                        T.C. Memo. 1996-493



                      UNITED STATES TAX COURT



                 PAGE G. STUART, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6664-95.                 Filed November 4, 1996.



     Page G. Stuart, pro se.

     Jillena A. Warner and Lynne A. Camillo, for respondent.



                        MEMORANDUM OPINION

     DAWSON, Judge:   This case was assigned to Chief Special

Trial Judge Peter J. Panuthos pursuant to the provisions of

section 7443A(b)(4) and Rules 180, 181, and 183.1   The Court



     1
        All section references are to the Internal Revenue Code
in effect for the years in issue, unless otherwise indicated.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

agrees with and adopts the opinion of the Special Trial Judge,

which is set forth below.

                 OPINION OF THE SPECIAL TRIAL JUDGE

     PANUTHOS, Chief Special Trial Judge:      This matter is

presently before the Court on respondent's Motion for Summary

Judgment.    As explained in greater detail below, we will grant

respondent's motion.

Background

     On March 22, 1995, respondent mailed a notice of deficiency

to petitioner determining deficiencies in the amounts of $236,973

and $146,140 in petitioner's Federal income taxes for the taxable

years 1992 and 1993, respectively.      In addition, respondent

determined that petitioner is liable for the penalty for fraud

under section 6663(a) in the amounts of $177,730 and $109,605 for

the taxable years 1992 and 1993, respectively.

     Petitioner filed a timely petition for redetermination with

the Court on May 1, 1995.2

     Respondent filed a timely answer to the petition which

includes affirmative allegations in support of respondent's

determination that petitioner is liable for the penalty for fraud

for the taxable years in issue.    Petitioner failed to file a

reply to respondent's answer within the 45-day period prescribed

in Rule 37(a).    As a consequence, respondent filed a motion

     2
        At the time that the petition was filed, petitioner was
incarcerated in a Federal prison in Lexington, Kentucky.
                                - 3 -

pursuant to Rule 37(c) requesting that the Court issue an order

that undenied allegations in the answer be deemed admitted.      By

order dated August 31, 1995, petitioner was notified of the

filing of respondent's Rule 37(c) motion and was ordered to file

a reply to respondent's answer.3   Petitioner failed to file a

reply to respondent's answer, or otherwise respond to the Court's

order.    Consequently, we granted respondent's Rule 37(c) motion,

and the undenied allegations set forth in respondent's answer

were deemed to be admitted.   See Doncaster v. Commissioner, 77

T.C. 334, 336 (1981); Gilday v. Commissioner, 62 T.C. 260, 261

(1974).

     As indicated, respondent now moves for summary judgment with

respect to petitioner's liability for the deficiencies and

penalties set forth in the notice of deficiency.     Petitioner was

notified that respondent's motion was calendared for hearing at

the motions session of the Court in Washington, D.C.     In

addition, the Court issued an order directing petitioner to file

a written response to respondent's motion.     Petitioner did not

respond to the Court's order.

     Counsel for respondent appeared at the hearing and presented

argument in support of the motion.      No appearance was made by or




     3
        The Court's order dated Aug. 31, 1995, expressly advised
petitioner of the potential consequences that would attend a
failure to file a reply.
                               - 4 -

on behalf of petitioner at the hearing, nor did petitioner file a

statement with the Court pursuant to Rule 50(c).4

Facts Deemed Admitted

     During 1992 and 1993, petitioner earned wage income as a

commercial truck driver and realized substantial income from the

sale of illegal drugs.

     On August 11, 1992, a Texas Highway Patrol officer stopped

petitioner in his vehicle and, after obtaining petitioner's

consent, searched petitioner's vehicle and found currency in the

amount of $316,111.   Petitioner's vehicle and the $316,111 in

currency were seized by, and forfeited to, the State of Texas.

     During 1992 and 1993, the Organized Crime Drug Enforcement

Task Force secured and executed warrants to search petitioner's

residence in Nashville and other properties.   As a result of the

execution of these search warrants, currency was discovered and

seized on the dates and in the amounts as follows:

                 Date             Amount

                9/8/92           $120,396
                9/9/92            159,227
                9/10/92           130,100
                2/6/93             50,000
                5/21/93            35,260
                6/3/93            315,000




     4
        Petitioner was reminded of Rule 50(c) in the Court's
order. Petitioner was advised that he could submit a written
statement in lieu of (or in addition to) attendance at the
hearing.
                               - 5 -

All of the currency seized in this manner was in petitioner's

possession and/or subject to petitioner's dominion and control at

the time that it was seized.

     During 1992, petitioner paid $26,000 in cash to a general

contractor for work done on a residence located in Nashville,

Tennessee.

     During 1994, petitioner was convicted of Federal money

laundering charges and was sentenced to 5 years in prison.    At

the same time, petitioner was convicted of conspiracy to

distribute marijuana by the State of Tennessee.

     Petitioner failed to maintain, or submit to respondent for

examination, adequate books or records regarding the income that

he derived from sales of illegal drugs during the years in issue.

At the start of the 1992 taxable year and at all times during the

1992 and 1993 taxable years, petitioner neither had nor received

any nontaxable or excludable income, receipts, cash, or other

assets.

