                        T.C. Memo. 1997-45



                      UNITED STATES TAX COURT



                TIMOTHY C. SADLIER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22181-94.                    Filed January 27, 1997.



     Timothy C. Sadlier, pro se.

     Willie Fortenberry, Jr., for respondent.



                        MEMORANDUM OPINION


     COLVIN, Judge:   This case is before the Court on

respondent's motion for summary judgment under Rule 121.    On

August 25, 1995, respondent filed a motion for summary judgment

to sustain the adjustments to income and additions to tax

determined in the notice of deficiency.   Timothy C. Sadlier
                                 - 2 -

failed to appear at the calendar call on December 4, 1995, and no

one appeared on his behalf.    We decide this motion on the basis

of the parties' pleadings, admissions, written submissions, and

other acceptable materials.    For reasons stated below, we grant

respondent's motion.

                              Background

     Petitioner lived in Florida when he filed the petition in

this case.

     By notice of deficiency dated November 1, 1994, respondent

determined that petitioner has a deficiency in Federal income tax

and an addition to tax and penalties as follows:

                               Addition To Tax and Penalties
     Year    Deficiency   Sec. 6651(a)(1) Sec. 6662    Sec. 6663

     1989     $29,659          $6,589          $268      $21,240


     Respondent determined that all but $1,339 of the deficiency

was attributable to fraud.    Respondent also determined that

petitioner was liable for a penalty for negligence under section

6662 for this $1,339 part of the deficiency.

     On February 27, 1995, respondent filed an answer to

petitioner's amended petition.    In it, respondent alleged:

     6. FURTHER ANSWERING the amended petition and in
     support of the determination that a part or all of the
     underpayment of tax required to be shown on the
     petitioner's income tax return for the taxable year
     1989 is due, in whole or in part, to fraud with the
     intent on the part of the petitioner to evade tax, the
     respondent alleges:
                         - 3 -

     (a) Prior to and during the year 1989, petitioner,
Timothy Charles Sadlier, was extensively involved in
gambling, especially horse and dog races. Also, prior
to and during 1989, petitioner was involved in other
business activities, whether illegal or legal, which
required the reporting of income.

     (b) During the year 1989, the petitioner derived
unreported taxable income from the aforementioned
business activities as well as additional unreported
rental income and interest income.

     (c) The records maintained by petitioner for the
taxable year 1989 were inadequate in that they were
incomplete and failed to disclose all sources of income
and did not properly reflect the correct taxable income
of petitioner.

     (d) The petitioner's failure to maintain complete
and accurate records of his income-producing activities
and his failure to produce complete and accurate
records for respondent in connection with the
examination of his income tax return for the taxable
year 1989 were fraudulent acts conducted by petitioner
with the intent to evade tax for the taxable year 1989.

     (e) Because of the petitioner's failure to
maintain adequate books and records of his income-
producing activities, his refusal to cooperate with
respondent's examining agents, and his failure to
voluntarily report his federal income tax for the
taxable year 1989, the respondent has determined the
petitioner's correct taxable income for the taxable
year 1989 by the use of a combination sources and
application of funds and specific item method of
reconstructing income. In making her determination,
the respondent has utilized all records, memoranda and
other sources of information which were available.

     (f) Petitioner is an admitted gambler of many
years and was clearly aware that all gambling income
was includable in income in the year of receipt.

     (g) Petitioner also had an extensive history of
arrest involving the distribution of marijuana
paraphernalia.

     (h) During 1989, petitioner received the following
sources of funds totaling $70,901:
                            - 4 -


             Sources of Funds          Tax Year: 1989
     Interest income per return               $145
     Rental income per return                7,800
     Rental income increase (herein)           600
     Gambling winnings per return           23,298
     Sch. C Reentries gross receipts
        per return                           3,260
     Sch. C Reentries gr. receipts
        increase (herein)                    3,003
     Reimbursement from New Horizons        11,700
     NCNB acct #4319742 1/1/89 balance       9,998
     Horse sale proceeds per return          2,500
     Loan from mother                        6,000
     Credit card cash advances               2,597

     Total                                  $70,901

     (i) During 1989, petitioner had the following
application of funds totaling $156,425:

