                        T.C. Memo. 2006-74



                      UNITED STATES TAX COURT



               TOMMY HO CHING CHENG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15027-02.              Filed April 12, 2006.


     David C. Holtz and Steven R. Mather, for petitioner.

     Alan H. Cooper, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency in

petitioner’s 1996 Federal income tax of $459,500 and an addition

to tax under section 6651(f) of $344,625.1   The issues for



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
                                - 2 -

decision are:   (1) Whether the Court should reconsider its denial

of petitioner’s fourth motion for continuance; (2) whether the

statute of limitations under section 6501(a) bars the issuance of

a notice of deficiency; (3) whether petitioner has an income tax

deficiency for 1996; and (4) whether petitioner is liable for an

addition to tax under section 6651(f).

                           FINDINGS OF FACT

     At the time the petition was filed, petitioner resided in

Diamond Bar, California.

     Petitioner was born in Hong Kong in 1951 and moved to the

United States in 1982.   Petitioner resided in the United States

from 1982 until his deportation on March 17, 2005.

A.   Petitioner’s Business Activities

     During 1996, petitioner earned income from his trade or

business of obtaining U.S. passports and Republic of Marshall

Islands (Marshall Islands) passports for various individuals.

Petitioner also sought foreign investors for his trade or

business and used their investments as a basis for obtaining

marketing investment visas which would allow the foreign

investors to visit the United States.

     During 1996, petitioner deposited funds received from his

business activities into seven bank accounts.   Four of these

accounts were in petitioner’s name, three at Cathay Bank (the

Cathay Bank accounts) and one at Bank of America (the Bank of
                               - 3 -

America account).   The remaining three accounts were not in

petitioner’s name but were subject to his control:   (1) “Bona

Trust” account at Cathay Bank (the Bona Trust account); (2) “Amex

Hospitality” account at Citizens Bank (the Amex Hospitality

account); and (3) the “Amex Professional Services Group” account

at East West Bank (the Amex Services account).

     Petitioner did not make estimated tax payments or file a

Federal income tax return for 1996.

B.   Criminal Tax Investigation

     Petitioner was the subject of a criminal investigation

regarding his 1995 tax return and his failure to file tax returns

for 1993, 1994, and 1996.   The criminal investigation was

conducted by Special Agent Fred Bautista (Special Agent

Bautista).   As a result of the investigation, criminal charges

were filed against petitioner, one count under section 7201 for

an attempt to evade or defeat tax in 1995 and three counts under

section 7203 for willful failure to file tax returns in 1993,

1994, and 1996.   On October 12, 2001, petitioner pleaded guilty

to the charges.   As part of the plea agreement, petitioner

admitted to receiving income of at least $645,253 in 1996.2

Petitioner was sentenced to 33 months on the count under section



     2
        The plea agreement was under seal at the time of trial
and was not considered by the Court. See infra p. 17. However,
this admission by petitioner as part of the plea agreement was
established by independent evidence. See infra p. 14.
                                - 4 -

7201 and 1 year on each of the counts under section 7203, with

all terms running concurrently.    Petitioner was also ordered to

pay restitution to 19 individuals.

C.   Respondent’s Determinations

     Following the criminal investigation, respondent conducted a

civil investigation of petitioner’s 1996 taxable year.   Agent Bob

Golub (Agent Golub) conducted the investigation on respondent’s

behalf.   Respondent used the bank deposits method to reconstruct

petitioner’s income for 1996.   Respondent determined that

petitioner had total unreported income of $1,138,436, as

reflected by the following:   (1) Deposits into the Cathay Bank

accounts totaling $369,761; (2) deposits into the Bank of America

account totaling $106,670; (3) withdrawals from the Bona Trust

account totaling $550,000; (4) withdrawals from the Amex

Hospitality account totaling $26,000; and (5) withdrawals from

the Amex Service account totaling $86,005.

     On June 21, 2002, respondent mailed petitioner a notice of

deficiency for the tax year 1996.    As reflected in the notice of

deficiency, respondent determined that petitioner had an income

tax deficiency of $459,500 and was liable for an addition to tax

under section 6651(f) of $344,625 for fraudulent failure to file.

D.   Procedural History

     On September 23, 2002, petitioner filed his petition with

this Court contesting respondent’s determinations.   The case was
                                - 5 -

initially calendared for the Court’s Los Angeles trial session

beginning September 8, 2003.    On August 4, 2003, respondent filed

a motion to continue, which was granted on August 27, 2003.      On

August 8, 2003, petitioner’s counsel filed a motion to withdraw

as counsel, which was granted on August 27, 2003.      From August

27, 2003 through March 16, 2005, petitioner proceeded pro se.

