                          T.C. Memo. 2005-51



                       UNITED STATES TAX COURT



             PAUL F. AND BARBARA J. BASILE, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent

              BASILE HEALTH CENTER, DC, PC, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 2900-02, 2901-02.        Filed March 17, 2005.


     Paul F. Basile and Barbara J. Basile, pro sese.

     James N. Beyer, for respondent.



                          MEMORANDUM OPINION


     MARVEL, Judge:    These consolidated cases are before the

Court on respondent’s motion for judgment by default pursuant to

Rule 123.1    By separate notices of deficiency, respondent


     1
      Unless otherwise indicated, all section references are to
                                                   (continued...)
                                - 2 -

determined the following deficiencies, additions to tax, and

penalties with respect to petitioners’ Federal income taxes:

Paul F. and Barbara J. Basile

                          Addition to tax    Accuracy-related
                            delinquency          penalty
Year       Deficiency     Sec. 6651(a)(1)      Sec. 6662(a)

1996        $255,805            $25,581           $51,161
1997         203,462               --              40,692

Basile Health Center, DC, PC

                          Addition to tax    Accuracy-related
                            delinquency          penalty
Year       Deficiency     Sec. 6651(a)(1)      Sec. 6662(a)

1997        $154,126            $38,532           $30,825

Respondent conceded in his motion for judgment by default,

however, that the deficiencies, additions to tax, and penalties

with respect to petitioners’ Federal income taxes are less than

those originally determined and are as follows:

Paul F. and Barbara J. Basile

                          Addition to tax    Accuracy-related
                            delinquency          penalty
Year       Deficiency     Sec. 6651(a)(1)      Sec. 6662(a)

1996        $110,901            $11,090           $22,180
1997          82,583               --              16,517




       1
      (...continued)
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. Monetary amounts are rounded to the nearest dollar.
                                - 3 -

Basile Health Center, DC, PC

                            Addition to tax     Accuracy-related
                              delinquency           penalty
Year        Deficiency      Sec. 6651(a)(1)       Sec. 6662(a)

1997          $55,971           $13,994             $11,194

       Petitioners filed separate petitions to redetermine the

deficiencies and related penalties.     We consolidated these cases

(hereinafter this case) for trial, briefing, and opinion,

pursuant to Rule 141(a), because they present common issues of

fact and law.

                             Background

       Paul and Barbara Basile (the Basiles) are licensed

chiropractors.    Basile Health Center, DC, PC (BHC), is one of

several business entities the Basiles have used to conduct their

chiropractic practice.

       On January 10, 2002, respondent issued a notice of

deficiency to the Basiles in which he determined that certain

entities the Basiles used in running their chiropractic practice

were shams, and that the Basiles had used those entities to

underreport their income.    Respondent also determined that the

Basiles had not established that they qualified for the disabled

access credit, that certain computational adjustments were

necessary, and that the Basiles were liable for deficiencies in

their income taxes, penalties, and an addition to tax.
                                - 4 -

     On January 10, 2002, respondent also issued a notice of

deficiency to BHC in which he determined that BHC had not

established that it was qualified to deduct certain claimed

expenses.    Respondent also determined that BHC was liable for a

deficiency in its income tax, a penalty, and an addition to tax.

     The Basiles and BHC invoked the jurisdiction of this Court

on February 5, 2002, by the timely filing of their petitions.

The Basiles resided in Orefield, Pennsylvania, when their

petition was filed.    BHC’s mailing address was the same as the

Basiles’ Orefield, Pennsylvania, address when its petition was

filed.   Petitioners’ representative at the time of the filings,

Robert N. Bedford (Mr. Bedford), designated Tampa, Florida, as

the place of trial.

     The Basiles’ only allegations of error in their petition are

as follows:

          The service based their assessment upon a denial
     of legitimate business structures such as corporations
     designed to provide legal protections as provided by
     the law. The service also denied legitimate business
     deductions that are available under Code Section 162.
     There is also a question of any assessment at this time
     for 1996 because the statute of limitations has expired
     for that year.

