                        T.C. Memo. 1998-131



                      UNITED STATES TAX COURT



                  PAUL GARFINKLE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 48967-86.                       Filed April 6, 1998.



     Paul Garfinkle, pro se.

     Aubrey C. Brown, for respondent.



                        MEMORANDUM OPINION


     SWIFT, Judge:   This case is before the Court under Rule 121

on respondent's motion for partial summary judgment with respect

to alleged unreported income, disallowed partnership losses, and

a fraud addition to tax under section 6653(b).
                                 - 2 -


     For 1976, respondent determined a deficiency of $2,268,906

in petitioner's Federal income tax and a fraud addition to tax

under section 6653(b) of $1,134,453.

     Unless otherwise indicated, all Rule references are to the

Tax Court Rules of Practice and Procedure, and all section

references are to the Internal Revenue Code in effect for the

year in issue.

     When the petition was filed, petitioner resided in Boca

Raton, Florida.

     On March 26, 1990, respondent served petitioner with

requests for admission under Rule 90 with respect to significant

material facts regarding the alleged unreported income, the

disallowed partnership losses, and the fraud addition to tax that

were determined by respondent.    Petitioner did not answer or

object to respondent's requests for admission.     Because

petitioner failed to respond to respondent's requests for

admission, the factual matter set forth in respondent's requests

for admission is deemed admitted.    Rule 90(c).

     Petitioner was an intelligent, well-educated individual, and

an experienced tax attorney.   In 1976, petitioner and an

individual named George Osserman organized, promoted, controlled,

and invested in a group of tax-oriented limited partnerships

hereinafter referred to as the S-J partnerships or as the
                               - 3 -


partnerships.1   Petitioner and Osserman controlled the activities

of the S-J partnerships.

     For purposes of attracting investors in the S-J

partnerships, petitioner and Osserman were responsible for

preparation of an offering memorandum (OM) that was distributed

to prospective investors.

     In the OM, a number of misrepresentations and omissions of

material facts were made regarding the S-J partnerships, and

significant aspects of the S-J partnerships' activities were not

consistent with representations made in the OM.

     In the OM, it was noted that the S-J partnerships would

lease an 11,000-acre tract of property in Campbell County,

Wyoming (the property), which lease would include the right to

mine for coal on 500 acres and a conditional right of access to

the additional 10,500 acres if additional leases to mine coal

could be obtained from the Federal Government, which owned the

coal reserves on the 10,500 acres.     It was suggested in the OM

that leases to mine coal on the remaining 10,500 acres could be

readily obtained from the Federal Government.

     It was also represented in the OM that the S-J partnerships

intended to enter into agreements with experienced mining

contractors to mine for coal on the property.

1
     The S-J partnerships include S-J Mineral Associates, L.P.,
S-J Mineral Associates II, L.P., S-J Mineral Associates III,
L.P., International Associates, L.P., and G & O Associates.
                               - 4 -


     In fact and contrary to the above representations in the OM,

the S-J partnerships obtained coal mining leases on only 400

acres of property.   Significantly, with regard to the remaining

10,600 acres, mining leases were not available because in 1976,

at the time the S-J partnerships were promoted and sold, a

Federal moratorium was in place on the issuance of mining leases

for coal reserves owned by the Federal Government.

     Attached to the OM was a feasibility study in which

estimates of probable coal reserves on the property were made and

in which it was again suggested that leases to mine the coal

reserves on the property could be readily obtained.

     In the feasibility study, additional misrepresentations were

made with regard to the market price of coal, the estimated

amount of coal reserves on the property, and the sulphur content

of coal reserves on the property.   The author of the feasibility

study was not a geologist, as represented in the OM, and he had

no special qualifications to prepare the feasibility study.

     In the OM, it was represented that advanced royalties that

the S-J partnerships agreed to pay were negotiated at arm's

length between unrelated parties and that such advanced royalties

would give rise to large net operating losses for the S-J

partnerships and its limited partners.

     Stated advanced royalty obligations of the S-J partnerships

under the lease agreement were in fact not negotiated at arm's
                               - 5 -


length between unrelated parties.    The advanced royalty

obligations of the S-J partnerships ran in favor of and the

payments were to be made to Prodamat, N.V. and Bombardon

Investments, N.V., corporations controlled by petitioner and

Osserman.

