                        T.C. Memo. 1997-256



                      UNITED STATES TAX COURT



                   JOHN DEVLIN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7779-94.                        Filed June 9, 1997.



     Randall L. Preheim, for respondent.



                        MEMORANDUM OPINION


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

Motion for Summary Judgment pursuant to Rule 121.1   Respondent's

Motion for Summary Judgment was based on matters deemed admitted

by reason of petitioner's failure to respond to two requests for

     1
      All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                 - 2 -

admissions served by respondent under Rule 90(c).      Petitioner

resided in Lakewood, Colorado, at the time his petition was

filed.

Background

     Respondent determined deficiencies in and additions to tax

as follows:

                                             Additions to Tax
                                            Sec.           Sec.
         Year       Deficiency           6651(a)(1)1       6654

         1990         $2,269               $1,632           $143
         1991         27,458               20,357          1,559
         1992          5,998                4,496            260

                1
            Respondent, in the Amended Answer to Amended
     Petition, alleged that petitioner is liable for additions to
     tax for fraud under sec. 6651(f) for 1990, 1991, and 1992.
     Respondent relies on the additions to tax determined in the
     notice of deficiency under sec. 6651(a)(1) as an alternative
     position, if we find that petitioner is not liable for
     additions to tax for fraud under sec. 6651(f).


     Petitioner worked as an insurance agent for the Prudential

Life Insurance Company (Prudential) during 1990, 1991, and 1992.

Prudential employed him to sell insurance and annuities to

Prudential clients but did not authorize him to sell securities.

In his capacity as a Prudential insurance agent, petitioner

convinced Prudential clients to cancel their Prudential annuities

and transfer the proceeds to another company, named Project

Input, Inc., which petitioner alleged was sponsored by
                                - 3 -

Prudential.2    The Prudential clients would write a check made

payable to petitioner, and in return the clients would receive an

installment note.    The installment note stated that it was for an

investment known as Neo Genesis Paradigm, Inc.3    Petitioner would

then convert the proceeds from this transaction to his own use.

Such transactions occurred on three different occasions from 1991

through 1992.    Each time, petitioner targeted an elderly client.

     On May 6, 1992, petitioner was charged in Denver County

Court, Denver, Colorado, with theft from the elderly, fraud, and

selling securities without a license.    Petitioner pleaded guilty

to attempted fraud and deceit in offering securities, was placed

on probation for 16 years, and was ordered to pay restitution to

Prudential in the amount of $107,000.

     In the notice of deficiency, respondent determined that

petitioner did not file returns for the taxable years 1990, 1991,

and 1992.   Respondent also determined that petitioner realized

gross income for those years in the amounts of $20,436, $107,301,

and $27,381, respectively.4    The gross income determined by

respondent resulted in deficiencies of $2,269, $27,458, and

     2
      In fact, Prudential does not have any connection with
Project Input, Inc., nor does the Colorado Secretary of State
have a record of it.
     3
      Respondent's first and second requests for admission refer
to Neo Genesis Paradigm, Inc. and Neo Genesis. These are
references to the same entity.
     4
      Petitioner also did not file individual Federal income tax
returns for the tax years 1986-89.
                                - 4 -

$5,998, for the taxable years 1990, 1991, and 1992, respectively.

Additionally, in the Amended Answer to Amended Petition, respon-

dent asserted that petitioner was liable for the addition to tax

for fraud under section 6651(f).   In the alternative, respondent

relies on the determination in the notice of deficiency that

petitioner was liable for a 25 percent addition to tax under

section 6651(a)(1).

     Petitioner filed a petition in this Court on July 11, 1994.

On December 30, 1994, the case was calendared for trial during

the trial session beginning on June 5, 1995.

     On March 8, 1995, this Court granted the parties' first

Joint Motion for Continuance and continued the case for trial

from the June 5, 1995, trial session.    Subsequently, on May 25,

1995, the case was again calendared for trial during the trial

session beginning on October 30, 1995.   On September 7, 1995, the

Court granted the parties' second Joint Motion for Continuance,

to allow time for petitioner's recovery from brain and spinal

cord injuries.   On December 6, 1995, petitioner requested an

additional 90 days in which to answer Respondent's Requests for

Admission (First Admission Request), which had been mailed to

petitioner on October 31, 1995.    This Court granted the extension

of time until April 25, 1996.

