                              T.C. Memo. 2016-205



                         UNITED STATES TAX COURT



                 BRADLEY A. BALLARD, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13293-14.                          Filed November 9, 2016.



      Bradley A. Ballard, pro se.

      Blaine Charles Holiday, for respondent.



                           MEMORANDUM OPINION


      PUGH, Judge: In a notice of deficiency dated March 6, 2014, respondent

determined the following deficiencies, additions to tax, and penalties:
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[*2]                                      Addition to tax         Penalty
        Year           Deficiency         sec. 6651(a)(1)         sec. 6663

        2005            $314,134             $78,534               $235,601
        2006             185,349              46,217                138,652
        2007             227,785              56,461                169,384

       Unless otherwise indicated, all section references are to the Internal

Revenue Code of 1986, as amended and in effect for the years in issue. Rule

references are to the Tax Court Rules of Practice and Procedure. Amounts are

rounded to the nearest dollar.

       When this case was called from the trial calendar in St. Paul, Minnesota,

petitioner failed to appear. Counsel for respondent appeared and described his

conversation with petitioner earlier that morning as follows: “[Petitioner]

indicated he had no intention of coming this morning * * *. And he indicated that

it was his intention to try to resolve this or work with this on the collection side

through either an installment agreement or an offer-in-compromise.” Counsel for

respondent further stated that he had advised petitioner of his intention to file a

motion for default and entry of decision pursuant to Rule 123(a). Respondent

filed the motion for default and entry of decision on February 24, 2016. This case

now is before the Court on respondent’s motion.
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[*3]                                Background

       Petitioner failed to appear when the case was called for trial, as noted above.

Petitioner also failed to respond to our order to show cause why facts set forth in a

proposed stipulation by respondent should not be deemed admitted under Rule

91(f). We therefore made our order to show cause absolute, and those facts are

deemed admitted for purposes of our decision on respondent’s motion. We

incorporate those facts by this reference.

       Petitioner was a resident of Minnesota at the time his petition was filed.

Petitioner filed his 2005, 2006, and 2007 Forms 1040, U.S. Individual Income Tax

Return, on September 8, 2009, claiming a filing status of single and no

dependents. Attached to his 2005, 2006, and 2007 Forms 1040 were Schedules C,

Profit or Loss From Business, reflecting the business name “Quik Copy” and

reporting gross receipts of $101,400, $128,600, and $134,600 for 2005, 2006, and

2007, respectively. Petitioner reported no taxable income for all three years. The

address reported for Quik Copy was on University Avenue in Saint Paul.

       On October 14, 2011, after petitioner was sent a letter informing him that

his 2007 Form 1040 was being examined, petitioner submitted Forms 1040X,

Amended U.S. Individual Income Tax Return, for tax years 2005, 2006, and 2007,

as joint returns. Attached to petitioner’s 2005, 2006, and 2007 Forms 1040X were
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[*4] Schedules C reflecting gross receipts from “Quik Copy” of $1,165,809,

$955,133, and $1,091,379 for 2005, 2006, and 2007, respectively, and claiming

substantial deductions for each year. Respondent did not file the Forms 1040X as

they were submitted, but the gross receipts that petitioner reported on his amended

Schedules C for tax years 2005 and 2007 match the gross receipts that respondent

used in determining petitioner’s taxable income. On petitioner’s amended returns

the street address reported for Quik Copy was on Rainier Alcove in Woodbury,

Minnesota.

      Petitioner’s Quik Copy business was engaged in counterfeiting intellectual

property through the illegal duplication and sale of DVDs and CDs. Petitioner’s

Quik Copy business deals only in cash and maintains no business records.

       Respondent determined petitioner’s income for 2006 under the bank

deposits method. In 2006 petitioner had total deposits into four bank accounts of

$1,388,418, which included taxable deposits of $1,004,357.

      Petitioner timely petitioned this Court for redetermination.

                                    Discussion

I. Burden of Proof

      Ordinarily, the burden of proof in cases before the Court is on the taxpayer.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In unreported income
                                        -5-

[*5] cases, the Commissioner generally must make some minimal evidentiary

showing to link the taxpayer to the disputed income. See Weimerskirch v.

Commissioner, 596 F.2d 358, 360 (9th Cir. 1979), rev’g 67 T.C. 672 (1977); see

also Dodge v. Commissioner, 981 F.2d 350, 353-354 (8th Cir. 1992), aff’g in part,

rev’g in part 96 T.C. 172 (1991). The Commissioner also bears the initial burden

of production with respect to additions to tax. See sec. 7491(c). The

Commissioner bears the burden of proof as to penalties for fraud. Sec. 7454(a);

Rule 142(b).

