                         T.C. Memo. 2008-100



                       UNITED STATES TAX COURT



          REGAN D. AND SUSAN A. REEDY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10941-06.                 Filed April 15, 2008.



     Regan D. and Susan A. Reedy, pro sese.

     Aaron D. Gregory, for respondent.



                         MEMORANDUM OPINION


     CHIECHI, Judge:    This case is before the Court on respon-

dent’s motion to impose sanctions (respondent’s motion).     We

shall grant respondent’s motion.

                             Background

     Petitioners resided in Christiansburg, Virginia, at the time

they filed the petition in this case.
                              - 2 -

     In the petition, petitioners allege error in respondent’s

determinations in the notice of deficiency for petitioners’

taxable year 2000 (2000 notice) (1) that there is a deficiency of

$40,023 in petitioners’ Federal income tax (tax), (2) that

petitioners have capital gain of $246,277,1 and (3) that peti-

tioners are liable for an addition to tax of $29,402.25 under

section 6651(f)2 for fraudulent failure to file a tax return.3

     In paragraph 7 of the answer, respondent affirmatively

alleged the following with respect to respondent’s determination

in the 2000 notice that petitioners are liable for an addition to

tax under section 6651(f):

          a. During the year 2000, petitioners were married
     to each other and were engaged in the operation of a
     business known as Reedy’s Paint and Body Supplies, Inc.
     (the “Corporation”). The petitioners owned the Corpo-
     ration as the sole-shareholders.

          b. During the year 2000, the Corporation was
     liquidated. The net proceeds from the sale of the
     Corporation’s assets equaled approximately $246,277.00.

     1
      As a result of respondent’s determination to increase
petitioners’ capital gain for their taxable year 2000, respondent
determined to reduce the amount of the personal exemptions that
petitioners claimed in the tax return for that year that the
Internal Revenue Service received from petitioners in October
2004.
     2
      All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
     3
      In the 2000 notice, respondent determined in the alterna-
tive to respondent’s determination under sec. 6651(f) that
petitioners are liable for an addition to tax under sec.
6651(a)(1).
                              - 3 -

      All of the net proceeds were received by the petition-
     ers in the year 2000.

          c. Upon receiving the net proceeds from the sale
     of the Corporation, the petitioners transferred approx-
     imately $255,000.00 to an offshore trust/tax avoidance
     scheme known as Anderson Ark and Associates (“Anderson
     Ark”). Anderson Ark was based in Costa Rica and in-
     volved the use of offshore credit cards and bank ac-
     counts.

          d. The petitioners failed to file a timely income
     tax return for the year 2000 and subsequent years.
     Eventually, in October 2004, the petitioners submitted
     a delinquent return for the year 2000 after several
     attempts by respondent’s compliance office, including
     the issuance of summonses, to secure a delinquent
     return and/or to obtain relevant information regarding
     the unfiled return for the year 2000. The delinquent
     year 2000 income tax return provided by the petitioners
     did not report the proceeds from the liquidation of the
     Corporation as income, which fact was acknowledged by
     the petitioners’ representative at the time the delin-
     quent return was filed.

          e. Petitioners filed their federal income tax
     returns prior to the year 2000 and were aware of their
     obligation to timely file a correct federal income tax
     return for the year 2000.

          f. Petitioners’ failure to timely file their
     return for the tax year 2000 was fraudulent and not due
     to reasonable cause.

          g. Petitioners are liable for the fraudulent
     failure to file penalty pursuant to I.R.C. § 6651(f)
     for the taxable year 2000.

     In petitioners’ reply, petitioners alleged the following

with respect to respondent’s affirmative allegations in paragraph

7 of the answer regarding respondent’s determination that peti-

tioners are liable for an addition to tax under section 6651(f):

          1. Petitioners admit the allegation in paragraph
     7a of the Answer.
                              - 4 -

          2. Petitioners admit the allegation in paragraph
     7b of the Answer.

          3. As to the allegations in paragraph 7c of the
     Answer, Petitioners admit that they transferred money
     to Keith Anderson of Anderson Ark Associates, but
     specifically deny that such transfer was part of an
     “offshore trust/tax avoidance scheme.” Petitioners
     allege that Anderson Ark represented the transaction as
     a perfectly legal investment program. Petitioners did
     not set out to avoid taxes. They set out to invest
     money.

          4. Petitioners admit the allegations in paragraph
     7d of the Answer insofar as it alleges that Petitioners
     failed to file a timely 2000 federal income tax return
     and that filing the return was in response to IRS
     pressure to file. Petitioners expressly deny that they
     knew or believed that the proceeds of the liquidated
     corporation were taxable at any level. Petitioners did
     not believe they had any duty to file a return or that
     they had a tax liability in connection with the pro-
     ceeds of the liquidation.