BHC’s only allegation of error in its petition is that “The

service based their assessment upon a disallowance of certain

expenses.”

     On April 5, 2002, respondent’s answers to the petitions were

filed.   Respondent denied that he erred as alleged.   Respondent’s
                              - 5 -

answer to the Basiles’ petition also included the following

allegations in support of the timeliness of the Basiles’ notice

of deficiency for 1996:

          (a) The petitioners’ joint income tax return for
     the taxable year 1996 was filed on October 14, 1997.

          (b) The amount of gross income stated in the
     income tax return filed by the petitioners for the
     taxable year 1996 was $115,600.

          (c) During the taxable year 1996, the petitioners
     received additional income of $602,514 from their
     chiropractic practice through corporations or trusts
     which should be disregarded as sham entities * * *.
     Said amount of additional income was not included in
     the gross income stated in the return filed by
     petitioners for the taxable year 1996, and there was
     not disclosed on the return or in a statement attached
     thereto the fact that such amount was received during
     said year.

          (d) Petitioners did not borrow or receive from
     nontaxable sources any funds, or other assets, not
     properly taken into account by the respondent which
     would cause or account for the additional income as set
     forth above.

          (e) The additional gross income that petitioners
     received and that was omitted from the income tax
     return they filed for the taxable year 1996 is in
     excess of 25 percent of the gross income reported in
     such return.

          (f) The notice of deficiency setting forth the
     respondent’s determination of the deficiencies for the
     taxable year 1996 was timely sent to the petitioners by
     certified mail on October 12, 2001, which date was
     prior to the expiration of the six-year period for
     assessment applicable under I.R.C. § 6501(e)(1)(A).
                               - 6 -

In the answer to BHC’s petition, respondent included specific

allegations that BHC’s 1997 tax return was due on September 15,

1998, but that BHC did not file the return until May 28, 1999.

Petitioners did not file replies to respondent’s answers.

     By notice dated May 23, 2002, we set this case for trial at

the Tampa, Florida, trial session beginning on October 28, 2002.

The notice specifically stated that “YOUR FAILURE TO APPEAR MAY

RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST

YOU.”   Our standing pretrial order, which requires that all facts

be stipulated to the maximum extent possible, all documentary and

written evidence be stipulated in accordance with Rule 91(b), and

each party prepare a trial memorandum not less that 15 days

before the first day of the trial session, was attached to the

notice.   The standing pretrial order also warned that “If any

unexcused failure to comply with this Order adversely affects the

timing or conduct of the trial, the Court may impose appropriate

sanctions, including dismissal”.

     On June 26, 2002, counsel for respondent telephoned Mr.

Bedford in order to introduce himself and arrange for a

conference to discuss this case.   Respondent’s counsel was unable

to reach Mr. Bedford, so he left him an answering machine message

and sent letters informally requesting that petitioners answer

questions and produce certain documents.   Mr. Bedford provided

cursory responses to some but not all of the questions, and he
                                 - 7 -

produced no documents.   Due to the inadequacy of petitioners’

informal responses, on August 8, 2002, respondent served

interrogatories on Mr. Bedford.    Petitioners failed to respond to

the interrogatories.

     On August 9, 2002, respondent’s requests for admission in

regard to both the Basiles and BHC were filed.    Petitioners never

replied to respondent’s requests, so they are deemed admitted.

Rule 90(c).

     On September 13, 2002, respondent’s motions to compel

responses to respondent’s interrogatories were filed.    On

September 16, 2002, we granted respondent’s motions in that

petitioners were to serve upon respondent’s counsel “full,

complete, and responsive responses made under oath and in good

faith” to the interrogatories.    We warned petitioners that if

they did not fully comply with the order, we would be inclined to

impose sanctions.   Petitioners failed to comply with the

September 16, 2002, order.