II. Petitioner’s Deficiencies

      Section 61(a) provides that gross income includes “all income from

whatever source derived”. See also Commissioner v. Glenshaw Glass Co., 348

U.S. 426, 430 (1955).

      A taxpayer is required to maintain adequate books and records sufficient to

establish his or her income. See sec. 6001; DiLeo v. Commissioner, 96 T.C. 858,

867 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992). If a taxpayer fails to maintain these

records, the Commissioner may determine income under the bank deposits

method. DiLeo v. Commissioner, 96 T.C. at 867. A bank deposit is prima facie

evidence of income. Id. at 868. The Commissioner is not required to follow any

“leads” suggesting that a taxpayer might have deductible expenses. Id. at 872.
                                         -6-

[*6] Rule 123(a) provides as follows:

            (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, or may impose such
      sanctions (see, e.g., Rule 104) as the Court may deem appropriate.
      ***

      Rule 149(a) provides as follows:

             (a) Attendance at Trials: The unexcused absence of a party or
      a party’s counsel when a case is called for trial will not be ground for
      delay. The case may be dismissed for failure properly to prosecute, or
      the trial may proceed and the case be regarded as submitted on the
      part of the absent party or parties.

      Petitioner is deemed to have admitted that he underreported his income by

omitting gross receipts and other income and failing to substantiate expenses

underlying deductions beyond those that respondent allowed for tax years 2005,

2006, and 2007, resulting in deficiencies of $314,134, $185,349, and $227,785 for

2005, 2006, and 2007, respectively. These deficiencies will be sustained because

of petitioner’s failure to appear for trial, failure to comply with the Court’s orders

and Rules, and failure otherwise properly to prosecute the case.
                                         -7-

[*7] III. Additions to Tax Under Section 6651(a)(1)

      Respondent determined that petitioner is liable for additions to tax for 2005,

2006, and 2007 under section 6651(a)(1) for failure timely to file a valid return.

The Commissioner bears the burden of production with respect to a taxpayer’s

liability for additions to tax. See sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446 (2001). Once the Commissioner carries the burden of production, the

taxpayer must come forward with persuasive evidence that the Commissioner’s

determination is incorrect or that the taxpayer has an affirmative defense. See

Higbee v. Commissioner, 116 T.C. at 446-447.

      Section 6651(a)(1) authorizes the imposition of an addition to tax for failure

timely to file a return unless it is shown that such failure is due to reasonable cause

and not due to willful neglect. See United States v. Boyle, 469 U.S. 241, 245

(1985). A failure to file a Federal income tax return timely is due to reasonable

cause if the taxpayer exercised ordinary business care and prudence but

nevertheless was unable to file the return within the prescribed time, typically for

reasons outside the taxpayer’s control. See McMahan v. Commissioner, 114 F.3d

366, 368-369 (2d Cir. 1997), aff’g T.C. Memo. 1995-547; sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.
                                        -8-

[*8] Petitioner was required to file Forms 1040 for 2005, 2006, and 2007 and

failed to do so until September 2009. See sec. 6012(a)(1)(A). Accordingly,

respondent has carried his burden of producing evidence showing that the

additions to tax under section 6651(a)(1) are appropriate. Petitioner failed to

introduce any credible evidence showing that he had reasonable cause for failing

to file his Forms 1040 timely. Accordingly, petitioner is liable for the additions to

tax under section 6651(a)(1).

IV. Fraud Penalty Under Section 6663(a)

      Fraud is an intentional wrongdoing on the part of a taxpayer with the

specific purpose to evade a tax believed to be owed. Sadler v. Commissioner, 113

T.C. 99, 102 (1999). The fraud penalty is a civil sanction provided primarily as a

safeguard for protection of revenue and to reimburse the Government for the

heavy expense of investigation and the loss resulting from the taxpayer’s fraud.

Helvering v. Mitchell, 303 U.S. 391, 401 (1938); Sadler v. Commissioner, 113

T.C. at 102. The Commissioner has the burden of proving fraud by clear and

convincing evidence. Sec. 7454(a); Rule 142(b). The Commissioner satisfies this

burden by showing that an underpayment exists and that the taxpayer intended to

conceal, mislead, or otherwise prevent the collection of taxes known or believed to

be owing. Katz v. Commissioner, 90 T.C. 1130, 1143 (1988). If the
                                         -9-

[*9] Commissioner establishes that any portion of the underpayment is attributable

to fraud, the entire underpayment shall be treated as attributable to fraud and

subject to a 75% penalty, except with respect to any portion that the taxpayer

establishes (by a preponderance of the evidence) is not attributable to fraud. Sec.