          5. Petitioners deny the allegation in paragraph
     7e of the Answer insofar as it alleges that Petitioners
     knew they had a duty to file a federal income tax
     return for the year 2000.

          6. Petitioners deny the allegation in paragraph
     7f of the Answer.

          7. Petitioners deny the allegation in paragraph
     7g of the Answer.

     After this case was calendared for trial at the Court’s

trial session beginning on March 5, 2007, in St. Paul, Minnesota

(St. Paul trial session), respondent filed with the Court and

served on petitioners the following requests for admission:

          1. In the year 2000, Petitioners were the sole
     shareholders of an S corporation sometimes referred to
     as Reedy’s Paint and Body, Inc. (hereinafter “the
     corporation”).
                               - 5 -

           2. During the year 2000, Petitioners received
     $246,277 from the sale of the assets of the corpora-
     tion.

          3. Petitioners made no loans to the corporation
     in the year 1999.

          4. Petitioners made no loans to the corporation
     in the year 2000.

          5. Petitioners have no records of loans made by
     Petitioners to the corporation during any year.

          6. Petitioners have no records of capital contri-
     butions made by Petitioners to the corporation during
     any year.

          7. Petitioners’ federal income tax return for the
     year 2000 was due on April 15, 2001.

          8. Petitioners did not request, or receive, an
     extension of time in which to file their federal income
     tax return for the year 2000.

          9. Petitioners submitted their federal income tax
     return for the year 2000 to the Internal Revenue Ser-
     vice on October 21, 2004.

     Petitioners did not file with the Court and did not serve on

respondent a response to respondent’s requests for admission.

Accordingly, each matter set forth in respondent’s requests for

admission is deemed admitted pursuant to Rule 90(c).

     After this case was calendared for trial at the St. Paul

trial session, respondent filed a motion to compel answers to

interrogatories and responses to requests for production of

documents.   The Court issued an Order dated January 25, 2007

(January 25, 2007 Order) in which it granted that motion.   In

that Order, the Court ordered that
                               - 6 -

     petitioners shall, on or before February 22, 2007,
     (1) produce to counsel for respondent those documents
     requested in respondent’s request for production of
     documents served on petitioners on December 19, 2006,
     and (2) serve on counsel for respondent answers to each
     of the interrogatories served on petitioners on Decem-
     ber 19, 2006. * * *

In the January 25, 2007 Order, the Court indicated that:

     in the event petitioners do not fully comply with the
     provisions of this Order, this Court may be inclined to
     impose sanctions pursuant to Tax Court Rule 104, which
     may include dismissal of this case and entry of a
     decision against petitioners.

     About three months after the notice setting this case for

trial at the St. Paul trial session was served on petitioners,

petitioners’ counsel of record filed a motion for leave to

withdraw.   In that motion, petitioners’ counsel of record repre-

sented in pertinent part as follows:

          1. The Petitioners have clearly expressed to the
     undersigned that they no longer wish to have the under-
     signed represent them in this matter.

          2. The Petitioners have already contacted the
     Respondent’s counsel directly in order to discuss the
     case with Respondent’s counsel.

          3. Petitioner has advised Respondent’s counsel by
     fax letter dated December 18, 2006, that Respondent may
     deal directly with the Petitioners in this matter.

          4. Based upon the clear wishes of the Petition-
     ers, this Court should permit the withdrawal of counsel
     under Rule 24(c), Tax Court Rules of Practice.

The Court granted the motion for leave to withdraw.

     About a month thereafter, respondent filed a motion for

continuance of trial and a motion to change place of trial.    In
                              - 7 -

respondent’s motion for continuance of trial, respondent repre-

sented in pertinent part as follows:

          1. Petitioners in this case reside in
     Christiansburg, Virginia.

          2. Until January 4, 2007, petitioners had been
     represented by Mr. Pilla, who was located in St. Paul.
     Petitioners are now acting pro se.

           3. On February 4, 2007, petitioner Regan Reedy
     contacted the undersigned and stated he had just been
     released from the hospital. Mr. Reedy asked if his
     case could be transferred to an office closer to his
     residence. He indicated that Richmond, VA was accept-
     able.

          4. Concurrent with the filing of this motion,
     respondent is submitting a motion to change place of
     trial to Richmond, Virginia.

     In respondent’s motion to change place of trial, respondent

represented in pertinent part as follows:

          2. Concurrent with the filing of this motion
     respondent has submitted a motion to continue the trial
     of this case. This case has not previously been con-
     tinued.

          3. Until January 4, 2007, petitioners had been
     represented by Mr. Pilla, who was located in St. Paul.
     Petitioners are now acting pro se.