             Application of Funds        Tax Year:    1989

     Withholding credits per return         $3,302
     Sch. C Reentries purchases
        per return                            6,231
     Sch. C Reentries purchases
        decrease herein                        (271)
     Sch. C Reentries expenses
        per return                            5,462
     Sch. E expenses per return               4,200
     Sch. E depreciation per return          (1,677)
     Loan to New Horizons                    95,991
     Personal expenses                       38,180
     NCNB acct #4319742 1/1/89 balance        5,007

     Total                                 $156,425

     (j) For the year 1989, petitioner had unexplained
applications of funds in excess of sources of funds in
the amount of $85,524, which petitioner failed to
report on his fraudulent delinquent income tax return
filed for the taxable year 1989, all with the intent to
evade tax for the period.

     (k) For 1989, petitioner failed to report bartered
rental income in the amount of $600, all with the
intent to evade tax for the period.
                              - 5 -

          (l) Petitioner failed to report income from the
     operation of the business, Re-Entries Consignment Shop
     in the amount of $3,003 for 1989, all with the
     fraudulent intent to evade tax for the period.

          (m) Petitioner filed his 1989 return on September
     18, 1990, with the knowledge that he clearly failed to
     report all income received for the year, whether
     illegal or legal, all with the fraudulent intent to
     evade tax for the year.

          (n) Petitioner failed to report taxable income of
     $94,469 for taxable year 1989, all with the fraudulent
     intent to evade tax for the year.

          (o) Petitioner failed to report his tax liability
     in the amount of $29,659 for 1989, all with the
     fraudulent intent to evade tax for the year.

          (p) A part or all of the underpayment of tax which
     petitioner was required to show on his income tax
     return for the taxable year 1989 is due to fraud.

          7. FURTHER ANSWERING the Amended Petition and in
     the alternative to the additions to the tax for the
     taxable year 1989 due from the petitioner under the
     provisions of I.R.C. section 6663 and in support of
     respondent's claim for additions to the tax for the
     taxable year 1989 under the provisions of I.R.C.
     section 6662(a) in the amount totaling $5,664, the
     respondent alleges as follows:

          (a) Petitioner was clearly aware that when he
     filed his delinquent income tax return that he had not
     reported all the income received by him for the taxable
     year 1989.

          (b) Petitioner's failure to file timely a return
     for 1989 and report his income received during the year
     and petitioner's underpayment of income tax for the
     taxable year 1989 were due to negligence and the
     intentional disregard of rules and regulations, as is
     more fully set forth by the facts in paragraph 6 above,
     which facts are incorporated herein by reference * * *.

     Petitioner did not file a reply to respondent's allegations.

On May 22, 1995, respondent filed a motion under Rule 37(c) to
                               - 6 -

have the undenied allegations of fact deemed admitted.    By notice

of filing dated May 22, 1995, the Court directed petitioner to

file a reply on or before June 12, 1995.    Petitioner did not

respond.   We granted respondent's motion on June 19, 1995.

     On August 28, 1995, we ordered petitioner to file a response

to respondent's motion for summary judgment.    Petitioner did not

do so.

                             Discussion

A.   Summary Judgment and Deemed Admissions

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.     Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).     We grant summary judgment

if the pleadings, answers to interrogatories, depositions,

admissions, affidavits, and any other acceptable materials 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);

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.

17 F.3d 965 (9th Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753,

754 (1988).   The moving party bears the burden of proving that

there is no genuine issue of material fact, and factual

inferences are read in a manner most favorable to the party

opposing summary judgment.   Dahlstrom v. Commissioner, 85 T.C.

812, 821 (1985); Jacklin v. Commissioner, 79 T.C. 340, 344

(1982).
                               - 7 -

     The Commissioner may carry the burden of proof by undenied

facts deemed admitted under Rule 37(c).   Doncaster v.

Commissioner, 77 T.C. 334, 336-338 (1981); Marcus v.

Commissioner, 70 T.C. 562, 577 (1978), affd. without published

opinion 621 F.2d 439 (5th Cir. 1980); Gilday v. Commissioner, 62

T.C. 260, 262 (1974).   If facts are deemed admitted under Rule

37(c), the Commissioner may move for judgment on the issues,

including fraud, on the basis of the facts deemed admitted under

Rule 121 (summary judgment). Gordon v. Commissioner, 73 T.C. 736,

739 (1980).