     On October 27, 2002, Mr. Bedford telephoned respondent’s

counsel to inform him that he was experiencing car trouble and

that he did not anticipate making it to the calendar call the

next day.   On October 28, 2002, this case was called at the

Court’s Tampa, Florida, trial session.    Although counsel for

respondent appeared and was heard, no appearance was made by or

on behalf of petitioners.    We continued this case.
                               - 8 -

     By notice dated April 22, 2003, we set this case for trial

at the Tampa, Florida, trial session beginning on September 22,

2003.   The notice contained the same warnings of sanctions as the

previous notice setting this case for trial and the standing

pretrial order.

     On July 25, 2003, respondent’s motions for continuance of

trial regarding both the Basiles and BHC were filed.   In support

of his motions, respondent stated that a criminal indictment had

been filed against Mr. Bedford charging him with tax crimes,

including aiding, assisting, or advising the preparation of false

and fraudulent returns, and he provided us with a copy of the

indictment.   Respondent further asserted that Mr. Bedford either

prepared or was otherwise linked to the preparation of the

returns at issue in this case and that certain of the disallowed

expenses and unreported income at issue were related to entities

that petitioners, with Mr. Bedford’s assistance, allegedly used

to facilitate the diversion of unreported taxable income.

Respondent also expressed his concern that any settlement offer

previously made by Mr. Bedford would be subject to attack because

of Mr. Bedford’s potential conflicts of interest.   Mr. Bedford

did not object to the granting of respondent’s motions.

     On July 28, 2003, we ordered petitioners and Mr. Bedford to

file written responses to respondent’s motions for continuance

and to show cause why Mr. Bedford should not be withdrawn as
                               - 9 -

counsel.   We also granted the motions for continuance, but this

case remained calendared on the September 22, 2003, trial session

for a status report.   Petitioners did not respond as ordered and

did not appear at the September calendar call.   Respondent

appeared and stated that he had had no communication from any of

the petitioners.   We ordered that Mr. Bedford be withdrawn as

petitioners’ counsel and that this case be restored to the

general docket.

     On November 4, 2003, petitioners moved to change the place

of trial from Tampa, Florida, to Philadelphia, Pennsylvania.     On

November 13, 2003, we granted the motion.   By notice dated April

1, 2004, we set this case for trial at the Philadelphia,

Pennsylvania, trial session beginning on September 7, 2004.    The

notice again contained sanction warnings and referred to our

standing pretrial order, which was enclosed.

     On June 7, 2004, respondent’s second requests for admission

in regard to both the Basiles and BHC were filed.   Petitioners

failed to respond to these requests, so they are deemed admitted.

Rule 90(c).

     On April 19, 2004, respondent sent petitioners a letter

inviting them to request a conference to discuss this case and

informally asking that they answer certain questions and produce

certain documents.   Petitioners failed to request a conference,

however, and did not provide respondent with the requested
                              - 10 -

answers, documents, or any other information.    On June 4, 2004,

respondent served on both the Basiles and BHC a second set of

interrogatories and a second request for production of documents.

Again, petitioners failed to respond.

     On July 21, 2004, respondent’s motions to compel responses

to the second set of interrogatories and second set of motions to

compel production of documents were filed.    On July 22, 2004, we

ordered petitioners to file a response to these motions.

Petitioners did not comply with the order.    Consequently, on

August 17, 2004, we ordered that petitioners, on or before August

25, 2004, provide respondent with answers to the interrogatories

and produce the requested documents.    We warned petitioners that

failure to comply with our order could result in sanctions.

Petitioners continued to disregard our orders.

     On July 30, 2004, respondent’s motion to consolidate the

Basiles’ case with BHC’s case for trial, briefing, and opinion

was filed.   On August 3, 2004, we ordered petitioners to file a

response to the motion for consolidation on or before August 17,

2004, but petitioners failed to do so.   On August 25, 2004, we

granted the motion.

