                        T.C. Memo. 2005-101



                      UNITED STATES TAX COURT


                  DONALD G. FORD, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3436-97.            Filed May 9, 2005.


     Donald G. Ford, pro se.

     Aubrey C. Brown and Andrew M. Winkler, for respondent.


                        MEMORANDUM OPINION


     COLVIN, Judge:   This case is before the Court on

respondent’s motion for default and entry of decision.

Respondent requests that we find petitioner in default and enter

a decision against him for deficiencies including additions to

tax for fraud and the fraud penalty.   Petitioner was ordered to

file a response to respondent’s motion, but he failed to do so.

We will grant respondent’s motion for reasons described below.
                                  -2-

       Respondent determined deficiencies in petitioner’s income

tax and additions to tax and a penalty for taxable years 1986 to

1990 as follows:1

                                  Additions to tax          Penalty
Year       Deficiency   Sec. 6651(a)(1) Sec. 6653(b)(1)    Sec. 6663
1986        $152,373                         $114,280
1987          10,819                            8,115
1988          58,380           --              43,785          --
1989          55,509        $5,266               --          $41,632
1990          45,637                                          34,228

       Section references are to the Internal Revenue Code as in

effect during the years in issue.       Rule references are to the Tax

Court Rules of Practice and Procedure.

                               Background

A.     The Pleadings

       The petition in this case was filed on February 24, 1997.

Petitioner lived in Louisville, Kentucky, when the petition was

filed.

       In the answer, respondent alleged:

            (a) Throughout the years in issue, Petitioner and
       W. Paul Schultz (Schultz), Petitioner’s accountant and
       return preparer, willfully conspired to evade and
       defeat income tax due from Petitioner for those years.

            (b) Petitioner and Schultz willfully made and
       signed federal income tax returns for Petitioner’s 1986
       through 1990 tax years, which returns were made under
       the penalties of perjury and were filed with the
       Internal Revenue Service (the Service), which returns
       they did not believe to be true and correct as to every


       1
        Respondent concedes the deficiencies, additions to tax,
and fraud penalty for 1986, 1987, and 1990, if respondent’s
motion is granted.
                          -3-

material matter. In preparing, signing, and filing
those returns, Petitioner and Schultz knew that the
returns were false and fraudulent as to material
matters.

     (c) Throughout the years in issue, Petitioner was
a used car dealer in Louisville, Kentucky, and Schultz
was a Certified Public Accountant in that same city.

     (d) The manner and means by which Petitioner and
Schultz sought to carry out the conspiracy to evade
income tax for Petitioner’s tax years in issue included
the willful creation of a fraudulent assignment of a
note receivable. It was further a part of such effort
to evade and defeat Petitioner’s income tax liability
for Petitioner and Schultz to cause this fraudulent
transaction and loss to be reported and carried forward
on Petitioner’s returns. The fraudulent loss amount
was $300,000.00.

     (e) In furtherance of their conspiracy Petitioner
and Schultz committed a number of overt acts.

     (f) In about 1984, Petitioner sold real estate to
Huber’s, Inc., for a total of $1,500,000.00.

     (g) On his return for his 1984 tax year,
Petitioner reported that he had sold the land for
$400,000.00, that his basis in the land was
$440,000.00, and that his loss on the sale of the land
was $40,000.00. He further reported that he sold the
buildings on the land for $1,100,000.00 and was
electing the installment method of reporting that sale,
with the result that he paid no tax on the sale of the
buildings for his 1994 tax year. His election required
that he report as taxable income a portion of all
payments he received on the sale of the buildings.

     (h) On the above sale, Huber’s, Inc., paid
Petitioner a $400,000.00 down payment and gave him a
promissory note for $1,100,000.00. Huber’s Inc. made
interest payments on the note until in or about the
year 1986.

     (i) In July, 1986, Ken Huber (Huber), president
of Huber’s, Inc., notified Petitioner of its intent to
pay off the $1,100,000.00 note. Petitioner asked Huber
if Huber’s, Inc., would agree to pay off $800,000.00 of
                          -4-

the note and renegotiate a note for the remaining
$300,000 balance, which Huber’s, Inc., subsequently
agreed to do.