B.   Deficiency

     Respondent seeks summary judgment that the deficiency and

addition to tax and penalties determined in the notice of

deficiency be sustained.   The allegations in respondent's answer

to petitioner's amended petition were deemed admitted under Rule

37(c) when we granted respondent's motion on June 19, 1995.    On

the basis of those deemed admissions respondent seeks to hold

petitioner liable for the deficiency in income tax and addition

to tax and penalties respondent determined in the notice of

deficiency.

     We conclude that there are no genuine issues of material

fact, and that respondent is entitled to judgment sustaining

respondent's determination of the deficiency and addition to tax

and penalties for 1989 as a matter of law.
                                 - 8 -

C.   Fraud

     Respondent determined that petitioner is liable for fraud

under section 6663.     Respondent affirmatively pled fraud and the

facts in support of fraud in the answer.       Respondent has the

burden of proving, by clear and convincing evidence, that some

part of the underpayment for the year in issue was due to fraud.

Secs. 6663(b), 7454(a); Rule 142(b).       Respondent must establish

that petitioner underpaid tax and that part of the underpayment

was due to fraud.    Sec. 6663(b).   The deemed admissions under

Rule 37(c) establish that petitioner underpaid tax for 1989 in

the amount determined by respondent.        Doncaster v. Commissioner,

supra.

     Respondent must prove by clear and convincing evidence that

petitioner had fraudulent intent.        Parks v. Commissioner, 94 T.C.

654, 664 (1990).    Fraud means actual, intentional wrongdoing,

Mitchell v. Commissioner, 118 F.2d 308, 310 (5th Cir. 1941),

revg. 40 B.T.A. 424 (1939), or the intentional commission of an

act for the specific purpose of evading a tax believed to be

owing, Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968),

affg. T.C. Memo. 1966-81.    The deemed admissions also establish

that petitioner did not report all of his income.

     The courts have developed a number of objective indicators

or "badges" of fraud.     Recklitis v. Commissioner, 91 T.C. 874,

910 (1988).   Several badges of fraud are present in this case:
                                 - 9 -

(1) A large understatement of income, (2) inadequate records, and

(3) failure to cooperate with tax authorities.    Bradford v.

Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986), affg. T.C.

Memo. 1984-601; Ruark v. Commissioner, 449 F.2d 311, 312-313 (9th

Cir. 1971), affg. T.C. Memo. 1969-48.

     1.     Large Understatement of Income

     The deemed admissions establish that petitioner knowingly

underreported $94,469 in income for 1989 that he derived from

business, gambling, and barter activities, and that he knew that

gambling income was includable in income in the year of receipt.

     2.     Inadequate Records

     A taxpayer's failure to maintain accurate records is a badge

of fraud.    Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir.

1962), affg. T.C. Memo. 1959-172; Reaves v. Commissioner, 295

F.2d 336, 338 (5th Cir. 1961), affg. 31 T.C. 690 (1958).     The

deemed admissions establish that petitioner's records were

incomplete and did not disclose all of his sources of income.

     3.     Failure To Cooperate With Tax Authorities

     A taxpayer's failure to cooperate with the Commissioner's

examining agents is a badge of fraud.    Bradford v. Commissioner,

supra.    The deemed admissions establish that petitioner refused

to cooperate with respondent's examining agents, forcing them to

use alternative methods to reconstruct petitioner's income.

     Respondent has established by clear and convincing evidence

that petitioner intended to evade tax.    We conclude that
                              - 10 -

petitioner is liable for the fraud penalty under section 6663 for

1989 and that $28,320 of the underpayment for 1989 was due to

fraud.   In the memorandum of authorities in support of the motion

for summary judgment, respondent conceded that $1,339 of the

underpayment for 1989 was not due to fraud.   Respondent contends

that this amount is due to negligence under section 6662.   The

deemed admissions establish that petitioner is liable for the

negligence penalty as to the $1,339 because petitioner failed to

keep adequate records and negligently failed to report income.

     We will grant respondent's motion for summary judgment to

sustain the adjustments to income and addition to tax and

penalties determined in the notice of deficiency.



                                         An appropriate order and

                                    decision will be entered.
