                          T.C. Memo. 1996-111



                        UNITED STATES TAX COURT



                    ADEL ABDALLA, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 21678-94.              Filed March 11, 1996.



      Linda S. Bednarz and Kenneth J. Rubin, for respondent.



                          MEMORANDUM OPINION

      VASQUEZ, Judge:    This case is before the Court on

respondent's motion for entry of default judgment pursuant to

Rule 123(a).1   By separate notices of deficiency, respondent

determined additions to petitioner's Federal income tax for fraud

under section 6653(b), as follows:2

1
   All Rule references are to this Court's Rules of Practice and
Procedure, and all section references are to the Internal Revenue
Code in effect for the years in issue.
2
    Prior to the issuance of the notices of deficiency, but
                                                    (continued...)
                                   - 2 -


                                         Additions to Tax3
                               Sec.             Sec.             Sec.
Year      Deficiency       6653(b)(1)(A)    6653(b)(1)(B)     6653(b)(1)

1987         -0-            $48,272.78        $6,565.11           ---
1988         -0-               ---               ---          $39,920.66

Background

       Petitioner invoked the jurisdiction of this Court on

November 23, 1994, by timely filing a petition for

redetermination.       Petitioner resided in Schnecksville,

Pennsylvania, at the time the petition was filed.         Respondent's

answer, filed on March 6, 1995, after an extension to file the

answer was granted, asserted affirmative allegations of fact in

support of the foregoing additions to tax for fraud.

Respondent's answer reads, in pertinent part, as follows:

       7. FURTHER ANSWERING the petition, and in support of the
       determination that a part of the underpayments of tax
       required to be shown on the petitioner's income tax returns
       for the taxable years 1987 and 1988 are due to fraud, the
       respondent alleges:




2
 (...continued)
subsequent to being contacted by the Internal Revenue Service
regarding the examination of his originally filed 1987 and 1988
returns, petitioner filed amended returns wherein he admitted
understating his tax liabilities for 1987 and 1988 in the amounts
of $64,363.71 and $53,227.64, respectively. The filing of
amended returns, however, does not vitiate any fraud perpetrated
when the returns were due. See Badaracco v. Commissioner, 464
U.S. 386, 394 (1984).
3
   The additions to tax for fraud determined by respondent in the
notices of deficiency were based on the understated tax
liabilities reported by petitioner on his amended 1987 and 1988
returns.
                         - 3 -


     (a) During each of the taxable years 1987 and 1988, the
petitioner owned and operated Papa's Restaurant in
Schnecksville, Pennsylvania, a sole proprietorship.

     (b) During the taxable years 1987 and 1988,
petitioner's restaurant earned gross receipts of $900,510.38
and $977,136.00, respectively. On his original income tax
returns for 1987 and 1988, petitioner reported gross
receipts of $363,732.00 and $407,503.10, respectively.

     (c) During the taxable years 1987 and 1988,
petitioner's cost of goods sold were $466,628.78 and
$514,119.57, respectively. On his original income tax
returns for 1987 and 1988, petitioner reported cost of goods
sold of $114,094.14 and $131,412.90, respectively.

     (d) The petitioner understated his taxable income on
his income tax returns for the taxable years 1987 and 1988,
in the amounts of $192,429.16 and $193,253.20, respectively.

     (e) The petitioner understated his income tax
liabilities on his income tax returns for the taxable years
1987 and 1988 in the amounts of $68,912.50 and $62,153.90,
respectively.

      (f) Petitioner Adel Abdalla fraudulently and with
intent to evade taxes for the taxable years 1987 and 1988,
filed false income tax returns for said years that omitted
the skimmed cash receipts and understated cost of goods
sold.

     (g) Respondent's determination of the omission of
income and cost of goods sold is corroborated by the fact
that petitioner filed two documents captioned "Amended
United States Individual Income Tax Returns" for the years
1987 and 1988 with the Internal Revenue Service Center in
Philadelphia, Pennsylvania including all the omitted income
for these years. These amended returns were received at the
Internal Revenue Service Center on December 4, 1989. Said
documents were not sent to the Internal Revenue Service
Center until the Examination Division had contacted the
petitioner regarding his 1987 and 1988 federal income tax
returns.

     (h) Respondent's determination of the understatement of
cost of goods sold has also been corroborated by documenting
cost of goods sold through contact with petitioner's
suppliers.
                              - 4 -


          (i) In an effort to avoid detection of the skimmed cash
     receipts, petitioner purchased a large amount of his
     supplies with cash and only reported a portion of his cost
     of goods sold during 1987 and 1988.

          (j) Petitioner fraudulently and with intent to   evade
     taxes, falsely informed his return preparer in 1987   and 1988
     that all gross receipts and cost of goods sold were   reported
     on the original income tax returns, and that he had   no
     additional income or expenses for those years.

          (k) Petitioner Adel Abdalla's fraudulent
     understatements of his gross receipts and cost of goods sold
     on his income tax returns for 1987 and 1988 is part of a two
     year pattern of intent to evade taxes.

          (l) The petitioner fraudulently, and with intent to
     evade taxes, omitted from his income tax returns for the
     taxable years 1987 and 1988, substantial amounts of gross
     receipts from his schedule C restaurant business, in the
     amounts of $536,778.18 and $569,632.90, respectively.

          (m) The petitioner fraudulently, and with intent to
     evade taxes, omitted from his income tax returns for 1987
     and 1988, substantial amounts of cost of goods sold from his
     schedule C restaurant business, in the amounts of
     $352,534.64 and $382,706.67, respectively.