     The case was recalendared for the Court’s Los Angeles trial

session beginning March 15, 2004.    On March 1, 2004, petitioner

filed a motion to continue, stating:      “The Petitioner moves this

Honorable Court to grant * * * [a motion to continue] due to:        a.

Incarceration[;]   b. To hire an attorney[;]     c. Review records

with C.P.A.[; and] d. Receive bank records.”      Petitioner’s motion

was granted on March 2, 2004.

     The case was recalendared for the Court’s Los Angeles trial

session beginning October 4, 2004.      On August 20, 2004,

petitioner filed his second motion to continue, asking the Court

to grant his motion “due to the following(s) [sic]:      1. Currently

Incarcerated at the Federal Prison[;] 2. To retain/hire an

Attorney[;] Review records/files with the C.P.A.[; and] 4.

Receive Bank records.”   Petitioner’s motion was granted on

September 14, 2004.

     The case was recalendared for the Court’s Los Angeles trial

session beginning March 14, 2005.    On February 28, 2005,

petitioner filed his third motion to continue, asking the Court
                                - 6 -

to grant his motion “due to:   a/ Incarceration[;] b/ To hire an

attorney[;] c/ Review records with the C.P.A.[;and ] d/ Receive

bank records.”   Respondent objected, noting the two previous

motions to continue on the same grounds and petitioner’s

impending deportation.    The Court denied petitioner’s motion to

continue on March 2, 2005.

     Calendar call was held on March 14, 2005.          At that time,

petitioner was still incarcerated.      David C. Holtz (Mr. Holtz)

attempted to file another motion to continue on petitioner’s

behalf.    Mr. Holtz had not filed an entry of appearance with the

Court, and the Court informed him that he would not be heard

until he filed an entry of appearance.         Mr. Holtz refused to file

an entry of appearance, stating that he intended to file an entry

of appearance only if the motion for continuance would be

granted.   The trial was then scheduled for March 16, 2005.

     On March 16, 2005, Steven R. Mather (Mr. Mather) and Mr.

Holtz filed an entry of appearance.         At that time, petitioner

filed his fourth motion to continue.         In the motion, petitioner

states:

          7.   Petitioner is currently scheduled to be
     released from custody on March 17, 2005, but will be
     escorted to the airport and immediately deported from
     the United States.

                 *    *    *    *       *      *    *
                               - 7 -

           10. Petitioner has made arrangements to retain
     the services of Steve Mather and David Holtz * * *.
     Petitioner’s attorneys in turn have engaged the
     services of Lilly Hsu, C.P.A. to do the accounting
     work.

          11. Once Petitioner is released from
     incarceration and can gain access to his records,
     Petitioner can assist Petitioner’s counsel in preparing
     the case for trial.

                    *     *    *       *   *   *   *

          14. * * * Through no fault of his own, Petitioner
     has been unable to prepare the case for trial, has been
     unable to gain access to Petitioner’s or Respondent’s
     records, and has been unable to assist counsel in the
     preparation of the case for trial.

The Court heard arguments on petitioner’s fourth motion for

continuance, during which respondent objected to the motion on

the basis of the prior history of continuances and petitioner’s

impending deportation.   After a brief hearing, the Court denied

petitioner’s motion.3

                              OPINION

A.   Petitioner’s Fourth Motion for Continuance

     Petitioner contends that the Court should have granted his

fourth motion for continuance filed on March 16, 2005.

Petitioner argues that “severe prejudice [will result] to

petitioner’s case due to petitioner’s unavoidable inability to




     3
        Also on Mar. 16, 2005, respondent filed a motion to
dismiss for lack of prosecution. Following the entry of
appearance by counsel for petitioner and petitioner’s filing of
posttrial briefs, the Court denied respondent’s motion.
                                - 8 -

testify. * * * The injustice to petitioner by the Court’s failure

to grant the motion for continuance is profound.”

     While petitioner’s first three motions for continuance are

not in issue, they provide important context.    All three motions

were filed approximately 2 weeks before the respective calendar

calls and listed the same four grounds for continuance:    (1)

Petitioner’s incarceration; (2) to allow petitioner to hire an

attorney; (3) to give petitioner the time to review records with

an accountant; and (4) to give petitioner time to receive bank

records.

     Petitioner’s fourth motion for continuance was not filed

until March 16, 2005, on the morning of trial and 2 days after

calendar call.    Essentially, the fourth motion offers three

grounds for continuance.    Two of the grounds are:   (1) Petitioner

has been unable to review his records on account of his

incarceration; and (2) petitioner recently hired counsel and an

accountant to help in the preparation of the case.