           4. On February 2, 2007, petitioner Regan Reedy
     contacted the undersigned and stated he had just been
     released from the hospital. Mr. Reedy asked if his
     case could be transferred to an office closer to his
     residence. He indicated that Richmond, VA was accept-
     able.

          5. Petitioners in this matter reside in
     Christiansburg, Virginia. Respondent believes that the
     books and records pertinent to this case, including
     petitioners’ books and records and the records of the
     related corporation are primarily located in Virginia.
                               - 8 -

          6. The pertinent witnesses in this matter appear
     to reside in or around Richmond, Virginia including the
     following:

                (a) Petitioners.

               (b) The revenue agent that conducted the
     examination.

               (c) The purchaser of petitioner’s business
     during the year at issue.

               (d) The preparer of petitioners’ income tax
     return for the year at issue, as well as the return of
     the related corporation.

The Court granted respondent’s motion for continuance of trial

and respondent’s motion to change place of trial.

     On July 26, 2007, respondent filed a motion to impose

sanctions.   In that motion, respondent asked the Court to impose

sanctions on petitioners under Rule 104(c) for their failure to

comply with the Court’s January 25, 2007 Order.     The Court issued

to petitioners a notice of the filing of respondent’s motion for

sanctions.   In that notice, the Court ordered that any objection

by petitioners to that motion be filed by August 30, 2007.

     On August 31, 2007, petitioners filed an objection to

respondent’s motion for sanctions.     That objection contained

statements, contentions, and/or arguments that the Court finds to

be frivolous and groundless.

     After having received petitioners’ objection to respondent’s

motion for sanctions, the Court issued an Order to Show Cause

dated September 10, 2007 (Order to show cause).     In that Order,
                               - 9 -

the Court

          ORDERED that petitioners, on or before October 1,
     2007, shall show cause, if any, in writing why this
     case should not be dismissed and a decision entered
     against petitioners due to their failure to comply with
     the Court’s Order dated January 25, 2007.

     Petitioners filed a response to the Order to show cause.

That response contained statements, contentions, and/or arguments

that the Court found in an Order dated December 4, 2007 (December

4, 2007 Order) to be frivolous and groundless.   In the December

4, 2007 Order, the Court reminded petitioners about section

6673(a)(1) and informed them that

     In the event that petitioners continue to advance
     frivolous and/or groundless statements, contentions,
     and/or arguments, the Court will impose a penalty not
     in excess of $25,000 on petitioners under section
     6673(a)(1) * * *.

     On January 4, 2008, petitioners submitted to the Court

various documents that in an Order dated January 10, 2008 (Janu-

ary 10, 2008 Order) the Court had filed as petitioners’ supple-

ment to petitioners’ response to the Order to show cause.    That

supplement contained statements, contentions, and/or arguments

that the Court found in the January 10, 2008 Order to be frivo-

lous and groundless.   In that Order, the Court again reminded

petitioners about section 6673(a)(1) and the consequences de-

scribed in the Court’s December 4, 2007 Order in the event that

petitioners continued to advance frivolous and/or groundless

statements, contentions, and/or arguments in this case.
                              - 10 -

     On January 4, 2008, respondent filed a reply to petitioners’

response to the Order to show cause.

     On March 5, 2008, petitioners submitted to the Court various

documents that in an Order dated March 6, 2008 (March 6, 2008

Order) the Court had filed as petitioners’ reply to respondent’s

reply to petitioners’ response to the Order to show cause.    That

reply of petitioners contained statements, contentions, and/or

arguments that the Court found in the March 6, 2008 Order to be

frivolous and groundless.   In that Order, the Court again re-

minded petitioners about section 6673(a)(1) and the consequences

described in the Court’s December 4, 2007 Order and the Court’s

January 10, 2008 Order from their continuing to advance frivolous

and/or groundless statements, contentions, and/or arguments in

this case.

                            Discussion

     Where a party fails to obey an Order of the Court with

respect to, inter alia, Rule 71 relating to interrogatories and

Rule 72 relating to the production of documents and things, the

Court may make such Orders as to the failure that are just,

including

          (3) An order striking out pleadings or parts
     thereof, * * * or dismissing the case or any part
     thereof, or rendering a judgment by default against the
     disobedient party.

Rule 104(c)(3).
                              - 11 -

     In objecting to respondent’s motion for sanctions, petition-

ers advanced statements, contentions, and/or arguments that the

Court found to be frivolous and groundless.   In petitioners’

response to the Court’s Order to show cause, petitioners contin-

ued to advance frivolous and groundless statements, contentions,

and/or arguments.   In petitioners’ supplement to petitioners’

response to the Order to show cause, petitioners persisted in

advancing statements, contentions, and/or arguments that the

Court found to be frivolous and groundless.   In petitioners’

reply to respondent’s reply to petitioners’ response to the Order

to show cause, petitioners continued to advance statements,

contentions, and/or arguments that the Court found to be frivo-

lous and groundless.

