                        T.C. Memo. 1999-89



                      UNITED STATES TAX COURT



                LINDA RUTH PALMER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9338-97.               Filed March 23, 1999.




     Clinton M. Fried and Kirk S. Chaberski, for respondent.



                        MEMORANDUM OPINION



     WELLS, Judge:   This case is before the Court on respondent's

motion for summary judgment pursuant to Rule 121.   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.
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       Respondent determined the following deficiencies in and

additions to petitioner's Federal income taxes:

                             Additions to Tax and Penalties
Year       Deficiency   Sec. 6653(b)(1)1   Sec. 6654   Sec. 6661

1982         $6,918          $3,459           $656       $1,730
1983         53,455          26,728          3,271       13,364
1984         41,584          20,792          2,614       10,396
       1
       Plus 50 percent of the interest on the deficiency under
section 6653(b)(2).

       Petitioner resided in East Dublin, Georgia, at the time she

filed the petition in the instant case.      In the answer,

respondent denied all substantive allegations of fact and error

contained in the petition and affirmatively alleged the following

facts:

            6. FURTHER ANSWERING the petition and in support
       of respondent's determination that the underpayment of
       tax required to be shown on the petitioner's federal
       income tax returns for each of the taxable years 1982,
       1983, and 1984 is due to fraud, the respondent alleges:

                 (a) From at least January of 1981 through October
       of 1985, the petitioner operated, as a sole proprietorship,
       a retail store in Las Vegas, Nevada known variously as
       "Linda Palmer Designs," "Mill Direct Carpets," and "Mill
       Direct Carpet and Furniture."

                 (b) The business referred to in subparagraph 6.(a)
       above was primarily engaged in the retail sale of carpeting
       and other floor coverings, though the business also sold
       draperies and wall coverings.

                 (c) During all relevant periods, the petitioner
       was solely responsible for maintaining all books and records
       of the business referred to in subparagraph 6.(a) above.

                 (d) On or about April 15, 1983, the petitioner,
       with her husband Wayne E. Palmer (since deceased), filed a
       joint federal income tax return (Form 1040) for the 1982
                         - 3 -


taxable year with the Director, Ogden Service Center in
Ogden, Utah.

          (e) The petitioner signed the joint 1982 federal
income tax return referred to in subparagraph 6.(d) above on
her own behalf and on behalf of Wayne E. Palmer as "his
attorney in fact."

          (f) The petitioner's 1982 joint federal income tax
return reflected total income of $0 and total tax liability
in the amount of $0. Said return made no mention of any
business income or expenses or of any other income received
by either the petitioner and/or Wayne E. Palmer during that
taxable year.

          (g) On her joint 1982 federal income tax return,
the petitioner listed her occupation as "disabled."

          (h) On or about May 17, 1984, the petitioner filed
a joint federal income tax return (Form 1040) with Wayne E.
Palmer for the 1983 taxable year with the Director, Ogden
Service Center in Ogden, Utah. The sole income listed on
said return is a loss in the amount of $10,524 which is
reflected on a Schedule C (Profit (or Loss) From Business or
Profession) from a business known as "Mill Direct Carpets."
That Schedule C lists the petitioner as the sole proprietor
of that business.

          (i) On the Schedule C referred to in subparagraph
6.(h) above, the petitioner listed gross receipts or sales
in the amount of $343,607. After subtracting the claimed
cost of goods sold, returns and allowances, the petitioner
listed gross income from Mill Direct Carpets of $103,504,
total deductions in the amount of $114,028, and a net loss
from the business of $10,524.

          (j) The petitioner listed total income tax
liability of $0 on her 1983 joint federal income tax return.

          (k) On or about April 15, 1985, the petitioner
filed a joint federal income tax return (Form 1040) with
Wayne E. Palmer for the 1984 taxable year with the
Director, Ogden Service Center in Ogden, Utah. The sole
income listed on said return is on an attached Schedule C
which reflects a net loss in the amount of $4,519 from the
operation of Mill Direct Carpets by the petitioner.
                         - 4 -


          (l) The 1994 Schedule C referred to in
subparagraph 6.(k) above reflects gross receipts or sales of
$493,956 less claimed cost of goods sold in the amount of
$333,930 for gross income of $160,026. Said Schedule C also
lists total deductions in the amount of $164,545 for a net
loss from the operation of the business in the amount of
$4,519.

          (m) The petitioner listed total income tax
liability of $0 on her 1984 joint federal income tax return.