     (j) On December 10, 1986, Petitioner and his then
wife, Margaret Ford, executed an assignment conveying
all of Petitioner’s interest in the $1,100,000.00 note
to Schultz. The assignment recited that it was made in
consideration for Schultz’s payment of $800,000.00 to
Petitioner.

     (k) On that same date, Schultz applied for and
received a loan in the amount of $800,000.00 from the
Bank of Louisville. Schultz’s loan application showed
no information about his ability to repay the loan.

     (l) On that same date, Schultz used the proceeds
of the $800,000.00 loan to purchase a one year
certificate of deposit in the amount of $800,000.00
payable to Petitioner.

     (m) On that same date, Petitioner executed a
collateral assignment and hypothecation agreement to
the Bank of Louisville, pledging the certificate of
deposit as collateral for the Bank of Louisville’s
$800,000.00 loan to Schultz.

     (n) On that same date, Petitioner paid $2,000.00
to Schultz for accounting fees.

     (o) On December 23, 1986, Huber’s, Inc.,
transferred $800,000.00 from its account at Citizen’s
Fidelity Bank & Trust Company to the Bank of
Louisville, where the funds were applied to the payment
of Schultz’s $800,000.00 loan.

     (p) On that same date, Huber’s, Inc., executed a
promissory note to Schultz in the amount of
$300,000.00.

     (q) On that same date, Schultz executed an
assignment conveying all of his interest in the
$300,000.00 note to Petitioner and his wife.

     (r) On that same date, Schultz executed a limited
power of attorney to name Petitioner as his attorney in
fact on all matters pertaining to the $300,000.00 note.
                          -5-

     (s) On that same date, Petitioner paid $6,000.00
to Schultz for accounting fees.

     (t) On that same date, the Bank of Louisville
debited Petitioner’s personal checking account for
$2,036.67 and credited that amount to interest owed on
Schultz’s $800,000.00 note.

     (u) On March 20, 1988, Huber’s, Inc., paid in
full the balance on the $300,000.00 promissory note,
plus interest, by a check payable to Schultz in the
amount of $330,969.93.

     (v) On that same date Schultz endorsed the
$330,969.93 check for deposit in petitioner’s checking
account.

     (w) On October 19, 1987, Petitioner filed his
return for his 1986 tax year. The return included a
Schedule C for "Financing - Sales Notes." The Schedule
C shows gross receipts of $800,000.00, with a related
cost of goods sold of $1,100,000.00, and a loss in the
amount of the $300,000.00 difference. When the loss
was combined with interest income, the net result was a
negative gross income of $187,586.00. And the net
result on Petitioner’s return for his 1986 tax year is
a reported loss for taxable income of $234,345.00, and
a return that is false as to a material fact.

     (x) The negative taxable income of $234,586.00
produced carryforward amounts that were carried forward
to Petitioner’s returns for his 1987, 1988, 1989, and
1990 tax years, making each of those returns false as
to a material fact.

     (y) As part of his fraudulent actions, Petitioner
willfully failed to report on his return for his 1986
tax year the $800,000.00 in income that he received as
an installment payment on the 1984 sale of the
buildings. If that income had been properly reported
it would have resulted in $739,840.00 in additional
taxable income for Petitioner’s 1986 tax year.

     (z) As part of his fraudulent actions, Petitioner
willfully failed to report on his return for his 1988
tax year the $300,000.00 in income that he received as
an installment payment on the 1984 sale of the
buildings. If that income had been properly reported
                          -6-

it would have resulted in $277,440.00 in additional
taxable income for Petitioner’s 1988 tax year.

     (aa) Petitioner knowingly, willfully, and with
the intent to evade tax signed and caused to be filed
with the Service returns for his 1986 through 1990 tax
years that understated his tax liability for each year.