     Rule 133 provides that a motion for continuance filed within

30 days of the trial date will be denied unless the ground for

continuance arose during that period or there is a good reason

for not making the motion sooner.    See Higginbotham v.

Commissioner, T.C. Memo. 2005-270; Smith v. Commissioner, T.C.

Memo. 2004-198.    Employment of an attorney or an accountant

shortly before trial ordinarily is not grounds for a continuance.
                                - 9 -

Rule 133; Schaefer v. Commissioner, T.C. Memo. 1998-163, affd.

without published opinion 188 F.3d 514 (9th Cir. 1999); Harris v.

Commissioner, T.C. Memo. 1992-638.

       From March 1, 2004, when petitioner filed his first motion

for continuance, through March 16, 2005, when petitioner filed

his fourth motion, petitioner has asserted that he has been

unable to review his records on account of his incarceration.

This ground for continuance did not arise within 30 days of trial

and thus does not justify granting petitioner’s motion.      See Rule

133.

       Petitioner, acting pro se, filed his third motion for

continuance on February 28, 2005, which was denied on March 2,

2005.    While the record is unclear, it is likely that petitioner

hired Mr. Holtz and Mr. Mather, who in turn hired an accountant,

sometime after the third motion was denied, or within 2 weeks of

trial.    In addition, Mr. Holtz and Mr. Mather were not recognized

by the Court as petitioner’s representatives until they filed an

entry of appearance on March 16, 2005, the day of trial.

Petitioner had more than 1-1/2 years to hire counsel and an

accountant after his first attorney withdrew.    His employment of

counsel and an accountant so close to trial does not justify

granting petitioner’s motion.    See Rule 133; Schaefer v.

Commissioner, supra; Harris v. Commissioner, supra.
                              - 10 -

     Petitioner’s third ground for continuance is that he was set

to be released on March 17, 2005, and would be better able to

prepare for trial after his release.   While petitioner was set to

be released from incarceration on March 17, 2005, he was to be

immediately deported.   Petitioner’s counsel represented that,

upon order of this Court, petitioner would be allowed back into

the country for 60 days to prepare for and attend trial.

However, they offered no proof of this assertion.   Additionally,

there is nothing to indicate that petitioner would come back to

the United States to prepare for or attend trial.   Petitioner has

repeatedly filed motions for continuance within approximately 2

weeks of trial and has apparently failed to take any steps in

preparation for trial since his first attorney withdrew.

Considering the history of this case, we doubt petitioner would

be more likely to prepare for trial after deportation.   We find

that petitioner’s release from incarceration, given his immediate

deportation, does not justify granting petitioner’s motion.

     The Court has wide discretion to consider the prejudice to

all parties to a case when ruling on a motion for continuance.

Morris v. Slappy, 461 U.S. 1, 11-12 (1983) (trial court granted

broad discretion on matters of continuance); Schaefer v.

Commissioner, supra; Harris v. Commissioner, supra.   Any

prejudice to petitioner was the result of his own delay in

preparation for trial and his procrastination in hiring counsel
                                - 11 -

and an accountant.     Petitioner has presented nothing that would

indicate the Court should have granted his fourth motion for

continuance.

B.   Statute of Limitations

     Petitioner argues that the statute of limitations under

section 6501 bars the issuance of respondent’s notice of

deficiency because the notice was issued more than 3 years after

petitioner’s 1996 return was due.    Petitioner’s argument is

flawed, both procedurally and substantively.

     Rule 39 provides that “A party shall set forth in the

party’s pleading any matter constituting an avoidance or

affirmative defense, including * * * the statute of limitations.”

Petitioner did not raise the statute of limitations as an

affirmative defense in his petition, reply, or at trial, but does

so for the first time on brief.4    Petitioner’s failure to timely

raise the statute of limitations amounts to a waiver of this

affirmative defense.    Because petitioner has waived it, we need

not consider his argument further.       However, because petitioner

seeks to misapply section 6501, we will briefly address it.




     4
        In his opening brief, petitioner states: “Respondent
apparently contends as an affirmative defense that the statute
remains open”. Respondent is not raising an affirmative defense
and thus the burden is not on respondent to plead it. Petitioner
apparently made this argument in an effort to side-step the fact
that he failed to plead the statute of limitations as an
affirmative defense, and it is without merit.
                              - 12 -

     Section 6501(a) provides:   “Except as otherwise provided in

this section, the amount of any tax imposed by this title shall

be assessed within 3 years after the return was filed (whether or

not such return was filed on or after the date prescribed)”.