     The S-J partnerships never entered into mining agreements

with mining contractors, owned any mining equipment, employed

coal operators, or obtained rail siding to transport coal.

During the time the S-J partnerships owned the leases, no coal

was mined or sold on the property.

     The lease transactions through which the S-J partnerships

acquired mining leases in the property occurred on or after

November 1, 1976.   Material documents relating to the lease

transactions were backdated to either October 25, 1976 or

October 28, 1976, in order to attempt to establish the ownership

interests of the S-J partnerships in the property prior to

October 29, 1976, the effective date of a change in Federal law

eliminating the deductibility of advanced royalty payments made

in years in which no mineral is sold.    In a deposition given as

part of a plea agreement in a criminal proceeding relating to

petitioner's promotion of the S-J partnerships, petitioner

admitted that documents were backdated at his request.

     Outside consultants hired by S-J partnerships to determine

the feasibility of mining coal on the leased property identified
                               - 6 -


two major limitations of the property:   (1) The sulphur content

in the coal was too high to comply with Environmental Protection

Agency requirements, and (2) the amount of coal on the property

was insufficient to support the purportedly planned mining

operation.   This significant information was not disclosed in the

OM.

      In order to invest in one unit of the S-J partnerships, an

individual investor would generally contribute $30,000 in cash to

one of the partnerships and sign a nonrecourse promissory note

for $126,000.   In general, each limited partner's contribution in

the S-J partnerships constituted $1 of cash contributed for each

approximate $4 of nonrecourse debt.

      Investor funds received on sale of partnership interests

were not used to mine coal.   Instead, most of the funds were used

to pay commissions to promoters, including petitioner.

      The S-J partnerships did not earn operating income and did

not function as a trade or business in 1976.

      The partnerships received approximately $20 million from

investors for sale of limited partnership interests.   Most of the

funds from sale of partnership interests were received by the S-J

partnerships by the end of December 1976.

      Petitioner received and exercised dominion and control for

his personal benefit over at least $1,968,364 of the funds

received from sale of S-J partnership interests.
                              - 7 -


     Petitioner did not maintain accurate accounting books and

records of the funds he received from sale of S-J partnership

interests.

     On petitioner's individual 1976 Federal income tax return

that was filed untimely, petitioner did not report the above

$1,968,364 that he received from sale of S-J partnership

interests, and petitioner claimed ordinary losses of $9,499,701

relating to alleged investments in the S-J partnerships.    During

the audit, petitioner did not cooperate with respondent's

examining agents.

     In respondent's notice of deficiency for 1976, respondent

determined that petitioner, in 1976, received income of

$1,968,364 from sale of S-J partnership interests that was not

reported on petitioner's 1976 Federal income tax return.

Respondent also disallowed $9,269,756 of the claimed $9,499,701

in losses relating to the S-J partnerships primarily on the

ground that the alleged advanced royalties were not deductible.

Further, respondent determined that petitioner was liable for the

fraud addition to tax under section 6653(b).2

2
     In respondent's motion for partial summary judgment,
respondent asserts that an additional $229,945 of the $9,499,701
claimed loss relating to the S-J partnerships should be
disallowed. Respondent apparently seeks to increase the tax
deficiency set forth in respondent's notice of deficiency to
reflect this additional loss disallowance. Respondent has not
raised this increased deficiency in the answer or by motion to
amend the pleadings, and we decline to allow respondent to raise
                                                   (continued...)
                               - 8 -


     In 1982, petitioner pleaded guilty to several crimes in

connection with his promotion of investments in the S-J

partnerships, including mail fraud, assisting in the preparation

of an individual income tax return relating to the S-J

partnerships that was fraudulent as to a material item, and

willfully and knowingly conspiring to devise a scheme to defraud

and to obtain money from respondent and from investors by means

of false representations relating to the S-J partnerships.

     During the pendency of additional criminal charges against

petitioner, petitioner alleged certain Fifth Amendment rights in

the instant proceeding.   On August 14, 1996, however, petitioner

entered into a plea bargain and a judgment was entered against

petitioner with regard to those charges.   On October 1, 1996, the

Court herein issued a pretrial order calendaring the instant case

for trial and requiring discovery to be completed, expert witness

reports to be exchanged, a list of witnesses to be exchanged, a

stipulation of facts and a stipulation of exhibits to be filed,

and pretrial briefs to be filed.   Petitioner failed to comply

with any aspect of the above pretrial order.