6663(a) and (b).

      The existence of fraud is a question of fact to be resolved upon considera-

tion of the entire record. King’s Court Mobile Home Park, Inc. v. Commissioner,

98 T.C. 511, 516 (1992). Fraud may be proved by circumstantial evidence and

inferences drawn from the facts because direct proof of a taxpayer’s intent rarely is

available. Niedringhaus v. Commissioner, 99 T.C. 202, 210 (1992). The

taxpayer’s entire course of conduct may establish the requisite fraudulent intent.

DiLeo v. Commissioner, 96 T.C. at 874; Stone v. Commissioner, 56 T.C. 213, 224

(1971). Fraudulent intent may be inferred from various kinds of circumstantial

evidence, or “badges of fraud”. Bradford v. Commissioner, 796 F.2d 303, 307

(9th Cir. 1986), aff’g T.C. Memo. 1984-601. Over the years, courts have

developed a nonexclusive list of factors that demonstrate fraudulent intent. These

badges of fraud include: (1) understating income, (2) maintaining inadequate

records, (3) failing to file tax returns, (4) giving implausible or inconsistent

explanations of behavior, (5) concealing assets, (6) failing to cooperate with tax
                                         - 10 -

[*10] authorities, (7) engaging in illegal activities, (8) attempting to conceal illegal

activities, (9) dealing in cash, and (10) failing to make estimated tax payments.

See, e.g., Spies v. United States, 317 U.S. 492, 499 (1943); Recklitis v.

Commissioner, 91 T.C. 874, 910 (1988); see also McGraw v. Commissioner, 384

F.3d 965, 971 (8th Cir. 2004) (citing Spies and Bradford), aff’g Butler v.

Commissioner, T.C. Memo. 2002-314.

      We have held that the Commissioner may satisfy his burden of proving

liability for the fraud penalty with deemed admissions. See Smith v.

Commissioner, 91 T.C. 1049, 1052-1053 (1988), aff’d, 926 F.2d 1470 (6th Cir.

1991); Marshall v. Commissioner, 85 T.C. 267 (1985). In numerous cases we

have relieved the Commissioner of the burden of putting on his case for the

penalty for fraud where deemed admissions have resulted from a taxpayer’s failure

to respond to certain procedural devices contained in our rules. See Smith v.

Commissioner, 91 T.C. at 1055. We review the facts established through deemed

admissions or stipulation to determine whether they are sufficient to sustain a

finding of fraud. Id. at 1058-1059.

      Petitioner significantly underreported his income, reporting a negative

taxable income for all three years. See Otsuki v. Commissioner, 53 T.C. 96, 107-

108 (1969) (holding that underreporting income by a substantial amount for five
                                        - 11 -

[*11] consecutive years is strong evidence of an attempt to defraud the

Government). In addition, petitioner’s income was derived from the illegal

duplication and sale of DVDs and CDs, and his business dealt exclusively in cash.

See Arouth v. Commissioner, T.C. Memo. 1992-679 (holding that the taxpayer’s

activity of illegally obtaining and selling prescription drugs, failing to maintain

records, and dealing only in cash was sufficient evidence to hold that the

taxpayer’s understatements were attributable to fraud). Petitioner’s failure to keep

records for his business also is a badge of fraud. See Bradford v. Commissioner,

796 F.2d at 307-308.

      When the case was called from the calendar, we expressed concern with the

wording of the proposed stipulation (characterizing petitioner’s business activities

as illegal), but petitioner was given an opportunity to contest the issue. In our

order to petitioner to show cause why the matters set forth in respondent’s Rule

91(f) motion should not be deemed admitted for purposes of this case, we warned

him of the consequences of not contesting respondent’s motion. We stated: “If no

response is filed with the Court within the periods specified above with respect to

any matter or portion thereof, or if the response is evasive or not fairly directed to

the proposed stipulation or portion thereof, such matter or portion thereof may be

deemed stipulated”. Counsel for respondent also notified petitioner that a motion
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[*12] for default would be filed if he did not appear for trial. Petitioner cannot

escape fraud penalties simply by failing to respond to the Court’s orders or to

show up to contest his case. The deemed admissions presented by respondent and

not contested by petitioner are clear and convincing evidence of fraud with respect

to each year in issue, satisfying respondent’s burden of proof. We therefore hold

that petitioner is liable for the fraud penalties under section 6663.

      Any contentions we have not addressed we deem irrelevant, moot, or

meritless.

      To reflect the foregoing,


                                                 An appropriate order and decision

                                        will be entered.
