                         T.C. Memo. 2002-147



                       UNITED STATES TAX COURT



         WALTER J. & VIRGINIA L. WARD ET AL.,1 Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 10598-00, 10599-00,     Filed June 11, 2002.
                 10600-00, 10601-00,
                 10602-00.


     Walter J. and Virginia L. Ward, pro sese.

     Kay Hill, for respondent.




     1
        Cases of the following petitioners are consolidated
herewith: Alaska Statewide Investors Co. Trust, Daniel A.
Carvalho, Trustee, docket No. 10599-00; Great Northern
Development Co. Trust, Daniel A. Carvalho, Trustee, docket No.
10600-00; Worldwide Travelers Trust, Daniel A. Carvalho, Trustee,
docket No. 10601-00; Golden Nugget Investments Co. Trust, Daniel
A. Carvalho, Trustee, docket No. 10602-00.

     We use the words “trust” and “trustee” in our opinion for
convenience only.
                                - 2 -

                         MEMORANDUM OPINION


     VASQUEZ, Judge:    These consolidated cases are before the

Court on respondent’s motions to dismiss for lack of prosecution

pursuant to Rule 123(b),2 motion for partial summary judgment,

and motion for damages under section 6673(a)(1).    By separate

notices of deficiency, respondent determined the following

deficiencies in and penalties on petitioners’ Federal income

taxes:3

     Walter J. Ward (Mr. Ward) and Virginia L. Ward (together,

the Wards):

                                             Penalty
            Year         Deficiency        Sec. 6662(a)

            1996          $197,521            $39,504
            1997           209,127             41,825

     Alaska Statewide Investors Co. Trust (ASI), Daniel A.

Carvalho, Trustee:

                                             Penalty
            Year         Deficiency        Sec. 6662(a)

            1996          $110,561            $22,112
            1997           125,944             25,189




     2
        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.
     3
          For convenience, figures are rounded to the nearest
dollar.
                              - 3 -


     Great Northern Development Co. Trust (GND), Daniel A.

Carvalho, Trustee:

                                           Penalty
          Year         Deficiency        Sec. 6662(a)

          1996          $110,123           $20,025
          1997           138,529            27,706

     Worldwide Travelers Trust (WT), Daniel A. Carvalho, Trustee:

                                           Penalty
          Year         Deficiency        Sec. 6662(a)

          1996          $102,685           $20,537
          1997           138,394            27,679

     Golden Nugget Investments Co. Trust (GNI), Daniel A.

Carvalho, Trustee:

                                           Penalty
          Year         Deficiency        Sec. 6662(a)

          1996           $78,013          $82,873
          1997            15,603           16,575


Background

     In the Wards’ notice of deficiency, respondent determined:

(1) The amount the Wards could claim for their exemptions in 1996

and 1997 was reduced to zero because of the amount of their

income; (2) the Wards’ itemized deductions for 1996 and 1997 were

decreased by $38,043 and $25,096, respectively, because they

failed to establish that $24,783 for 1996 and $12,285 for 1997

were losses sustained by them and because their itemized

deductions were limited because of the amount of their adjusted

gross income; (3) the Wards’ Schedule C, Profit or Loss From
                              - 4 -

Business, realty advertising and auto expenses for 1996 and 1997

were reduced to zero because they did not establish the expenses

were paid during the taxable years and that they were ordinary

and necessary to their business; (4) the Wards’ Schedule C video

cost of goods sold and supplies expenses for 1996 and 1997 were

reduced to zero because they did not establish they were paid

during the taxable years and that they were ordinary and

necessary to their business; (5) the Wards’ Schedule C video

depreciation expenses for 1996 and 1997 were reduced to zero

because they did not establish the basis of the assets, that the

assets were depreciable, and that they were ordinary and

necessary to their business; (6) the Wards’ Schedule E,

Supplemental Income or Loss, income was increased by $407,362 for

1996 and $448,253 for 1997 because (a) the Wards’ trust

arrangements were shams or grantor trusts, or alternatively due

to assignment of income, (b) of income from a partnership, and

(c) of failure to establish that $1,487 for 1996 from Video City

Shepard and $4,576 for 1997 from Arctic Video City were losses

the Wards sustained; (7) self-employment tax adjustments for 1996

and 1997; and (8) accuracy-related penalties for 1996 and 1997

due to negligence or substantial understatement of tax.

