return”, sec. 6651(a)(2). A return made by the Secretary under section

6020(b)--i.e., an SFR--is treated as “the return filed by the taxpayer for purposes

of determining the amount of the addition” under section 6651(a)(2).

Sec. 6651(g)(2). The Commissioner’s motion shows that the IRS did prepare

SFRs for Mr. Schlussel in compliance with section 6020(b). Cf. Wheeler v.

Commissioner, 127 T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).

The Commissioner has thus carried his burden of production under

section 7491(c) to show that Mr. Schlussel is liable for the addition to tax under

section 6651(a)(2). Mr. Schlussel has not made any defense, and he is liable for

the failure-to-pay addition to tax.
                                         - 13 -

[*13] D.     Failure to pay estimated tax

      Section 6654 imposes an addition to tax on an individual taxpayer who

underpays his estimated tax. The Commissioner determined this addition for

Mr. Schlussel’s 2006 and 2007 years. A taxpayer has an obligation to pay

estimated tax for a particular year if he has a “required annual payment” for that

year. Sec. 6654(d). A “required annual payment” is defined in section

6654(d)(1)(B), in pertinent part, as “the lesser of--(i) 90 percent of the tax shown

on the return for the taxable year (or, if no return is filed, 90 percent of the tax for

such year)”, or (ii) if the individual filed a return for the preceding taxable year,

then “100 percent of the tax shown on the return of the individual for the

preceding taxable year”. Thus, the Commissioner’s burden of production under

section 7491(c) requires him to produce, for each year for which the addition is

asserted, evidence that the taxpayer had a required annual payment under section

6654(d); and in order to do so he must demonstrate the tax shown on the

taxpayer’s return for the preceding year or that the taxpayer filed no return. For

the year 2007, the “preceding taxable year” is 2006; for the year 2006, the

“preceding taxable year” is 2005; and for neither of these “preceding taxable

year[s]” did Mr. Schlussel file a return. Consequently, the Commissioner carried

his burden of production to show that Mr. Schlussel is liable for the section 6654
                                         - 14 -

[*14] addition for 2006 and 2007, and he made no defense. He is therefore liable

for this addition for failure to pay estimated tax.

III.   Failure to respond

       The foregoing discussion resolves this case on its merits. In the alternative,

we would reach the same outcome by dismissing the case, on our own motion, for

Mr. Schlussel’s failure to comply with our orders of November 23 and

December 21, 2012, directing him to file a response to the Commissioner’s motion

for summary judgment. As we advised him in our order,

       Tax Court Rule 121(d) provides, “If the adverse party [i.e.,
       Mr. Schlussel] does not so respond [to a motion for summary
       judgment], then a decision, if appropriate, may be entered against
       such party”--i.e., against Mr. Schlussel.

In addition, Rule 123 (“Default and Dismissal”) provides:

             (a) Default: If any party has failed to plead or otherwise
       proceed as provided by these Rules or as required by the Court, then
       such party 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 * * *.

              (b) Dismissal: For failure of a petitioner properly to
       prosecute or to comply with these Rules or any order of the Court
       * * *, the Court may dismiss a case at any time and enter a decision
       against the petitioner.
                                         - 15 -

[*15] As we have noted, the Commissioner has the burden of proof on the issue of

fraud; but where (as here) his answer alleges specific facts sufficient to sustain a

finding of fraud, a decision of default can be entered pursuant to Rule 123(a)

against a petitioner who “has failed to plead or otherwise proceed”. See Smith v.

Commissioner, 91 T.C. 1049, 1056 (1988), aff’d, 926 F.2d 1470 (6th Cir. 1991).

Likewise, where fraud is at issue, a petition can be dismissed for “failure * * *

properly to prosecute or to comply with these Rules or any order” under

Rule 123(b), where “the Commissioner * * * come[s] forward, either in the

pleadings or at trial, with sufficient facts to sustain a finding of fraud”. Fifer v.

Commissioner, T.C. Memo. 1993-44.

      The Court explained to Mr. Schlussel the nature of the Commissioner’s

motion for summary judgment and the proper manner for responding to the motion

and then showed extraordinary leniency by allowing him an additional six months

to file his response--though that allowance substantially delayed decision in this

case and consequently (by operation of section 6213(a)) delayed the assessment

against Mr. Schlussel of the tax at issue. Having been granted the allowance he

requested, Mr. Schlussel then made no filing in response to the Court’s order. He

thus induced delay in these proceedings for no purpose. This circumstance

warrants dismissal of the case for failure to comply with the Court’s order.
                                      - 16 -

[*16]                              Conclusion

        The Commissioner is entitled to summary judgment. To reflect the

foregoing,


                                               An appropriate order and decision

                                      will be entered.