          (n) The petitioner's 1982, 1983, and 1984 federal
income tax returns were prepared by the "Nevada Tax
Professionals" based upon information provided to them by
the petitioner.

          (o) The petitioner did not supply the "Nevada Tax
Professionals" with access to books and records relating to
income and expenses of her business for any of the taxable
years here at issue.

          (p) The petitioner failed to maintain, or submit
for examination by the respondent, any books of account
and/or records of her business relating to gross and net
receipts for each of the taxable years 1982 through 1984, as
is required by applicable provisions of the Internal Revenue
[C]ode and the regulations promulgated thereunder.

          (q) Any records maintained by the petitioner for
the 1982 through 1984 taxable years are incomplete,
inadequate, fail to disclose all receipts and disbursements,
and do not properly reflect the petitioner's correct taxable
income for any of those years.

          (r) The petitioner's failure to keep adequate
records regarding the income and expenses of her business
and/or her failure to turn any such records over to the
respondent constitutes indicia of the petitioner's
fraudulent intent to evade the assessment and payment of
federal income tax due following the receipt of that income.

          (s) The respondent has determined the petitioner's
correct gross receipts and resultant taxable income for each
of taxable years 1982 through 1984 on the basis of the bank
deposits analysis method of income reconstruction. In
making said analysis, the respondent has utilized all
available records.
                         - 5 -


          (t) Attached as Exhibits 1A and 1B to the Notice
of Deficiency (which is itself attached hereto as Exhibit A)
is a bank deposits analysis statement of income
reconstruction for the petitioner's 1982 through 1984
taxable years. Such analysis is incorporated herein in its
entirety by reference. The petitioner did in fact make all
deposits to bank accounts as are reflected on those
exhibits.

          (u) The petitioner's understatement of gross
receipts as determined by the bank deposits analysis method
of income reconstruction is in the amount of $95,445 for
1982, $138,160 for 1983 and $103,125 for [the] 1984.

          (v) During 1982, 1983, and 1984, neither the
petitioner nor Wayne E. Palmer received any gifts,
inheritances, legacies or other devises.

          (w) At the beginning of the 1982 taxable year and
at all times during 1982, 1983, and 1984, neither the
petitioner nor Wayne E. Palmer received any non-taxable or
excludable income, receipts, cash, or other assets other
than as reflected in the bank deposits analysis attached
hereto and incorporated herein by reference.

          (x) The petitioner realized gross receipts from
her business during 1982 in the amount of $95,445 which she
fraudulently omitted from her 1982 joint federal income tax
return with the intent to evade income tax.

          (y) The petitioner realized gross receipts from
her business during 1983 in the amount of $138,160 which she
fraudulently omitted from her joint 1983 federal income tax
return with the intent to evade income tax.

          (z) The petitioner realized gross receipts from
her business during 1984 in the amount of $103,125 which she
fraudulently omitted from her joint 1984 federal income tax
return with the intent to evade income tax.

          (aa) In addition to the unreported gross receipts
from her business which the respondent was forced to
determine through use of the bank deposits analysis, the
petitioner received interest income during 1982, 1983, and
1984 in the respective amounts of $7,541, $6,619 and $610.
                         - 6 -


          (ab) The petitioner reported none of the interest
income reflected in subparagraph 6.(aa) above on her
respective 1982, 1983, and 1984 federal income tax returns.

          (ac) In addition to the interest and business
income reflected above, the petitioner realized income from
the sale of a tractor during the 1984 taxable year in the
amount of $4,478, which income the petitioner failed to
report on her joint 1984 federal income tax return.

          (ad) The petitioner also received taxable social
security income during 1984 in the amounts of $4,478 which
she failed to report on her joint 1984 federal income tax
return.

          (ae) The petitioner's failure to report income as
reflected above on her 1982, 1983, and 1984 joint federal
income tax returns was fraudulent with the intent to evade
income tax.

          (af) The petitioner represented to third-parties
that her gross, net, and taxable income from her business
and from other sources was significantly higher than the
income which she reported on her joint 1982, 1983, and 1984
federal income tax returns. These wilful misrepresentations
included the petitioner's sworn written statements which she
submitted with applications for loans.

          (ag) The misrepresentations reflected in
subparagraph 6.(af) above indicate the petitioner's
contemporaneous knowledge that her income was significantly
greater than that which she reported on the tax returns
which she filed with the respondent, that those returns were
false, and that at all relevant times she possessed a
fraudulent intent to evade the assessment and payment of
income tax.