     On September 7, 2004, respondent appeared at the calendar

call of the Philadelphia, Pennsylvania, trial session, and his

motion for judgment by default was filed.    Petitioners did not

appear.   Petitioners also failed to provide respondent or the
                               - 11 -

Court with a pretrial memorandum as required by the Court’s

standing pretrial order.    Respondent asserted, however, that he

had received several pieces of frivolous correspondence from Paul

Basile (Mr. Basile) before the trial session and that Mr. Basile

stated in much of the correspondence that he was not disputing

the existence or amount of the tax liabilities.

     Respondent requested in his motion that we enter a judgment

by default against petitioners and find reduced deficiencies in

income tax, penalties, and additions to tax for each petitioner.

In support of the motion for judgment by default, respondent

argues that “petitioners have completely failed to comply with

the Court’s Orders and have ignored the Tax Court’s Rules of

Practice and Procedure”.

                             Discussion

     In general, the Commissioner’s determination of underlying

tax deficiencies is presumed correct, and the taxpayer bears the

burden of proving otherwise.   Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).   Unless otherwise indicated,

petitioners bear the burden of proof in this case.2   Petitioners


     2
      When a case involves unreported income and is appealable to
the Court of Appeals for the Third Circuit, the Commissioner’s
determination of unreported income is entitled to the presumption
of correctness only if the determination is supported by some
evidence linking the taxpayer to the tax-generating activity.
Anastasato v. Commissioner, 794 F.2d 884, 887 (3d Cir. 1986),
vacating T.C. Memo. 1985-101. As this case is appealable to the
Court of Appeals for the Third Circuit, barring a stipulation to
the contrary, the Court is bound to apply the law of the Court of
                                                   (continued...)
                              - 12 -

have not only failed to carry their burden, but they have

defaulted within the meaning of Rule 123(a).

     Pursuant to Rule 123(a), we may hold any party in default

when that “party has failed to plead or otherwise proceed as

provided by these Rules or as required by the Court”, and

“Thereafter the Court may enter a decision against the defaulting

party”.   The action or inaction of a taxpayer that constitutes

sufficient grounds to apply Rule 123(a) is a matter within our

discretion, and we have consistently given Rule 123 broad

applicability.   See, e.g., Smith v. Commissioner, 91 T.C. 1049,

1056 (1988) (default where taxpayer failed to communicate with

the Court, to appear at trial, to participate in preparation of

case for trial, and to comply with the requirements of Rule 91(a)

with regard to preparation of a stipulation of facts), affd. 926

F.2d 1470 (6th Cir. 1991); Stringer v. Commissioner, 84 T.C. 693,


     2
      (...continued)
Appeals for the Third Circuit in regard to respondent’s
determination that the Basiles failed to report income. Golsen
v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th
Cir. 1971). Because the facts alleged by respondent in his
answer to the Basiles’ petition and the deemed admissions provide
sufficient evidence linking the Basiles to the unreported income,
the presumption of correctness applies to respondent’s
determination, and petitioners bear the burden of proof that
respondent’s determination is erroneous. See Bosurgi v.
Commissioner, 87 T.C. 1403, 1409 (1986) (“The entry of a default
has the effect of admitting all well-pleaded facts in
respondent’s answer, and a default judgment must be supported by
respondent’s well-pleaded facts.”); Smith v. Commissioner, 91
T.C. 1049, 1057 (1988) (The establishment of respondent's
well-pleaded facts through a default is no different than
establishing such facts through deemed admissions), affd. 926
F.2d 1470 (6th Cir. 1991).
                                - 13 -

706 (1985), affd. without published opinion 789 F.2d 917 (4th

Cir. 1986); Rechtzigel v. Commissioner, 79 T.C. 132, 143 (1982)

(default as sanction for taxpayer’s willful flouting of Court-

ordered discovery that hampered Commissioner’s ability to develop

his case), affd. 703 F.2d 1063 (8th Cir. 1983).