     Petitioners have willfully disobeyed the Court’s January 25,

2007 Order.   They have persisted in advancing frivolous and

groundless statements, contentions, and/or arguments as their

response to whether the Court should impose sanctions on them

under Rule 104(c) for their failure to obey that Order.

     Petitioners’ failure to comply with the Court’s January 25,

2007 Order has operated to prejudice substantially respondent’s

ability to proceed to gather evidence in support of respondent’s

determinations in the 2000 notice, including respondent’s deter-

mination that petitioners are liable for an addition to tax under

section 6651(f) for fraudulent failure to file their tax return
                               - 12 -

for their taxable year 2000.

       The Court has the authority under Rule 104(c)(3) to order

dismissal of the petition and thereby to grant judgment for

respondent with respect to the deficiency determined for peti-

tioners’ taxable year 2000.    The Court also has the authority

under Rule 104(c)(3) to enter a judgment by default for respon-

dent with respect to the addition to tax under section 6651(a)(1)

determined for that year.    See Rechtzigel v. Commissioner, 79

T.C. 132 (1982), affd. per curiam on another ground 703 F.2d 1063

(8th Cir. 1983).    With respect to the addition to tax under

section 6651(f) on which respondent has the burden of proof by

clear and convincing evidence, see sec. 7454(a); Rule 142(b);

Clayton v. Commissioner, 102 T.C. 632, 652-653 (1994), the entry

of a default judgment as a sanction under Rule 104(c)(3) has the

effect of deeming admitted all of respondent’s factual and

conclusory allegations relating to section 6651(f) that are set

forth in the answer, see Rechtzigel v. Commissioner, supra at

142.    Facts alleged by respondent in the answer are deemed to be

true, and judgment for respondent is proper if the facts deemed

to be true are sufficient to show that petitioners fraudulently

failed to file their tax return for their taxable year 2000.       See

id.
                              - 13 -

     We have examined the affirmative allegations in paragraph 7

of respondent’s answer4 and find them to be sufficient to show

that petitioners fraudulently failed to file a tax return for

their taxable year 2000.5

     By refusing to comply with the Court’s January 25, 2007

Order requiring petitioners to comply with respondent’s discovery

requests, petitioners have prevented this case from proceeding to

the stage at which it is ready for trial.   The Court is

(1) dismissing the petition and thereby granting judgment for

respondent with respect to the deficiency determined for peti-

tioners’ taxable year 2000 and (2) granting a judgment by default

for respondent with respect to the addition to tax under section

6651(f) determined for that year as sanctions under Rule

104(c)(3) for petitioners’ willful flaunting of the Court’s

January 25, 2007 Order, which has hampered respondent’s ability

to develop this case.   See id. at 143.


     4
      We have also considered the matters set forth in respon-
dent’s requests for admission that are deemed admitted pursuant
to Rule 90(c).
     5
      Although we have the authority under Rule 104(c)(3) to
strike petitioners’ reply, that act would be meaningless. That
is because the absence of a reply has the effect under Rule 37(c)
of a denial of the affirmative allegations in the answer, which
is essentially what petitioners’ reply achieved. The necessary
effect of defaulting petitioners is to deem admitted the affirma-
tive allegations in paragraph 7 of the answer, regardless of
petitioners’ denial. The sanction under Rule 104(c)(3) in effect
converts the denial in petitioners’ reply into an admission. See
Rechtzigel v. Commissioner, 79 T.C. 132, 142 n.11 (1982), affd.
per curiam on another ground 703 F.2d 1063 (8th Cir. 1983).
                               - 14 -

     The Court turns now sua sponte to section 6673(a)(1), a

provision that the Court brought to petitioners’ attention on

several occasions.    Section 6673(a)(1) authorizes the Court to

impose a penalty in favor of the United States in an amount not

to exceed $25,000, inter alia, whenever it appears that a tax-

payer’s position in a proceeding is frivolous and/or groundless

or that the taxpayer institutes or maintains the proceeding in

the Court primarily for delay.

     Despite repeated admonitions to petitioners that the Court

would impose a penalty on them under section 6673(a)(1) if they

continued to advance frivolous and/or groundless statements,

contentions, and arguments, they persisted in doing so.

     On the record before us, we find that petitioners’ position

in this case is frivolous and groundless and that petitioners

instituted and maintained this case primarily for delay.     Accord-

ingly, we shall impose a $15,000 penalty on petitioners under

section 6673(a)(1).

     We have considered all of petitioners’ statements, conten-

tions, and/or arguments that are not discussed herein and we find

them to be without merit and/or irrelevant.

     To reflect the foregoing,


                                      An appropriate order and

                                 decision will be entered.