     Respondent's Second Requests for Admission (Second Admission

Request) was mailed to petitioner on May 21, 1996.   Petitioner

did not answer either the First Admission Request or the Second
                                - 5 -

Admission Request.   Not having received a response from petition-

er, respondent filed a Motion for Summary Judgment on August 8,

1996, asking that, based on matters deemed admitted by petitioner

as set forth in respondent's requests for admission, we find

petitioner liable for the deficiencies as determined by respon-

dent in the notice of deficiency.    Further, respondent asked the

Court to find that respondent had met the burden of proving that

petitioner fraudulently failed to file a Federal income tax

return for each of the years at issue.    The Court ordered a

response from petitioner to respondent's Motion for Summary

Judgment on or before September 9, 1996.    Petitioner failed to

respond to the Court's order.    By order dated October 3, 1996,

respondent's Motion for Summary Judgment was calendared for

hearing on December 2, 1996.    At the hearing, no appearance by or

on behalf of petitioner was made.    The Court heard respondent's

arguments on the Motion for Summary Judgment and took it under

advisement.

Discussion

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Kroh v. Commissioner, 98

T.C. 383, 390 (1992); Florida Peach Corp. v. Commissioner, 90

T.C. 678, 681 (1988).    Rule 121 provides that either party may

move for summary judgment upon any or all parts of the legal

issues in controversy.    When either party makes such a motion,

the opposing party must file "An opposing written response,
                                 - 6 -

with or without supporting affidavits * * * within such period

as the Court may direct."    Rule 121(b).   Summary judgment is

appropriate "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 moving party

bears the burden of proving that there is no genuine issue of

material fact, and factual inferences are viewed in the light

most favorable to the nonmoving party.      United States v. Diebold,

Inc., 369 U.S. 654, 655 (1962); Preece v. Commissioner, 95 T.C.

594, 597 (1990).     A fact is material if it "tends to resolve any

of the issues that have been properly raised by the parties."

10A Wright et al., Federal Practice and Procedure, Civil 2d, sec.

2725, at 93 (2d ed. 1983).

       The facts are established by the First Admission Request and

the Second Admission Request that respondent served on petition-

er.    Under Rule 90(c), matters set forth in requests for admis-

sion are deemed admitted unless an answer or objection is served

on the requesting party "within 30 days after service of the

request or within such shorter or longer time as the Court may

allow".    Since petitioner in the instant case has failed to

respond to respondent's requests, the facts set forth in the

requests for admission are deemed admitted.

A.    Deficiencies
                                - 7 -

     Respondent seeks summary judgment that the deficiencies and

additions to tax determined in the notice of deficiency and

amended answer be sustained.    The first issue is whether peti-

tioner is liable for the deficiencies.    The deficiencies are in

the amounts of $2,269, $27,458, and $5,998 for the taxable years

1990, 1991, and 1992.    The deficiencies arose because petitioner

failed to file Federal income tax returns and report gross income

for the taxable years 1990, 1991, and 1992 in the amounts of

$20,436, $107,301, and $27,381, as determined in the notice of

deficiency.

     Section 61 defines gross income as income from whatever

source derived.    The Supreme Court has held that, when earnings

are acquired, lawfully or unlawfully, without a consensual recog-

nition of an obligation to repay and without restriction on their

disposition, there is income to the taxpayer even though he may

be required to pay restitution at a later date.    James v. United

States, 366 U.S. 213, 219 (1961).    This proposition has been

extended to cover situations where the taxpayer "obtained loans

in bad faith without an intent to repay them," as well as where

the taxpayer obtained money by embezzlement, as in the James

case.    United States v. Swallow, 511 F.2d 514, 519-520 (10th Cir.

1975).    The evidence establishes that petitioner received wage

and interest income of $20,436 in 1990.    In 1991, petitioner

received $92,000 of embezzlement income as well as wage and

interest income of $15,301.    Further, the evidence establishes
                                  - 8 -

that, for the taxable year 1992, petitioner received $15,000 in

embezzlement income, $1,381 in wage income, and $11,000 in

taxable cash receipts.   Based on the admitted facts, we sustain

the deficiencies for 1990, 1991, and 1992, as determined in the

notice of deficiency.

B.   Additions to Tax for Fraud

      The second issue is whether petitioner is liable for the

additions to tax for fraud under section 6651(f).    Section

6651(f) provides for a maximum addition to tax of 75 percent if

any failure to file is fraudulent.