          (ah) The petitioner affirmatively attempted to
mislead agents of the Internal Revenue Service as to her
gross income for each of the years here at issue, and failed
to cooperate during the respondent's examination of her true
income with respect to those years. This behavior and lack
of cooperation provide evidence of petitioner's intent to
defraud.

          (ai) The petitioner also failed to report
substantial income from her business on her 1985 federal
                         - 7 -


income tax return, which year is not before the Court in
this case.

          (aj) The petitioner's four-year pattern of
substantially underreporting income from her business
evidences her intent to evade or defeat the assessment and
payment of income taxes for each of those years.

          (ak) The petitioner's failure to reflect her
operation of any business interest whatsoever on her 1982
federal income tax return, while in reality realizing net
income in excess of $95,000 from the operation of that
business during that year provides further evidence of her
intent to defraud.

          (al) The petitioner's act of reporting net losses
from the operation of her business on her joint federal
income tax returns for each of the taxable years 1983 and
1984 while in reality realizing net income in excess of
$138,000 and $103,000 during those years, respectively,
provides additional evidence of the petitioner's intent to
defraud.

          (am) The petitioner and Wayne E. Palmer enjoyed a
tremendous increase in their net worth during the years here
at issue while reporting negative net income on the joint
tax returns which they filed with the respondent and while
paying $0 in federal income tax during that same 3-year
period.

          (an) During 1995, the petitioner entered a plea of
guilty before the United States District Court for the
District of Utah to wilfully [sic] filing a false federal
income tax return for the 1984 taxable year in violation of
26 U.S.C. 7206(1).

          (ao) The material falsity to which the petitioner
entered a plea of guilty was her willful failure to
accurately report the true income received from her business
during the 1984 taxable year.

          (ap) The petitioner is collaterally estopped in
the instant proceeding from denying that she willfully
failed to report a material amount of income from her
business on her 1984 joint federal income tax return.
                                - 8 -


               (aq) All of the deficiency in income tax due from
     the petitioner for each of the taxable year 1982, 1983, and
     1984 is due to fraud with the intent to evade income tax.

     Petitioner failed to reply to respondent's answer within the

time permitted by Rule 37(a).   Respondent moved, pursuant to Rule

37(c), for entry of an order that the undenied allegations in the

answer be deemed admitted.   The Court gave petitioner notice of

respondent's motion and instructed petitioner that "if petitioner

files a reply as required by Rule 37(a) and (b) of this Court's

Rules * * *, respondent's motion will be denied."     The Court's

notice also advised petitioner that "if petitioner does not file

a reply as directed herein, the Court will grant respondent's

motion and deem admitted for purposes of this case the

affirmative allegations in the answer."

     Petitioner did not respond to respondent's motion.     The

Court granted respondent's motion and deemed admitted the

undenied affirmative allegations of fact set forth in

respondent's answer.

     Pursuant to notice to the parties, the instant case was set

for trial during the Court's trial session in Atlanta, Georgia.

Respondent filed a motion for summary judgment.     Petitioner moved

for a continuance which was denied.     Petitioner never filed a

response to respondent's motion for summary judgment.     Petitioner

did not appear before the Court when the instant case was called
                               - 9 -


for trial, and respondent's motion for summary judgment was taken

under advisement.

     We must now decide, based on the record in the instant case,

including the facts deemed admitted, whether petitioner is liable

for the deficiencies and additions to tax determined by

respondent.

Summary Judgment

     We grant summary judgment "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).   The

party opposing the motion cannot rest upon the allegations or

denials in the pleadings, but must "set forth specific facts

showing that there is a genuine issue for trial."   Rule 121(d).

"The moving party, however, 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."   Marshall v. Commissioner, 85 T.C.

267, 271 (1985).

Period of Limitations

     In general, section 6501(a) requires the Commissioner to

assess income tax deficiencies within three years from the date

the tax return was filed.   However, section 6501(c)(1) provides:
                              - 10 -


     SEC. 6501(c).   Exceptions.--

          (1) False Return.--In the case of a false or
     fraudulent return with the intent to evade tax, the tax
     may be assessed, or a proceeding in court for
     collection of such tax may be begun without assessment,
     at any time.


As discussed in detail below, we have found that the facts deemed

admitted under Rule 37(c) establish that petitioner's income tax

returns for 1982, 1983, and 1984, were filed fraudulently with

the intent to evade tax.   Consequently, the three-year period of

limitations in section 6501(a) does not apply.