     Despite repeated warnings, petitioners failed to comply with

the Rules and requirements of this Court by not participating in

the discovery process, by violating numerous Court orders,

including the standing pretrial order, and by not appearing at

any of three calendar calls.    Such conduct provides a more than

sufficient basis for granting respondent’s motion with respect to

those issues on which petitioners have the burden of proof.3    We

note, however, that the Basiles asserted in their petition that

respondent’s determination regarding 1996 should not be sustained

because it was made outside the 3-year period of limitations

specified in section 6501(a).    Respondent alleged in his answer




     3
      Although the Commissioner ordinarily has the burden of
production with respect to any penalties and additions to tax,
sec. 7491(c), the petitions did not contain any assignments of
error with respect to the additions to tax under sec. 6651(a)(1)
or the accuracy-related penalty under sec. 6662(a). Because
petitioners did not contest the additions to tax or penalties in
the petitions, they are deemed conceded. Rule 34(b)(4); Swain v.
Commissioner, 118 T.C. 358 (2002). Even if the additions to tax
and penalties were not deemed to be conceded, the facts alleged
in respondent’s answers and the deemed admissions are sufficient
to satisfy respondent’s burden of production for purposes of this
motion.
                               - 14 -

that his determination was timely made within the 6-year period

of limitations in section 6501(e)(1)(A) and argues in his motion

that a decision by default is appropriate on this issue.

     Section 6501(e)(1)(A) provides:

          (A) General rule.–-If the taxpayer omits from
     gross income an amount properly includible therein
     which is in excess of 25 percent of the amount of gross
     income stated in the return, the tax may be assessed,
     or a proceeding in court for the collection of such tax
     may be begun without assessment, at any time within 6
     years after the return was filed. * * *

To invoke the 6-year assessment period, respondent has the burden

of proving that petitioners omitted the requisite amount of gross

income from their return.   Id.; Bardwell v. Commissioner, 38 T.C.

84, 92 (1962), affd. 318 F.2d 786 (10th Cir. 1963).    In deciding

whether to grant respondent’s motion, we look to respondent’s

affirmative allegations in his answer to the Basiles’ petition

and the Basiles’ deemed admissions to decide whether respondent

has met his burden of proof.   See Smith v. Commissioner, supra at

1057; Bosurgi v. Commissioner, 87 T.C. 1403, 1408 (1986).

     The Basiles are deemed to have admitted that they did not

file their 1996 joint return until October 14, 1997.   Respondent

affirmatively alleged in his answer that although the Basiles

reported their 1996 gross income as $115,600, they received

additional taxable income of $602,514 that they did not disclose

on either their 1996 return or in a statement attached to the

return.   Respondent also alleged in his answer that the notice of

deficiency was sent to petitioners by certified mail on October
                              - 15 -

12, 2001, well within the 6-year period of limitations.       Because

the Basiles are deemed to have admitted the well-pleaded facts of

respondent’s answer and respondent’s requests for admission

stating that they received additional income in excess of 25

percent of what they reported on their 1996 return, respondent

has met his burden of proving that the notice of deficiency for

1996 was timely mailed and the 6-year period of limitations under

section 6501(e) applies.

                            Conclusion

     Petitioners have failed to comply with the Rules and

requirements of this Court, and the record reveals no reason to

excuse petitioners’ inactivity and otherwise noncompliant

behavior.   Moreover, we are satisfied that the well-pleaded facts

in respondent’s answer and the deemed admissions provide an

adequate factual basis for concluding that the period of

limitations for assessing the 1996 liability under section 6501

has not expired.   Consequently, we shall grant respondent’s

motion for default pursuant to Rule 123(a).

     To reflect the foregoing,


                                      An appropriate order and

                                 decision granting respondent’s

                                 motion for judgment by default will

                                 be entered in each docket.