     In the notices of deficiency issued to ASI, GND, WT, and GNI

(collectively, the trusts) respondent took protective,
                               - 5 -

inconsistent positions and asserted tax on the corrected income

of the trusts.

      On October 12, 2000, petitioners invoked the jurisdiction of

this Court by timely filing petitions.    At the time they filed

the petitions, the Wards resided in Anchorage, Alaska, and the

trusts’ mailing addresses were in Anchorage, Alaska.    In the

answers, respondent denied petitioners’ assignments of error.

      By notice dated January 18, 2001, the Court set these cases

for trial at the Court’s Anchorage, Alaska, session beginning

June 18, 2001.   This notice specifically stated:   “YOUR FAILURE

TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE AND ENTRY OF

DECISION AGAINST YOU.”   Although our standing pretrial order

required petitioners to submit trial memoranda, they never did

so.

      On April 2, 2001, respondent filed a motion to consolidate

for trial, briefing, and opinion the Wards’ case with the cases

of the trusts.   On April 12, 2001, the Court granted this motion.

      On April 9, 2001, respondent filed respondent’s first

request for admissions in each of the cases.     Petitioners did not

respond to the requests for admissions.    Therefore, each matter

of which respondent requested admission is deemed admitted.      Rule

90(c).   Some of these deemed admissions were:

      (1) The returns attached to the requests for admissions are
                                 - 6 -

true and correct copies of petitioners’ 1996 and 1997 Federal

income tax returns;

     (2) Before 1995, Mr. Ward was a partner with Jack Ward in

various partnerships that engaged in video and real property

rentals;

     (3) Before 1995, the Wards owned their residence at Reef

Place, the Parkview Rentals, an interest in Parkview Partnership,

an interest in the Video City Partnership, an interest in the

Arctic Building Commercial Partnership, an interest in the Arctic

Video City Partnership, and an interest in an office building;

     (4) Beginning in 1995, the Wards formed various trusts and

transferred their partnership and real property interests to the

trusts;

     (5) Around 1995, the Wards transferred their residence at

Reef Place to GNI;

     (6) Around 1995, the Wards transferred their interest in

Parkview Rentals and the Parkview Partnership to GNI;

     (7) GNI paid nothing to acquire the Wards’ residence, their

interest in Parkview Rentals, and their interest in the Parkview

Partnership;

     (8) Around 1995, the Wards transferred their interest in the

Video City Partnership to ASI;

     (9) ASI paid nothing to acquire the Wards’ interest in the

Video City Partnership;
                                - 7 -

       (10) Around 1995, the Wards transferred their interest in

the Arctic Building Commercial Partnership to GND;

       (11) Around 1995, the Wards transferred their interest in

the Arctic Video City Partnership to GND;

       (12) GND paid nothing to acquire the Wards’ interest in the

Arctic Building Commercial Partnership and the Arctic Video City

Partnership;

       (13) Around 1995, the Wards transferred their interest in

the office building to WT;

       (14) WT paid nothing to acquire the office building;

       (15) After the aforementioned transfers, the Wards’

relationship to the transferred partnership interests and

properties did not change;

       (16) The Wards, and not the trusts, are the correct

taxpayers to report the income and expenses of the transferred

partnership interests and properties;

       (17) Petitioners did not produce documents summonsed by the

revenue agent auditing their 1996 and 1997 returns; and

       (18) Although offered an opportunity to do so, petitioners

did not meet with respondent’s counsel for the purpose of

preparing this matter for trial.

       Attached to the requests for admissions, among other things,

are:    (1) The Wards’ 1995, 1996, and 1997 tax returns; (2) the

notices of deficiency; (3) several letters from the Wards to the
                               - 8 -

Internal Revenue Service (IRS); and (4) amended returns from the

Wards for 1996 and 1997.   In the letters to the IRS, the Wards

claimed that they did not have any remuneration paid to them that

was includable in gross income for 1996 and 1997--thus they did

not have any gross income for 1996 and 1997--and they made

various tax protester type arguments to support their claim.    In

the amended returns, the Wards listed the “correct amount” of

their adjusted gross income, taxable income, and tax as zero.