Deficiencies and Additions to Tax Under Sections 6654 and 6661

     As to the deficiencies determined by respondent and the

additions to tax under sections 6654 and 6661, respondent's

determinations are presumptively correct, and petitioner bears

the burden of proving otherwise.     See Rule 142(a).   Based on the

facts deemed admitted, petitioner has failed to meet her burden

of proof.   See Marshall v. Commissioner, supra at 272.

Accordingly, we shall grant summary judgment for respondent with

respect to such deficiencies and additions.

Additions to Tax Under Section 6653(b)

     Respondent determined that petitioner is liable for the

additions to tax for fraud pursuant to section 6653(b), which

requires respondent to establish, by clear and convincing

evidence, that there is an underpayment of tax and that some

portion of that underpayment is due to fraud.     See sec. 7454(a);
                               - 11 -


Rule 142(b); DiLeo v. Commissioner, 96 T.C. 858, 873 (1991),

affd. 959 F.2d 16 (2d Cir. 1992).

     "Facts deemed admitted pursuant to Rule 37(c) are considered

conclusively established and may be relied upon by the government

even in relation to issues where the government bears the burden

of proof."    Baptiste v. Commissioner, 29 F.3d 1533, 1537 (11th

Cir. 1994), affg. T.C. Memo. 1992-198; see also Doncaster v.

Commissioner, 77 T.C. 334, 336-338 (1981) (holding that deemed

admissions under Rule 37(c) are sufficient to satisfy the

government's burden of proof with respect to the issue of fraud).

     "Fraud is defined as an intentional wrongdoing designed to

evade tax believed to be owing."    Petzoldt v. Commissioner, 92

T.C. 661, 698 (1989).   Whether fraud exists is a question of fact

to be resolved upon review of the entire record.   See Gajewski v.

Commissioner, 67 T.C. 181, 199 (1976), affd. without published

opinion 578 F.2d 1383 (8th Cir. 1978).   Fraud will never be

presumed.    See Beaver v. Commissioner, 55 T.C. 85, 92 (1970).    It

may, however, be proved by circumstantial evidence.   See Otsuki

v. Commissioner, 53 T.C. 96, 106 (1969).   Courts have relied on a

number of indicia or badges of fraud in deciding whether to

sustain the Commissioner's determinations with respect to the

additions to tax for fraud including: (1) understating income,

(2) maintaining inadequate records, (3) failing to cooperate with
                               - 12 -


tax authorities, and (4) failing to make estimated tax payments.

See Recklitis v. Commissioner, 91 T.C. 874, 910 (1988).

     In the instant case, the deemed admissions pursuant to Rule

37(c) include petitioner's admission to a number of indicia of

fraud including:    (1) understating her income taxes in the

amounts of $6,918, $53,455, and $41,584 for the 1982, 1983, and

1984, taxable years, respectively; (2) maintaining inadequate

records; and (3) failing to cooperate with tax authorities.

Additionally, petitioner has failed to make estimated tax

payments, another indicia of fraud.     Furthermore, petitioner

failed to appear for trial which is another indicia of fraud.

See Smith v. Commissioner, 91 T.C. 1049, 1059-1060 (1988), affd.

926 F.2d 1470 (6th Cir. 1991).    Finally, with regard to the 1984

taxable year, petitioner pleaded guilty to willfully filing a

false Federal income tax return in violation of 26 U.S.C. sec.

7206(1).   Although petitioner's conviction does not collaterally

estop her from denying fraud, such conviction is one of the facts

to be considered.    See Wright v. Commissioner, 84 T.C. 636, 643-

644 (1985).   Based on the foregoing, we conclude that respondent

has satisfied the burden of proving, by clear and convincing

evidence, that the entire underpayment of tax for each of the

years in issue was due to fraud.    Accordingly, we sustain

respondent's determination regarding the additions to tax for

fraud under section 6653(b).
                             - 13 -


     We have considered the parties remaining arguments1 and find

them irrelevant or unnecessary to reach.

     To reflect the foregoing,

                                      An appropriate order and

                                 decision will be entered.




1
     In the petition, petitioner contends that her husband was
responsible for filing the income tax returns during the years in
issue and that she had no knowledge of any understatement of tax
when she signed those returns. Because the deemed admissions
clearly contradict petitioner's contention, we find that there is
no genuine issue of fact and, accordingly, we shall grant
respondent's motion for summary judgment.