     Summary judgment or partial summary judgment may be granted

if pleadings, answers to interrogatories, admissions, and other

material show that no genuine issue exists as to any material

2
 (...continued)
this increased deficiency by way of a motion for partial summary
judgment. Rule 41.
                                 - 9 -


fact and that a decision may be entered as a matter of law.     Rule

121(b).   A party opposing a motion for summary judgment may not

rest upon mere allegations or denials in pleadings, but the

opposing party must set forth specific facts showing that there

exists a genuine factual issue for trial.     Rule 121(d); Celotex

Corp. v. Catrett, 477 U.S. 317, 324 (1986).

     Facts deemed admitted under Rule 90(c) may support summary

adjudication of issues involving omitted income, disallowed

losses, and fraud.   Frazier v. Commissioner, 91 T.C. 1, 12-13

(1988); Marshall v. Commissioner, 85 T.C. 267, 271-273 (1985);

Doncaster v. Commissioner, 77 T.C. 334, 337-338 (1981);

Marineland Record Co. v. Commissioner, T.C. Memo. 1992-532.

     Section 61 provides that gross income includes all income

from whatever source derived.    Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 431 (1955).    Income "constitutes taxable

income when its recipient has such control over it that, as a

practical matter, * * * [the recipient] derives readily

realizable economic value from it."      Rutkin v. United States, 343

U.S. 130, 137 (1952).

     Claimed losses from partnership tax shelter transactions are

deductible for Federal income tax purposes only if they are

supported by economic substance and profit objective.     Karr v.

Commissioner, 924 F.2d 1018, 1022-1023 (11th Cir. 1991), affg. 91

T.C. 733 (1988); Brannen v. Commissioner, 78 T.C. 471, 505-506
                                - 10 -


(1982), affd. 722 F.2d 695 (11th Cir. 1984).   Transactions are

treated as lacking economic substance if the transactions do not

have any practicable economic effect other than creation of

claimed tax benefits.   Karr v. Commissioner, supra at 1023.

     To establish fraud, respondent must prove by clear and

convincing evidence that a taxpayer understated the taxpayer's

correct tax liability and that part of the understatement was due

to fraudulent intent.   Secs. 6653(b), 7454(a); Rule 142(b);

Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986),

affg. T.C. Memo. 1985-63; Clayton v. Commissioner, 102 T.C. 632,

646 (1994); Recklitis v. Commissioner, 91 T.C. 874, 909 (1988).

     With regard to fraudulent intent, respondent is required to

prove that a taxpayer intended to evade taxes by conduct intended

to conceal, mislead, or otherwise prevent the collection of

taxes.   Parks v. Commissioner, 94 T.C. 654, 661 (1990); Frazier

v. Commissioner, supra at 12.

     Generally, fraud is established by circumstantial evidence

because direct evidence of fraud is not available.   Clayton v.

Commissioner, supra at 647; Rowlee v. Commissioner, 80 T.C. 1111,

1123 (1983).   Courts have developed certain indicia of fraud,

including the following:   (1) Understatements of income;

(2) inadequate books and records; (3) failure to file tax

returns; and (4) failure to cooperate with tax authorities.

Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th Cir. 1986),
                              - 11 -


affg. T.C. Memo. 1984-601; Clayton v. Commissioner, supra;

Recklitis v. Commissioner, supra at 910.   A taxpayer's

intelligence, experience, and other circumstantial evidence

relating to events in question may also be considered.

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

Grosshandler v. Commissioner, 75 T.C. 1, 19-20 (1980).

     Petitioner's records relating to funds he received from sale

of the S-J partnerships interests are inadequate.   The evidence,

however, establishes that petitioner in 1976 received at least

$1,968,364 from sale of S-J partnerships interests.   The evidence

establishes that petitioner exercised dominion and control for

his personal benefit over these funds.   We conclude that the

evidence supports respondent's determination in the notice of

deficiency that petitioner received additional income in 1976 of

$1,968,364 from sale of partnership interests.