      The additions to tax in the case of fraud are civil

sanctions provided primarily as a safeguard for the protection of

the revenue and to reimburse the Government for the heavy expense

of investigation and for the loss resulting from the taxpayer's

fraud.   Helvering v. Mitchell, 303 U.S. 391, 401 (1938).      Respon-

dent has the burden of making a clear and convincing showing that

the failure to file a Federal income tax return for each year was

due to fraud.   See Rule 142(b); sec. 7454(a).   Fraud is

intentional wrongdoing on the part of the taxpayer with the

specific purpose of evading a tax believed to be owing.     Petzoldt

v. Commissioner, 92 T.C. 661, 698 (1989).   Fraud is shown by

proof that the taxpayer intended to conceal, mislead, or other-

wise prevent the collection of his taxes.   Stoltzfus v. United

States, 398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner,

394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81.      In
                                - 9 -

evaluating petitioner's fraudulent intent under section 6651(f),

we consider the same elements as are relevant for section 6663

and former section 6653(b).    See Clayton v. Commissioner, 102

T.C. 632, 652-653 (1994).

     Over the years, courts have developed a number of objective

factors, or "badges", that tend to establish fraud.    Recklitis v.

Commissioner, 91 T.C. 874, 910 (1988).   These badges include:

(1) A pattern of understatement of income, (2) inadequate books

and records, (3) failure to file tax returns, (4) concealment of

assets, (5) failure to cooperate with tax authorities, (6) income

from illegal activities, (7) implausible or inconsistent explana-

tions of behavior, (8) an intent to mislead which may be inferred

from a pattern of conduct, (9) lack of credibility of the tax-

payer's testimony, and (10) dealings in cash.    Laurins v. Commis-

sioner, 889 F.2d 910, 913 (9th Cir. 1989), affg. Norman v. Com-

missioner, T.C. Memo. 1987-265; Edelson v. Commissioner, 829 F.2d

828, 832 (9th Cir. 1987), affg. T.C. Memo. 1986-223; Petzoldt v.

Commissioner, supra at 699; Rowlee v. Commissioner, 80 T.C. 1111,

1125 (1983).   Though this list of the badges of fraud is nonex-

clusive, it is illustrative.    Miller v. Commissioner, 94 T.C.

316, 334 (1990).

     Respondent based the Motion for Summary Judgment on the

facts set forth in respondent's requests for admission, which

were deemed admitted.   Matters deemed admitted pursuant to Rule

90 are conclusively established and may be sufficient to support
                              - 10 -

the granting of a motion for summary judgment.   Morrison v.

Commissioner, 81 T.C. 644, 651 (1983).   Respondent may establish

fraud by relying on facts deemed admitted under Rule 90(c).

Marshall v. Commissioner, 85 T.C. 267, 272-273 (1985); Doncaster

v. Commissioner, 77 T.C. 334, 336 (1981).

     Respondent has established through petitioner's deemed

admissions that petitioner's failure to file a Federal income tax

return for each of the taxable years 1990, 1991, and 1992 was

fraudulent.   Respondent has demonstrated petitioner's fraudulent

intent by establishing "badges of fraud".

     The deemed admissions establish that petitioner failed to

file Federal income tax returns from taxable year 1986 through

taxable year 1992.   Petitioner received payroll checks and Forms

W-2 from Prudential in 1990, 1991, and 1992.   Petitioner also

submitted a false Form W-4 to Prudential for taxable year 1990.

Further, from 1991 to 1992, petitioner converted to his own use

$107,000 that he received from elderly individuals in his

capacity as a Prudential insurance agent.

     To avoid summary judgment, petitioner must set forth

specific facts showing that there is a genuine issue for trial

and cannot rely upon mere allegations and denials in his peti-

tion.   Rule 121(d); O'Neal v. Commissioner, 102 T.C. 666, 674

(1994).   Petitioner has failed to refute the material facts on

which respondent's fraud claims are based for the taxable years

1990, 1991, and 1992.   Through the deemed admission of facts set
                              - 11 -

forth in respondent's requests for admission, respondent has

established by clear and convincing evidence that petitioner's

failure to file Federal income tax returns for the years in issue

was fraudulent.   Thus, we shall grant respondent's Motion for

Summary Judgment and sustain the additions to tax for fraud

asserted in respondent's Amended Answer to Amended Petition for

the taxable years 1990, 1991, and 1992.    Because we are granting

respondent's Motion for Summary Judgment for the additions to tax

for fraud, we do not need to consider respondent's alternate

position that petitioner is liable for additions to tax under

section 6651(a)(1).

     To reflect the foregoing,

                                      An order granting respondent's

                                 Motion for Summary Judgment will be

                                 issued, and decision will be

                                 entered for respondent.