          (n) A part of each deficiency in income tax for the
     taxable years 1987 and 1988, is due to fraud with intent to
     evade taxes.

     Petitioner filed a reply on May 17, 1995, wherein he denied

generally portions of respondent's answer relating to

petitioner's alleged fraudulent conduct.   By notice dated July 7,

1995, the Court set this case for trial at the Philadelphia,

Pennsylvania, trial session beginning on December 11, 1995.    This

notice specifically stated that "YOUR FAILURE TO APPEAR MAY

RESULT IN DISMISSAL OF THE CASE AND ENTRY OF DECISION AGAINST

YOU."
                               - 5 -


     On September 25, 1995, petitioner's counsel filed a motion

to withdraw their representation of petitioner.   That motion

recites that petitioner removed himself from the United States

subsequent to filing the petition in this case following a

criminal indictment against him in the U.S. District Court for

the Eastern District of Pennsylvania, and that thereafter

petitioner had not cooperated with his counsel in preparing this

case for trial.   The motion also provided a mailing address in

Egypt where petitioner's counsel believed Mr. Abdalla could be

reached.   The Court, by Order dated September 29, 1995, granted

the motion of counsel to withdraw, and stated the following:

          ORDERED that if petitioner fails to appear, in
     person or by counsel, at the trial session and if
     petitioner continues to be a fugitive from justice and
     fails to prepare his case for trial, the Court will
     consider dismissing this case for failure properly to
     prosecute and will enter decision for respondent.

The Court served a copy of the September 29, 1995, Order and a

copy of the Court's standing pretrial order on petitioner at both

the Schnecksville, Pennsylvania, address provided by him in his

petition and the address in Egypt provided by petitioner's

counsel in their motion to withdraw representation.4




4
   There is no indication in the Court's records that petitioner
did not receive the pretrial order, the Sept. 29, 1995, Order, or
the notice setting this case for trial which was previously
served on petitioner at his Schnecksville, Pennsylvania, address.
Rule 21(b)(4) requires parties to notify the Court of any change
of mailing address.
                                  - 6 -


       This case was called at the Court's trial calendar in

Philadelphia, Pennsylvania, on December 11, 1995.     Petitioner did

not appear.    At that time, respondent filed her motion for

default judgment pursuant to the provisions of Rule 123(a).

Discussion

       Rule 123(a) provides that if any party fails to plead or

otherwise proceed as provided by the Rules or as required by the

Court, such party may be held in default on the motion of the

other party.    Smith v. Commissioner, 91 T.C. 1049, 1056 (1988),

affd. 926 F.2d 1470 (6th Cir. 1991).      The action or nonaction on

the part of a taxpayer that constitutes sufficient grounds to

apply Rule 123(a) in proceedings before us is a matter within

this Court's discretion.    Id.    In light of the affirmative

allegations in respondent's answer, petitioner's failure to

appear and to proceed with prosecution of his case, despite the

Court's warning in its notice setting this case for trial, its

pretrial order, and its September 29, 1995, order granting the

motion of petitioner's counsel to withdraw, constitutes

sufficient grounds for the entry of a default judgment against

him.

       The entry of default under Rule 123(a) has the effect of

admitting all well-pleaded facts in the Commissioner's answer.

Id. at 1056-1058; Bosurgi v. Commissioner, 87 T.C. 1403, 1409

(1986).    This is true even when a reply has been filed by a

taxpayer which addresses the facts pleaded by the Commissioner in
                                - 7 -


her answer.   Smith v. Commissioner, 926 F.2d at 1478; Rechtzigel

v. Commissioner, 79 T.C. 132, 142 n.11 (1982) ("the necessary

effect of defaulting petitioner is to deem admitted the

affirmative allegations in the answer irrespective of

petitioner's denial [in the reply].     The sanction thus converts

the denial into an admission."), affd. 703 F.2d 1063 (8th Cir.

1983).   Entry of a default decision as to the additions to tax

for fraud (on which the Commissioner has the burden of proof) is

appropriate upon a determination, which is within this Court's

discretion, that the pleadings set forth sufficient facts to

support such a decision.   Smith v. Commissioner, 91 T.C. at 1058-

1059.

     Based upon the pleadings in this case, there is ample

support for finding that petitioner fraudulently underpaid his

taxes for the years in issue.   The facts contained in the answer

are sufficient to establish the existence of fraudulent conduct

by petitioner.   Prominent among the matters contained in the

pleadings are petitioner's admissions that:    (1) The omission of

specific items of income for the years in issue is part of a

2-year pattern of intent to evade taxes; (2) petitioner

understated taxable income for those years; and (3) a part of

each understatement for the years in issue is due to fraud with

intent to evade taxes.

     The above-pleaded facts clearly establish that petitioner

fraudulently underpaid his income taxes for the years in issue.
                                 - 8 -


Thus, we are satisfied that the additions to tax for fraud for

the years in issue should be sustained by the entry of a default

against petitioner pursuant to Rule 123(a).5

     To reflect the foregoing,


                                         An appropriate order will be

                                 issued, and decision will be

                                 entered for respondent.




5
   We are mindful of the decision of the U.S. Court of Appeals
for the Third Circuit, to which an appeal of this case would lie,
in Estate of Spear v. Commissioner, 41 F.3d 103 (3d Cir. 1994),
revg. T.C. Memo. 1993-213. However, the situation in Estate of
Spear and that of this case are wholly dissimilar. Petitioner
has simply failed to participate in the preparation for, or trial
of, his case before us.