     With regard to the $9,269,756 disallowed claimed S-J

partnerships losses, the evidence establishes that during 1976

the S-J partnerships did not enter into any mining agreements

with mining contractors, own any mining equipment, employ coal

operators, obtain rail siding to transport coal, or mine or sell

coal.   The evidence establishes that the amount of coal reserves

on the property leased by the S-J partnerships was insufficient

to support a mining operation and that the funds received from
                              - 12 -


investors were not used to pay for mining activity but were

instead paid to promoters, including petitioner.

     The evidence establishes that the purpose of the S-J

partnerships was to create tax losses for the partners through

improper deductions relating to alleged advanced royalty

payments.

     Based on the above established facts, we conclude that the

transactions entered into by the S-J partnerships lacked business

purpose and economic substance.   Petitioner is not entitled to

deduct the claimed losses of $9,269,756 relating to the S-J

partnerships.

     Further, under section 1.612-3(b)(3), Income Tax Regs.,

advanced royalties allegedly paid in a year when no mineral is

sold are deductible as a general rule only if the leases were

entered into prior to October 29, 1976.   T.D. 7523, 1978-1 C.B.

192, 193.   Although the lease agreements in question were

backdated to either October 25, 1976 or October 28, 1976, the S-J

partnerships did not actually own interests in the property prior

to November 1, 1976.   Respondent properly disallowed the claimed

advanced royalty payments and the related claimed losses of the

S-J partnerships.

     With regard to the various elements of the fraud addition to

tax, petitioner's failure to report taxable income of $1,968,364

and the disallowed losses of $9,269,756 from the S-J partnerships
                             - 13 -


result in a substantial underpayment in petitioner's 1976 Federal

income tax, and respondent has established petitioner's

underpayment for 1976 by clear and convincing evidence.

     With respect to fraudulent intent, the evidence in the

record and in support of respondent's motion for partial summary

judgment establishes that for 1976 petitioner substantially

underreported his correct Federal income tax liability, backdated

material documents, did not timely file his 1976 income tax

return, failed to maintain accurate books and records, and did

not cooperate with respondent's examining agents.   Petitioner was

an experienced tax attorney and tax shelter promoter.    Petitioner

was aware that the S-J partnerships losses claimed on his 1976

income tax return were based on backdated documents.    The

evidence before us establishes by clear and convincing evidence

that petitioner fraudulently intended to understate his correct

Federal income tax liability for 1976.

     Petitioner is liable for the fraud addition to tax under

section 6653(b).

     In opposition to respondent's motion for partial summary

judgment, petitioner argues that respondent's requests for

admission should not be deemed admitted.   Petitioner argues that

respondent should not be entitled to rely on deemed admissions.

Petitioner alleges that the deemed admissions result from

petitioner's failure to respond to the requests for admission
                              - 14 -


during a period of time when petitioner was entitled to Fifth

Amendment protection and that after the judgment in the criminal

proceeding was entered on August 14, 1996, respondent should have

renewed the requests for admission.

     To date, petitioner has not responded to respondent's

requests for admission.   Petitioner has had more than ample time

to respond thereto after the judgment in petitioner's criminal

proceeding was entered.   This Court issued a pretrial order dated

October 1, 1996, which notified petitioner that this case was

proceeding to trial.   When respondent filed the motion for

partial summary judgment on December 30, 1996, more than 30 days

had passed since judgment was rendered in petitioner's criminal

proceeding and since our pretrial order was issued on October 1,

1996.   Further, petitioner cites no authority for his assertion

that respondent was required to renew the requests for admission

after judgment was entered in petitioner's criminal proceeding.

We conclude that respondent's requests for admission were

properly deemed admitted under Rule 90(c).

     The evidence establishes that for 1976 petitioner received

unreported income of at least $1,968,364, that petitioner is not

entitled to losses of $9,269,756 relating to the S-J

partnerships, and that petitioner is liable for the fraud

addition to tax as determined by respondent.   We also conclude

that no material factual matter remains in dispute that would
                              - 15 -


preclude us from granting respondent's motion for partial summary

judgment.   As indicated, to the extent respondent's motion for

partial summary judgment seeks an increase in respondent's

deficiency determination against petitioner for 1976,

respondent's motion will be denied.

     To reflect the foregoing,


                                      An appropriate order will be

                                 issued granting in part and denying

                                 in part respondent's motion for

                                 partial summary judgment.