     (ab) Petitioner reported a negative taxable
income of $234,345.00 on his return for his 1986 tax
year when he then and there well knew and believed that
the sale reported thereon should have been reported as
an installment sale with a taxable gain of $739,840.00,
which when combined with the other items of income and
expense on his return would have resulted in taxable
income of $805,495.00 for his 1986 tax year.

     (ac) Petitioner reported a $234,775.00 net loss
carry forward on his return for his 1987 tax year and a
negative taxable income of $184,120.00 for that year
when he then and there well knew and believed that he
should not have reported any loss carry forward and
that he should have reported a positive taxable income
in the amount of $50,665.00.

     (ad) Petitioner reported a $180,320.00 loss carry
forward on his return for his 1988 tax year and a
negative taxable income of $140,347.00 for that year
when he then and there well knew and believed that he
should not have reported any loss carry forward, that
he should have reported taxable installment sale income
of $277,440.00, and a positive taxable income in the
amount of $317,413.00.

     (ae) Petitioner reported a $136,147.00 loss carry
forward on his return for his 1989 tax year and a
negative taxable income of $76,230.00 for that year
when he then and there well knew and believed that he
should not have reported any loss carry forward and
that he should have reported a positive taxable income
in the amount of $59,517.00.

     (af) Petitioner reported a $72,230.00 loss carry
forward on his return for his 1990 tax year and a
taxable income of $21,833.00 for that year when he then
and there well knew and believed that he should not
have reported any loss carry forward and that he should
                               -7-

     have reported a taxable income in the amount of
     $94,063.00.

          (ag) Petitioner omitted $31,500.00 in dividend
     income from Don Ford Cars, Inc., from his return for
     his 1989 tax year with the intent to understate, and
     defeat the federal income tax on that income item.

          (ah) Petitioner omitted $22,917.00 in interest
     income received from C. Ball from his return for his
     1990 tax year with the intent to understate, evade, and
     defeat the federal income tax on that income item.

          (ai) Petitioner omitted $39,874.00 and $22,233.00
     in interest income from Don Ford Cars, Inc. from his
     returns for his 1989 and 1990 tax years, respectively,
     with the intent to understate, evade, and defeat the
     federal income tax on those amounts.

          (aj) Petitioner omitted $55,955.00 and $33,664.00
     in interest income from Tri-City Credit from his
     returns for his 1989 and 1990 tax years, respectively,
     with the intent to understate, evade, and defeat the
     federal income tax on those amounts.

          (ak). Petitioner omitted $7,000.00 in rent income
     from Don Ford Cars, Inc. from his return for his 1989
     tax year with the intent to understate, evade, and
     defeat the federal income tax on that amount.

          (al) In addition to conspiring with Schultz to
     evade and defeat income tax for his 1986 through 1990
     tax years, Petitioner also gave Schultz information
     from which to prepare his returns. Petitioner with the
     intent to evade and defeat federal income tax sometimes
     did not give complete and correct information to
     Schultz in order to maximize his fraudulent tax
     benefits.

          (am) A part of each deficiency in income tax for
     Petitioner’s taxable years 1986 through 1990 is due to
     fraud with intent to evade taxes.

     Petitioner filed a reply in which he denied all allegations

relating to fraud and alleged that he undertook the transactions

described in respondent’s reply in good faith and relied on
                                -8-

Schulz and other tax professionals after disclosing all of the

relevant facts to them.2

     B.   Procedural History

     This case was set for trial in Louisville, Kentucky, several

times, but was continued on November 7, 1997, September 30, 1998,

December 22, 1999, and February 6, 2001.   This case was called

for report at the February 5, 2001, Louisville, Kentucky, trial

session and set for trial at a special session of the Court to

begin on April 23, 2001.   A stipulation of facts was filed on

April 3, 2001.   However, the case was continued on April 17,

2001, and the special session was canceled.

     Motions to withdraw filed by petitioner’s counsel Robert C.

Webb and Scott William Dolson were granted on January 9, 2002,

and September 5, 2002.