(Emphasis added.)   Section 6501(a) thus provides a 3-year period

of limitations on the assessment of tax running from the date

when a return was filed--it does not provide a period of

limitations within which a notice of deficiency must be issued.

Because petitioner did not file a return, respondent may issue a

notice of deficiency at any time and the period of limitations on

assessment remains open indefinitely.   See sec. 6501(c)(3).

Petitioner’s argument has no merit.

C.   Petitioner’s Federal Income Tax Deficiency

     Respondent determined that petitioner had unreported income

of $1,138,436 in 1996, and a corresponding Federal income tax

deficiency of $459,500.   Petitioner asserts that because

respondent failed to produce sufficient evidence of petitioner’s

receipt of taxable income, the notice of deficiency is not

entitled to a presumption of correctness.   Therefore, petitioner

argues, respondent bears the burden of proof with respect to the

unreported income at issue.   In making this argument, petitioner

ignores his own admission.

     The Court of Appeals for the Ninth Circuit, to which an

appeal of this case would lie, has held that the Commissioner’s
                                   - 13 -

deficiency determination is normally entitled to a presumption of

correctness.   Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir.

1985); Delaney v. Commissioner, 743 F.2d 670, 671 (9th Cir.

1984), affg. T.C. Memo. 1982-666; Weimerskirch v. Commissioner,

596 F.2d 358, 360 (9th Cir. 1979), revg. 67 T.C. 672 (1977); see

Rule 142(a); see also Welch v. Helvering, 290 U.S. 111, 115

(1933).   However, in an unreported income case this presumption

arises only when it is supported by some substantive evidence

that the taxpayer received unreported income.         Rapp v.

Commissioner, supra; Delaney v. Commissioner, supra; Weimerskirch

v. Commissioner, supra; see also United States v. Janis, 428 U.S.

433, 441-442 (1976).       Once the Commissioner has carried his

initial burden of introducing some evidence linking the taxpayer

with the income-producing activity, the burden shifts to the

taxpayer to rebut the presumption by establishing by a

preponderance of the evidence that the deficiency determination

is arbitrary or erroneous.        Rapp v. Commissioner, supra; Adamson

v. Commissioner, 745 F.2d 541, 671 (9th Cir. 1984), affg. T.C.

Memo. 1982-371; see Rule 142(a).

     In his answer, respondent states:

          [6](c) In this plea agreement, petitioner admitted
     he had gross income during the calendar year 1996 of at
     least $645,253.00.

                       *      *    *    *    *    *      *

          [6](e) During 1996 the petitioner was in the trade
     or business of obtaining passports and visas.
                                  - 14 -

                       *      *   *    *   *    *    *

          [6](m) Petitioner admitted in his plea agreement
     that in 1996 he had income from his trade or business
     of obtaining U.S. passports and of obtaining Republic
     of the Marshall Island passports for various
     individuals.

          [6](n) Petitioner had income in 1996 from his
     trade or business of obtaining legitimate U.S.
     passports for residence outside of the United States,
     including residence of the Marshall Islands.

In his reply to answer, petitioner states:

            6(a) through (c), inclusive.   Admits.

                       *      *   *    *   *    *    *

            6(e).   Admits.

                       *      *   *    *   *    *    *

            6(m).   Admits.

            6(n).   Admits.

Petitioner’s admissions are sufficient for respondent to carry

his initial burden of connecting petitioner with the income-

producing activity.     Thus, the burden is on petitioner to show

that respondent’s deficiency determination is arbitrary or

erroneous.    See Rule 142(a).

     Petitioner’s argument focused exclusively on respondent’s

alleged inability to connect petitioner with the income-producing

activity.    Petitioner did not produce any evidence that would

indicate respondent’s determinations were incorrect.     Petitioner

has failed to meet his burden of proof.     Therefore, we sustain

respondent’s determination that petitioner had unreported income
                                - 15 -

of $1,138,436 and a Federal income tax deficiency of $459,500 for

1996.

D.     Addition to Tax Under Section 6651(f)

        Respondent determined that petitioner is liable for an

addition to tax under section 6651(f) of $344,625 for fraudulent

failure to file a return in 1996.     Petitioner argues that

respondent has not met his burden of proof under Rule 142(b) and

section 7454(a).

        Section 6651(f) imposes an addition to tax of up to 75

percent of the amount of tax required to be shown on the return

where the failure to file a Federal income tax return is due to

fraud.     The Commissioner has the burden of proving fraud by clear

and convincing evidence.     Sec. 7454(a); Rule 142(b); Clayton v.

