                             T.C. Memo. 2013-282



                        UNITED STATES TAX COURT



      MOHAMMAD A. SULTAN AND MIRIAM AKHTER, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 14733-12.                  Filed December 12, 2013.



      Mohammad A. Sultan and Miriam Akhter, pro sese.

      Michael A. Raiken, for respondent.



                         MEMORANDUM OPINION


      GERBER, Judge: Respondent determined income tax deficiencies and

penalties as follows:
                                         -2-

[*2]                                                      Penalties
             Year         Deficiency           Sec. 6662(a)       Sec. 6663

             2007          $133,527             $784.00            $1,315.40
             2008           118,156            97,205.25           83,684.25

Respondent’s motion for partial summary judgment was filed June 13, 2013. On

June 17, 2013, the Court ordered petitioners to file an objection, if any, to

respondent’s motion on or before July 8, 2013. No objection or response to

respondent’s motion has been received from petitioners.1

       The issues2 for which respondent has moved for summary judgment include

whether: (1) petitioners understated their gross receipts and sales reported on

Schedules C, Profit or Loss From Business, by $386,459 and $338,444 for 2007

and 2008, respectively; and (2) petitioners are liable for the section 66633 civil



       1
        This case was previously set for trial on May 20, 2013, at Baltimore,
Maryland. Respondent had filed a motion for partial summary judgment on March
13, 2013, and petitioners were given until April 15, 2013, to respond or object.
The motion was set for a hearing at the May 20, 2013, trial session. Petitioners
failed to respond or object and instead asked for a continuance so that they could
obtain counsel. The case was continued on that basis, and respondent’s March 13,
2013, motion for partial summary judgment was denied without prejudice.
       2
       If respondent is successful in his partial summary judgment motion, other
issues determined in the notice of deficiency remain for trial.
       3
       All section references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                        -3-

[*3] fraud penalty for underpayments for 2007 and 2008 resulting from failure to

report gross income with intent to evade tax.

                                   Background4

      Petitioners drove taxi cabs. In addition, petitioner Miriam Akhter sold

jewelry, and petitioner Mohammad A. Sultan sold musical instruments and

equipment. He operated the following businesses: Cartier Sound, Inc.; Deura,

Inc.; Deura Investments, Inc.; Deen International, Inc.; Apex Distributions; Deura

Products; Deura Harpes; Tripleeightusa; American Music Supply; M.A.S. Imports,

Inc.; Apex Industries, Inc.; and Deura Music Supply. Mr. Sultan used various

names or aliases in his business activities. Petitioners received payment for the

goods they sold by means of checks, cash, and credit card payments. Petitioners

received income that was not reported to respondent on their 2007 and 2008

income tax returns.

      Petitioners did not maintain complete or adequate records of their income-

producing activities, and they did not submit records to respondent’s agent during

the audit examination. Respondent determined petitioners’ adjusted gross income




      4
       The background facts are based on respondent’s affirmative allegations in
the answer that were deemed admitted by the Court’s order dated, December 18,
2012, pursuant to Rule 37(c).
                                       -4-

[*4] for 2007 and 2008 using the bank deposits method of reconstructing income.

Petitioners made the following deposits into bank accounts during 2007 and 2008:

 Account No.   Bank             Depositor            2007              2008
   6952      Wachovia           Ms. Akhter        $85,797.41        $105,317.87
   4983    Bank of America      Mr. Sultan         11,065.00             121.00
   9239      Wachovia           Mr. Sultan         24,722.97           8,323.42
   9063      Wachovia           Ms. Akhter            -0-             28,825.00
   2204      Wachovia           Cartier Sound     338,819.86         259,962.45
   4100      Wachovia           d.b.a Deura
                                 Harps, N.A.          -0-             17,352.75
    Total bank deposits                            460,405.24        419, 902.49

      Respondent determined the following nontaxable sources:

         Nontaxable sources                       2007             2008
      Refunds                                   $1,704.81        $467.76
      Federal tax stimulus refund                   -0-            900.00
      Check reversals                            5,422.50            -0-
      Nonsufficient funds checks                    -0-            968.99
      Transfers between accounts                11,800.00       13,829.00
       Total nontaxable sources/deposits        18,927.31       16,165.75

      Petitioners reported total gross receipts or sales of $55,019 for 2007 and

$65,292 for 2008. Respondent determined petitioners’ unreported adjusted

gross income for 2007 and 2008 as follows:

                                            2007                2008
      Total bank deposits               $460,405.24         $419,902.49
      Less: nontaxable items             (18,927.31)         (16,165.75)
      Net taxable deposits               441,477.93          403,736.74

      Less: income reported              (55,019.00)         (65,292.00)
       Unreported gross receipts         386,458.93          338,444.74
                                         -5-

[*5] Petitioners’ failure to maintain complete records of income and their failure

to provide complete and accurate records to respondent were fraudulent with the

intent to evade tax. Petitioners made false and misleading statements to

respondent’s agent during the examination. Petitioners fraudulently and with

intent to evade tax underpaid their tax for 2007 and 2008 by $133,527 and

$118,156, respectively.

                                     Discussion

      Summary judgment is appropriate where there is no genuine issue of

material fact. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), aff’d, 17 F.3d 965 (7th Cir. 1994). Respondent set forth material

allegations in his answer establishing that petitioners had, with intent to evade tax,

fraudulently underpaid their tax by $133,527 and $118,156 for 2007 and 2008,

respectively. After the time for filing a reply had expired, respondent moved,

under Rule 37(c), that the undenied allegations in the answer be deemed admitted.

The Court issued a notice to petitioners to file a reply or otherwise object, but

petitioners failed to file a reply or make any response to respondent’s motion or

the Court’s notice. Accordingly, respondent’s motion was granted and the

allegations in respondent’s answer were deemed admitted. See Rule 37(c).
                                        -6-

[*6] Respondent has advanced those deemed admitted allegations to support his

motion for partial summary judgment.

      Respondent is required to show that income was not reported and that the

resulting underpayments of tax were fraudulent. Respondent’s allegations in his

answer, which were deemed admitted by the Court on December 18, 2012, met the

burden of proving fraud by clear and convincing evidence as required by section

7454(a) and Rule 142(b). See Doncaster v. Commissioner, 77 T.C. 334, 336-337

(1981); see also Marshall v. Commissioner, 85 T.C. 267 (1985); Ellis v.

Commissioner, T.C. Memo. 2012-250. We accordingly hold that petitioners failed

to report income of $386,458.93 and $338,444.74 for 2007 and 2008, respectively

and that they are liable for civil fraud penalties on the resulting underpayments of

tax under section 6663.

      Because issues remain concerning whether certain expenses are allowable

and whether an accuracy-related penalty under section 6662(a) applies to any

underpayments of tax that may result from disallowed expense deductions,


                                              An appropriate order will be issued

                                       granting respondent’s motion for partial

                                       summary judgment.