     On May 1, 2001, the Court received a motion to dismiss for

mootness from the Wards.   The Wards claimed that “due to a

misunderstanding and misapplication of the law, the 1040 returns

that were filed were inaccurate and in error,” “the source of

[the Wards’] income is exempted, excluded, or eliminated from

gross income by law,” and that they had filed amended returns

correcting the error.   On May 2, 2001, the Court denied this

motion.

     On May 7, 2001, the Court received a motion to dismiss for

mootness from each of the trusts.   The trusts made similar claims

as the Wards; i.e., that the Forms 1041, U.S. Income Tax Return

for Estates and Trusts, were filed in error and the trusts’

income was exempted, excluded, or eliminated from gross income.

On May 9, 2001, the Court denied these motions.

     On June 4, 2001, petitioners filed a motion for continuance
                               - 9 -

and a motion for a protective order.     On June 8, 2001, the Court

denied these motions.

     By notice dated June 7, 2001, the Court notified the parties

of a change of courtroom and address for trial at the Court’s

Anchorage, Alaska, session beginning June 18, 2001.

     On June 12, 2001, the Wards filed a motion to dismiss,

claiming that the Wards were settling out of Court with the IRS

and that they were planning to pay all of the taxes they lawfully

owed.   On June 13, 2001, the Court denied this motion.

     On that same date, respondent sent the Wards a letter

regarding settlement of the cases.     Respondent attached a

decision document and a closing agreement to the letter.

Respondent’s counsel provided the Wards a telephone number to

call regarding their decision to settle.     There is no evidence

that the Wards actually pursued settlement of their case even

after respondent gave them an opportunity to do so.

     On June 18, 2001, these cases were called from the calendar

for the trial session of the Court at Anchorage, Alaska.

Petitioners failed to appear at the calendar call.

     On June 25, 2001, these cases were recalled from the

calendar for the trial session of the Court at Anchorage, Alaska.

Petitioners again failed to appear.     At this time, respondent

filed motions to dismiss for lack of prosecution in each case, a
                                  - 10 -

motion for partial summary judgment in the Wards’ case, and a

motion for damages under section 6673(a)(1) in the Wards’ case.

Discussion

I.   Rule 123(b).   Dismissal

     The Court may dismiss a case and enter a decision against a

taxpayer for his failure properly to prosecute or to comply with

the Rules of this Court.4    Rule 123(b).   The Court may, for

similar reasons, decide against any party any issue as to which

the party has the burden of proof, and the decision shall be

treated as a dismissal.     Id.

     When these cases were called for trial, and in respondent’s

motions, respondent represented that he has the burden of

production regarding the penalty because the examination in these

cases began after July 22, 1998, but claimed that he does not

bear the burden of proof on any issue in these cases.     Sec.

7491(a), (c); Higbee v. Commissioner, 116 T.C. 438, 440 (2001).

     As a general rule, the taxpayer bears the burden of proving

the Commissioner's deficiency determinations incorrect.     Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Section

7491(a), however, provides that if a taxpayer introduces credible

evidence and meets certain other prerequisites, the Commissioner

shall bear the burden of proof with respect to factual issues


     4
        Rule 123(b) generally applies in situations where the
taxpayer bears the burden of proof.
                               - 11 -

relating to the liability of the taxpayer for a tax imposed under

subtitle A or B of the Code.

      Petitioners failed to appear and did not introduce any

evidence.   Therefore, we conclude that the burden of proof is not

placed on respondent pursuant to section 7491(a).   Accordingly,

we sustain respondent’s deficiency determination regarding the

Wards, and we shall dismiss the case with regard to the

deficiencies in docket No. 10598-00 and enter a decision against

the Wards for those amounts.   Rules 123(b), 142(a); Welch v.

Helvering, supra at 115.

      In the motions to dismiss in the trust cases, respondent

stated that he took protective, inconsistent positions against

the trusts and the Wards.   Respondent concedes that if we find

the Wards liable for the deficiencies in their case, then there

are no deficiencies in the trust cases.   Accordingly, we shall

enter appropriate orders and decisions based on respondent’s

concession.

II.   Summary Judgment

      Respondent moved for partial summary judgment in the Wards’

case on the issue of whether he met his burden of production with

respect to the imposition of the accuracy-related penalty.