Commissioner, 102 T.C. 632, 646, 652-653 (1994).     For this

purpose, we consider the same factors under section 6651(f) that

are considered in imposing the fraud penalty under section 6663

and former section 6653(b).     Clayton v. Commissioner, supra at

653.

        Fraud is an intentional wrongdoing designed to evade tax

known or believed to be owing.     Edelson v. Commissioner, 829 F.2d

828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223; Bradford v.

Commissioner, 796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo.

1984-601.     The existence of fraud is a question of fact to be

resolved upon consideration of the entire record.     DiLeo v.
                              - 16 -

Commissioner, 96 T.C. 858, 874 (1991), affd. 959 F.2d 16 (2d Cir.

1992); Recklitis v. Commissioner, 91 T.C. 874, 909 (1988).     Fraud

is rarely established by direct evidence, and various kinds of

circumstantial evidence may be relied upon to establish fraud.

Bradford v. Commissioner, supra at 307; Stone v. Commissioner, 56

T.C. 213, 224 (1971).

     Courts have developed several indicia, or “badges of fraud”,

from which fraud may be inferred.   See Bradford v. Commissioner,

supra at 307-308; Clayton v. Commissioner, supra at 647;

Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).   Although

no single badge is necessarily sufficient to establish fraud, the

existence of several badges may be persuasive circumstantial

evidence of fraud.   Niedringhaus v. Commissioner, supra.

Respondent argues the following badges of fraud are present:    (1)

Failing to file tax returns; (2) understating income; (3)

maintaining inadequate books and records; (4) sophistication in

business affairs; (5) concealing assets; (6) dealing in large

amounts of cash; (7) engaging in illegal activities; and (8)

failing to make estimated tax payments.5

     Petitioner’s plea of guilty to three counts under section

7203 conclusively establishes petitioner’s willful failure to

file tax returns in 1993, 1994, and 1996, which is a badge of


     5
        Respondent framed the badges of fraud in a different
manner. However, several of the badges alleged by respondent
were repetitive, and are thus listed only once.
                               - 17 -

fraud.    See Castillo v. Commissioner, 84 T.C. 405, 409-410

(1985).   Respondent also established that petitioner failed to

make estimated tax payments in 1996.

     In an attempt to establish the remaining badges of fraud,

respondent relies almost entirely on petitioner’s plea agreement,

the plea hearing transcript, and testimony directed towards those

documents.   However, at trial, respondent informed the Court that

the documents were under the seal of the U.S. District Court for

the Central District of California.     Respondent further stated

that the seal could have been removed but was not because

respondent’s counsel failed to realize the seal was in place

until the week before trial.   Respondent provided no authority

for our using those documents while they are under seal.    The

Court informed respondent that it would respect the seal of a

Federal District Court and would not consider the plea agreement

or the plea hearing transcript.   In an attempt to get into

evidence the information contained in those documents, respondent

called Special Agent Bautista as a witness.    Specifically,

Special Agent Bautista testified to admissions purportedly made

by petitioner during the plea hearing.    However, the testimony

was struck from the record because it was based on Special Agent

Bautista’s reading of the sealed documents.    The purported

admissions were not made directly to Special Agent Bautista, and

he had no independent recollection of the admissions.
                               - 18 -

     In his posttrial briefs, respondent continued to rely on

information contained in the plea agreement, the plea hearing

transcript, and Special Agent Bautista’s testimony despite being

informed that the sealed documents would not be considered and

after the testimony was struck from the record.

     The only other information used by respondent in an attempt

to establish fraud was the testimony of Agent Golub.   Agent Golub

offered general statements that petitioner failed to maintain

adequate books and records, concealed assets and income, and

dealt heavily in cash.   However, there is nothing in the record

to provide any detail with respect to Agent Golub’s testimony.

Respondent failed to provide sufficient information that would

allow the Court to consider these purported badges of fraud.

     Respondent did not present fact witnesses or introduce clear

and convincing evidence to establish that petitioner’s failure to

file a return in 1996 was due to fraud.   Instead, respondent

relied on sealed documents, testimony struck from the record, and

vague testimony of one of his agents.   We find that respondent

failed to meet his burden of proving fraud by clear and

convincing evidence.   Therefore, we hold that petitioner is not

liable for an addition to tax under section 6651(f) for

fraudulent failure to file.6


     6
        Respondent has not argued in the alternative that
petitioner is liable for an addition to tax under sec.
                                                   (continued...)
                             - 19 -

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,

                                           Decision will be entered

                                      for respondent as to the

                                      deficiency in income tax and

                                      for petitioner as to the

                                      addition to tax.




     6
      (...continued)
6651(a)(1), and thus, we do not consider it.