     Petitioner, his adult son, and respondent had several

discussions in an effort to narrow the issues or resolve this

case, as ordered by the Court on October 1, 2003.   The

discussions did not result in a narrowing of the issues.   Around

February 9, 2004, petitioner’s son told respondent’s counsel that




     2
        On Mar. 22, 2001, an amendment to petition was filed in
which petitioner alleged that respondent was barred by the
doctrines of collateral estoppel, res judicata, and waiver, and
by sec. 6212 from proceeding with this case. On May 1, 2001, an
answer to amended petition was filed in which respondent denied
the allegations in the amendment to petition.
                                 -9-

petitioner did not have a guardian or anyone with power of

attorney or any authority to represent his interests.

     Respondent requested a letter verifying the above, but no

letter was provided to respondent.     Rule 60(d) provides that,

absent a duly appointed representative to represent an

incompetent taxpayer’s interest in the Tax Court, the incompetent

person may act by a next friend or by a guardian ad litem.     See

Campos v. Commissioner, T.C. Memo. 2003-193.     There is no

indication in the record that petitioner or his son has tried to

appoint a guardian or to have anyone act as next friend.

     Petitioner failed to file status reports in response to

Court orders dated October 1, 2003, and July 14, 2004.     The July

14, 2004, Order warned petitioner that failure to “respond to

this order without good cause shown may result in dismissal of

this case.”    Petitioner did not file a response to respondent’s

Motion For Default And Entry Of Decision, as ordered by the Court

on September 15, 2004.   The Court’s September 15, 2004, order

warned petitioner that “failure to file a response could result

in respondent’s motion being granted and decision entered against

petitioner.”

                             Discussion

     If a party fails to plead or otherwise proceed as provided

by the Rules or as required by the Court, that party may be held

in default on the motion of the other party or on the initiative
                                 -10-

of the Court.   Thereafter, the Court may enter a decision against

the defaulting party.   Rule 123.

     Petitioner’s son alleges that petitioner cannot proceed due

to petitioner’s mental health.    We have given petitioner and his

son an extended amount of time to make arrangements to proceed.

However, neither petitioner nor anyone else has provided the

Court with a response that adequately recognizes petitioner’s

obligations in this matter or respondent’s legitimate interest in

pursuing this case.   There must be a procedural means to bring

the case to a close regardless of petitioner’s mental health.

Petitioner has failed to proceed as ordered by the Court and has

abandoned his case.   Petitioner defaulted by not complying with

orders of this Court beginning more than a year and a half ago.

Respondent’s motion for default as to deficiencies for 1988 and

1989 and addition to tax under section 6651(a)(1) for 1989 will

be granted.

     A taxpayer may be liable for fraud based on default if the

Commissioner alleges sufficient facts in the answer to support a

finding of fraud even if the taxpayer denies the facts the

Commissioner alleged in the answer.     Smith v. Commissioner, 926

F.2d 1470, 1478 (6th Cir. 1991), affg. 91 T.C. 1049 (1988);

Rechtzigel v. Commissioner, 79 T.C. 132, 142 n.11 (1982), affd.

703 F.2d 1063 (8th Cir. 1983); see Gordon v. Commissioner, 73

T.C. 736 (1980).
                               -11-

     The facts alleged in respondent’s affirmative pleadings are

sufficient to establish fraud by clear and convincing evidence.

Petitioner received substantial amounts of unreported income.

Bradford v. Commissioner, 796 F.2d 303, 308 (9th Cir. 1986),

affg. T.C. Memo. 1984-601.   Petitioner’s pattern of substantially

underreporting income for several years is strong evidence of

fraud, Holland v. United States, 348 U.S. 121, 137-139 (1954), as

is the fact that he deliberately overstated his deductions,

Drobny v. Commissioner, 86 T.C. 1326, 1349-1351 (1986).

     The facts pleaded in respondent's answer clearly establish

that petitioner fraudulently underpaid his income taxes for 1988

and 1989.   Thus, we will grant respondent's motion for default

pursuant to Rule 123(a).



                                           An appropriate order and

                                      decision will be entered.