      Rule 121(a) provides that either party may move for summary

judgment upon all or any part of the legal issues in controversy.

Full or partial summary judgment may be granted only if it is
                               - 12 -

demonstrated that no genuine issue exists as to any material fact

and a decision may be rendered as a matter of law.      Rule 121(b);

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.

17 F.3d 965 (7th Cir. 1994).

       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.

       Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

due to negligence or disregard of rules or regulations or a

substantial understatement of income tax.      Sec. 6662(b).     An

“understatement” is the difference between the amount of tax

required to be shown on the return and the amount of tax actually

shown on the return.    Sec. 6662(d)(2)(A).    A “substantial

understatement” exists if the understatement exceeds the greater

of (1) 10 percent of the tax required to be shown on the return

for a taxable year, or (2) $5,000.      Sec. 6662(d)(1).   The

understatement is reduced to the extent that the taxpayer (1) has

adequately disclosed facts affecting the tax treatment of an item

and there is a reasonable basis for such treatment, or (2) has

substantial authority for the tax treatment of an item.        Sec.

6662(d)(2)(B).

       Section 6664(c)(1) provides that no accuracy-related penalty

shall be imposed with respect to any portion of an underpayment
                               - 13 -

if it is shown that there was reasonable cause for such portion

and that the taxpayer acted in good faith with respect to such

portion.   The decision as to whether the taxpayer acted with

reasonable cause and in good faith depends upon all the pertinent

facts and circumstances.    Sec. 1.6664-4(b)(1), Income Tax Regs.

     Section 7491(c) provides that the Commissioner shall bear

the burden of production with respect to the liability of any

individual for penalties.   “The Commissioner’s burden of

production under section 7491(c) is to produce evidence that it

is appropriate to impose the relevant penalty”.5   Swain v.

Commissioner, 118 T.C. ___, ___ (2002) (slip op. at 9); see also

Higbee v. Commissioner, supra at 446.    If a taxpayer files a

petition alleging some error in the determination of the penalty,

the taxpayer’s challenge generally will succeed unless the

Commissioner produces evidence that the penalty is appropriate.

Swain v. Commissioner, supra at ___ (slip op. at 12).    The

Commissioner, however, does not have the obligation to introduce

evidence regarding reasonable cause or substantial authority.

Higbee v. Commissioner, supra at 446-447.

     The Wards are deemed to have admitted certain facts--

including the fact that the Wards, and not the trusts, are the

correct taxpayers to report the income and expenses of the

     5
        We do not decide herein whether respondent would have met
his burden of production if he had not produced any evidence when
the taxpayer failed to appear for trial.
                                 - 14 -

transferred partnership interests and properties.     The Wards were

required to show $204,543 and $209,127 of tax on their 1996 and

1997 returns, respectively; however, they reported $7,022 and $0

of tax for 1996 and 1997, respectively.     Thus, the Wards’

understatements of $197,521 and $209,127 for 1996 and 1997,

respectively, exceed both 10 percent of the tax required to be

shown on their return--$20,454 for 1996 and $20,913 for 1997--and

$5,000.   Therefore, on the basis of the evidence, we conclude

that the Wards had a substantial understatement of income tax.

They did not present any evidence indicating reasonable cause or

substantial authority.     Id.   Accordingly, on this issue, we

sustain respondent’s determination and shall grant respondent’s

motion for partial summary judgment.

III. Section 6673(a)(1)

     Section 6673(a) authorizes this Court to penalize up to

$25,000 a taxpayer who institutes or maintains a proceeding

primarily for delay or pursues a position in this Court which is

frivolous or groundless.    The Wards’ conduct in these cases has

convinced us that they maintained these proceedings primarily for

delay.    Their actions have resulted in a waste of limited

judicial and administrative resources that could have been

devoted to resolving bona fide claims of other taxpayers.         Cook

v. Spillman, 806 F.2d 948 (9th Cir. 1986).     Their insistence on

making frivolous protester type arguments indicates an
                             - 15 -

unwillingness to respect the tax laws of the United States.

Accordingly, we shall grant respondent’s motion for sanctions and

require the Wards to pay a penalty to the United States pursuant

to section 6673 in the amount of $25,000.

     To reflect the foregoing,

                                        Appropriate orders and

                                   decisions will be entered.