     Petitioner realized income from sales of illegal drugs in

the amounts of $751,823 and $400,260 during the taxable years

1992 and 1993, respectively.

     Petitioner filed individual Federal income tax returns for

1992 and 1993 reporting adjusted gross income (comprised of wage

and interest income from a checking account) of $10,933 and

$6,169, respectively.   Petitioner failed to report any income

and/or expenses from illegal drug sales on his 1992 and 1993 tax
                                - 6 -

returns.   Petitioner attempted to conceal the source and amount

of the income that he realized from sales of illegal drugs by

engaging in large cash purchases, acquiring assets through the

use of nominees, and burying $315,000 in a cemetery.   During

1993, in an effort to avoid prosecution for his illegal

activities, petitioner acquired a false driver's license from the

State of California.

     Petitioner fraudulently and with the intent to evade taxes

filed income tax returns for 1992 and 1993 in which he omitted

$751,823 and $400,260 in income from sales of illegal drugs,

respectively.   The underpayments of tax required to be shown on

petitioner's 1992 and 1993 income tax returns are due to fraud

with intent to evade income tax.

Discussion

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment may be

granted with respect to all or any part of the legal issues in

controversy "if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law."   Rule 121(b); see Sundstrand Corp.

v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);
                                - 7 -

Naftel v. Commissioner, 85 T.C. 527, 529 (1985).     The moving

party bears the burden of proving that there is no genuine issue

of material fact, and factual inferences will be read in a manner

most favorable to the party opposing summary judgment.     Dahlstrom

v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.

Commissioner, 79 T.C. 340, 344 (1982).

     The factual allegations deemed admitted under Rule 37(c)

establish that petitioner failed to report income in the amounts

of $751,823 and $400,260 from sales of illegal drugs on his 1992

and 1993 Federal income tax returns, respectively.    Petitioner's

forfeiture of seized currency does not prevent it from being

included in his gross income.   See, e.g., Gambina v.

Commissioner, 91 T.C. 826 (1988).   In addition, petitioner failed

to maintain, or submit to respondent for examination, adequate

books or records regarding the income and expenses relating to

his illegal activities during the years in issue.    At the start

of the 1992 taxable year and at all times during the 1992 and

1993 taxable years, petitioner neither had, nor received, any

nontaxable or excludable income, receipts, cash, or other assets.

Consistent with these deemed admissions, it follows that

respondent is entitled to summary judgment that petitioner is

liable for the deficiencies in tax for 1992 and 1993 as set forth

in the notice of deficiency.

     Respondent also determined that petitioner is liable for the

penalty for fraud under section 6663(a) for 1992 and 1993.
                                - 8 -

Section 6663(a) provides that, if any part of the underpayment of

tax required to be shown on the return is due to fraud, there

shall be added to the tax an amount equal to 75 percent of the

portion of the underpayment that is attributable to fraud.

     Fraud is defined as an intentional wrongdoing designed to

evade tax believed to be owing.     Zell v. Commissioner, 763 F.2d

1139, 1142-1143 (10th Cir. 1985), affg. T.C. Memo. 1984-152; Webb

v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. T.C.

Memo. 1966-81, and cases cited therein.    Respondent has the

burden to prove fraud for each taxable year by clear and

convincing evidence.   Sec. 7454(a); Rule 142(b).   Fraud is a

question of fact to be resolved upon consideration of the entire

record and is never presumed.     Estate of Pittard v. Commissioner,

69 T.C. 391, 400 (1977).   Respondent's burden of proving fraud

can be met by facts deemed admitted pursuant to Rule 37(c).

Doncaster v. Commissioner, 77 T.C. at 337; see Marshall v.

Commissioner, 85 T.C. 267, 272-273 (1985).

     In the instant case petitioner is deemed to have admitted,

pursuant to Rule 37(c), that he attempted to conceal the source

and amount of the income that he realized from sales of illegal

drugs in 1992 and 1993 by engaging in large cash purchases,

acquiring assets through the use of nominees, and burying

$315,000 in a cemetery.    In addition, petitioner is deemed to

have admitted that, in an effort to avoid prosecution for his

illegal activities, he acquired a false driver's license from the
                                - 9 -

State of California.   Most importantly, petitioner is deemed to

have admitted that he fraudulently and with the intent to evade

taxes filed income tax returns for 1992 and 1993 in which he

omitted $751,823 and $400,260 in income from sales of illegal

drugs, respectively, and that the underpayments of tax required

to be shown on his income tax returns for 1992 and 1993 are due

to fraud with intent to evade income tax.

     We hold that the facts deemed admitted pursuant to Rule

37(c) satisfy respondent's burden of proving fraud.       Doncaster v.

Commissioner, 77 T.C. at 337.   Those facts constitute clear and

convincing evidence that petitioner, fraudulently and with the

intent to evade taxes known to be owing, failed to report the

income that he derived from sales of illegal drugs during 1992

and 1993 and that the underpayment of taxes required to be shown

on each of petitioner's 1992 and 1993 income tax returns is due

to fraud.   Consequently, respondent is entitled to summary

judgment that petitioner is liable for the penalty for fraud

under section 6663(a) for the taxable years 1992 and 1993.

     In order to reflect our conclusions herein,



                                        An order and decision granting

                          respondent's motion for summary judgment

                          will be entered.
